Corporate Governance

1
Corporate Governance
2
Corporate Governance

• Nature and Scope of Governance
• Role of the Board
• Checks and Balances

3
Evolution of Corporate Governance

• Prior to the 1980s relatively unknown. By the end
  of the decade and into the 90s well established
• 1930s - the Berle Means study
• 1950s 60s the alternative theory of the firm
  work by Simon, Cyert and March, Marris, Baumol
  etc.
• 1970s the call for representation
• 1970s worker director and industrial democracy -
  the Bullock Report
• 1980s merger boom and later - corporate
  malpractice

4
Corporate Governance

• Key questions in Corporate Governance
• The role and legitimacy of the corporation
• Complexity of company structures - the need for
  checks and balances
• To whom is the company responsible ?
• Is the 19th century notion of the joint stock
  company outdated ?
• What is the role of the modern corporation - is
  the profit maximising goal realistic ?

5
Why Corporate Governance ?

• Excesses of the 1980s
• Potential damage to the reputations of companies
• Control over Boards and Top Management
• Shareholder rights abused
• Corrupt dealings by some top managers
• General attack on sleaze

6
Working Definition

• Corporate Governance broardly refers to to the
  mechanisms by which companies are controlled,
  directed and made accountable.

7
An Organisational Framework for Corporate
Governance
Shareholders (Principals)
Boards of Directors Use and role of share
stakes Market for corporate control Debt
structure of the firm Product market
competition
Delegates Authority
CEO and Executive Management (Agents)
Agent actions
Implicit Incentives and Constraints
Clarke et al (1998)
8
Corporate Governance

• Appraisal of the power and the way Boards of
  Directors and Top management of a firm works and
  behaves towards its primary stakeholders
• Corporate Governance is in a sense an assertion
  of Shareholder Rights, and in a wider sense
  covers aspects of Social Responsibility

9
Focus on the Role of the Board

• The Board of Directors represent the interests of
  the shareholders
• Legal obligations
• Top managers report to the Board
• How to govern ?
• Cadbury Report
• Greenbury Report
• Hampel Report (final report out 29 Jan 1998)

10
Hampel Report 1998

• Hampel has argued for a continuation of self
  regulation or voluntarism in governance issues.
  Building on from Cadbury and Greenbury. Hampel
  has argued that it is for
• Shareholders and the general public to decide
  how companies meet these requirements....
  Shareholders should demonstrate increasing
  vigilance...

11
Role of Directors

• The directors as a Board are responsible for
  relations with stakeholders but they are
  accountable to the shareholders. ( CBI evidence
  to Hampel see p12, para 1.17)
• This is not simply a technical point but a
  practical one. Directors cannot be responsible to
  the wider stakeholders as this would be
  impractical and would mean that the directors
  would be respomnsible to no one. Thus detracting
  from good governance. ( See Hampel p12 ).

12
Hampel - some recommendations

• Directors should have training
• Boards should be evaluated along with individual
  directors
• Non-execs should make up one third of the board
• Biographical details of board members be
  available to shareholders
• Separation of roles of CEO and Chairman
• Directors who resign should give a statement of
  reasons
• Companies should describe how they are governed
  and explain why they deviate from best practice

13
Interested Parties in Corporate Governance
Shareholders
Other Stakeholders
Regulators Auditors
The Board
Top Management
14
Types of Boards
Effective Monitoring
No
Yes
No
Weak Bureaucratic Split
Process Driven Network
Strategic Activist
Keiretsu ?
Effective Performance Enhancement
Yes
15
Framework for Analysing Board Activity
Past Present Future Orientated
Orientated
Providing
Strategy Accountability
Formulation Monitoring
Policy Supervising Making
Outward Looking Inward Looking

Approve and work with and through the CEO
16
The Two Primary Functions of the Board
Past Present Future Orientated
Orientated
Outward Looking Inward Looking
Conformance Performance Roles
Roles

17
Why Regulation ?

• Free markets often cause anomalies
• Firms can operate with self interest
• Caveat Emptor is dangerous - firms will take
  advantage if not regulated
• Public interest defence
• Checks and balances
• Fairness to all parties

18
Governance - Voluntary or Legal ?

• In the UK the system is both voluntary as well as
  legally imposed.
• Statutory bodies
• Government watchdogs
• Voluntary agreements and structures
• Pseudo-legal instruments
• Legislation - UK and EU
• Consumer lobby

19
Notable Failures of Governance

• The Maxwell case
• Blue Arrow
• Barlow Clowes
• Polly Peck
• Guinnesss takeover of Distillers
• The pension misselling scandal (regulation
  failure)

20
Some Reasons for Corporate Governance Failure

• Checks and Balances
• Regulatory Bodies
• Board Structure
• Investor Relations
• Media and Social
• Influences

• Reasons for Evasion
• Complexity of business empire
• Legal uncertainties
• Failure of investigators
• Dominant managerial style
• Aura of respectability
• Lack of research by institutional investigators
• Failure of pension fund trustees
• Extensive use of litigation against the media