Corporate Governance
A system by which companies are directed and controlled
Primary reason for corporate governance is to protect stakeholders, reminding directors of the limitations of their power and to enforce the primary agency rule - directors work on behalf of stakeholders
Legal requirement in the US but only a set of best practice guidelines in UK
Sarbanes-Oxley Act (SOX) in the US
Applies to listed companies, directors of listed companies and auditors of listed companies
Auditors are restricted in the additional services they can provide to a listed audit client
Companies must have an audit committee
Annual FSs must include statements on internal control systems in place
CEO and CFO must verify reliability of FSs
Increased disclosure requirements e.g. off balance financing received
Restrictions on share dealings by directors during sensitive times
Senior audit partner must change every 5 years
Corporate governance in the UK
Comprises of "Principles of Good Governance" and "Code of Best Practice"
Revised in 2003 to reflect work of Turnbull, Smith and Higgs
Directors
Listed companies should be led by an effective board balanced with EDs and NEDs so that no individuals/groups can dominate decisions
clear division of responsibilities between running the board (chairperson) and running of business (Chief Executive) to limit powers
Appointments to board are formal, rigorous and transparent
to discharge duties, information provided to board should be good quality and timely
Directors should receive induction upon joining and regularly refresh skills
board/committee performance should be evaluated on annual basis
Directors should offer themselves for re-election at regular intervals and plan to progressively refresh board members
Remuneration
should not pay more then is needed and be necessary level to recruit and retain calibre of directors
Significant proportion of EDs pay should be performance related to encourage achievement of corporate objectives
Executive remuneration should be clear, and no director should be involved in determining own remuneration
Accountability and audit
board is responsible for presenting a balanced and understandable assessment of the company's financial position and prospects
board should maintain sound system of internal controls to safeguard assets and shareholder investment
board should have trasnparent arrangements for applying principles of financial reporting and internal control, and maintaining external auditor relationship
Shareholder Relations
board should maintain dialogue with shareholders on the basis of mutually understanding objectives
AGM meeting is the vehicle for communication with investors and a tool to encourage them to participate
Requires listed companies to include in accounts a narrative statement of how they applied the principles set out in the code and whether this was complied with throughout the period
Also includes principles for institutional shareholders, covering maters such as voting, communication between investor and company and investor responsibility to evaluate company's corporate governance
Benefits of Corporate Governance
Ensures personal objectives of the board, organisation's objectives, and stake holders' objectives align
Reduces risk of fraud and provides a mechanism for reviewing risk
Instils clear accountability and effective performance/reward link, stimulating performance
Use of NEDs encourages whole board to examine strategic decisions critically
Wider pool of knowledge from diverse board helps identify opportunities more readily
Increases transparency, social accountability and political/public support for the company
Enhances marketability of goods and services
Improves access to capital markets and reduces perception of risk (protects shareholder interests therefore making it easier to raise finance)
Market regulation
To produce, prevent or modify a particular outcome, managing the conflict between maximising profit and the interests of those using the product/service
Prices
Wages
Market entry
Size of firm/control they can exercise
Employment conditions
Pollution
Standards of production and quality
Effective vs efficient regulation
Effective ensures a safe and effective product/service is delivered whilst not inhibiting the effective functioning/development of businesses.
Efficient regulation exists if the total benefit to the nation is greater than the total cost
Inappropriate regulation is shown to make firms less likely to innovate and adapt the quality and mix of products offered to changing customer needs
Organisation for Economic Co-operation & Development OECD and other global nations have devised ways that enable minimal cross border disruption for transactions due to differences in regulation
Increasingly global market, investment, and technology create need for co-ordination both for multinational firms but also national government/trade association at a higher level