Corporate Governance

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corporate governance
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Class Announcements

• Assignment 7 due March 6th (today)
• Research Paper Part 3 due March 10th
• Mondays class (March 10th) is at 500-700pm in
  SCHW 110 (Movie)
• Business Banquet - April 2nd 545-8pm, Catering
  - Gabrieau's Bistro Keynote Speaker - Annette
  Verschuren, Past President of Home Depot for
  Canada and Asia

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Class Objectives

1. Contracts as a means to manage the expectations
   and relationship between principals and agents
2. Corporate Governance addresses agency issue

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Agency Theory

• Positive accounting theory envisions firms as a
  nexus of contracts.
• (e.g. compensation agreements, debenture
  contracts)
• Two parties with conflicting interests to a
  contract 1) agent 2) principal
• Partys actions are motivated by the contract
  itself
• Corporate governance addresses the contract
  between agent and principal via the Board of
  Directors

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Corporations Corporate Governance

• Private and Public Corporations
• Separation of Ownership (Shareholders) and
  Management
• Corporate Governance is the relationship between
• Shareholders (owners)
• Board of Directors
• Corporate Officers

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Corporate Governance Conflict

• Separation of ownership and management
• Manager and shareholder interests alignment
• Information asymmetry
• Incentives to conceal bad news (agency theory -
  adverse selection)
• Incentives to shirk (agency theory moral
  hazard)
• Agency Theory attempt to modify behavior

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Corporate Governance Defined

• Corporate Governance is the relationship between
  shareholder, the board of directors and other top
  managers in the corporation
• Corporate governance processes attempt to ensure
  proper functioning of management
• Corporate governance is implemented and evaluated
  through various processes within the organization
• Board of Directors internal and external
  directors
• Audit Committee meet with auditor and review
  audited financial statements
• Compensation Committee set corporate officers
  compensation
• Nominating Committee nomination of qualified
  members
• Securities Exchanges (e.g. OSC, SEC)
• Reporting in Annual Report

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Corporate Governance Importance

• Why is corporate governance important?
• Owners can not easily observe the corporate
  officers who are managing the owners investment
• Companies lack oversight by investors
• Board of Directors have failed to provide proper
  checks and balances
• Markets have stirred distrust instead of building
  confidence (e.g. Enron)
• Rules for Board of Directors make accountability
  explicit

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Corporate Governance Need

• 94 of investors say corporate governance is
  important
• 83.5 believed new regulations should be put in
  place to strengthen investor confidence in global
  markets
• Regulatory requirement
• US SOX (2002)
• Canada National Policy 58-201(2005)
• Globalization of world capital markets
• Internally imposed obligation
• Ownership responsibility
• Competitive advantage

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Corporate Governance Issues

• 1. Better Boards
• Independence, skill, accountability
• 2. Executive Compensation
• Link pay to performance, disclose metrics and
  links, executive overcompensation (US Canada)
• 3. Financial reporting
• Improved disclosure in financial statements
• 4. CEO Performance
• 5. Cost compliance/time

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Corporate Governance Proposed Solutions

• Better Boards
• Director independence How many? Who is
  independent?
• Independent and financially literate audit
  committee to whom external auditors would report
  directly
• Independent compensation committee
• Only one management representative on board of
  directors
• Continuing education
• Truly independent directors

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Corporate Governance Proposed Solutions

• Financial Reporting
• Management attest to financial statements and to
  the presence of reasonable internal controls
• Codes of conduct/ethics
• Transparency

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Corporate Governance Proposed Solutions

• Audit Committees
• Charter
• Qualifications (financial literacy)
• Auditors
• Participate in public oversight program
  established by CPAB
• Reduce concerns over loss of client
• Reduce commodification of audit by reducing cost
  pressure
• Increase oversight with firm review

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Corporate Governance National Instrument 58-101

• National Instrument 58-101 - Disclosure of
  Corporate Governance Practices
• Board of Directors
• Board Mandate
• Position Descriptions
• Orientation and Continuing Education
• Ethical Business Conduct
• Nomination of Directors
• Compensation
• Other Board Committees
• Assessments

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Corporate Governance Multilateral Instrument
58-110

• Multilateral Instrument 58-110 - Disclosure of
  Corporate Governance Practices
• Audit Committee Charter
• Composition of the Audit Committee
• Relevant Education and Experience
• Reliance on Certain Exemptions
• Reliance on Exemption in 3.3(2) or 3.6
• Reliance on Section 3.8
• Audit Committee Oversight
• Pre-approval Policies and Procedures
• External Auditor Service Fees (by Category)

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Corporate Governance Shoppers Drug Mart

• The Corporation and its Board of Directors
  recognize the importance of corporate governance
  to the effective management of the Corporation
  and to its shareholders and other stakeholders.
  The Corporations approach to significant
  corporate governance issues has been, and
  continues to be, designed with a view to ensuring
  that the business of the Corporation is
  effectively managed to enhance long-term
  shareholder value. The Corporation has
  implemented certain structures and procedures to
  ensure that effective corporate governance
  practices are followed and that the Board of
  Directors functions independently of management.
  Prior to March 2005, the directors reviewed and
  considered the Corporations corporate governance
  framework with a view to complying with the
  guidelines of the TSX and, more recently, with
  Multilateral Instrument 52-110 (MI 52-110)
  pertaining to audit committees. On June 30, 2005,
  National Instrument 58-101, Disclosure of
  Corporate Governance Practices (NI 58-101)
  was proclaimed into force, and National Policy
  58-201, Corporate Governance Guidelines (NP
  58-201) was adopted with the objective of
  providing greater transparency to Canadian
  capital markets regarding issuers corporate
  governance practices. Schedule B to this
  Circular sets out the Corporations overview of
  its corporate governance practices, as assessed
  in the context of NI 58-101 and NP 58-201. This
  overview has been prepared by the Nominating and
  Governance Committee of the Board and has been
  approved by the Board of Directors. (Shoppers
  Drug Mart)

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Class Objectives - Revisited

1. Contracts as a means to manage the expectations
   and relationship between principals and agents
2. Corporate Governance addresses agency issue