Lecture Corporate governance and ethics: Chapter 14 - Rezaee

Chapter 14 - Corporate governance in transition. After completing this chapter, students will be able to: Realize that corporate governance is evolving and the structure varies across countries, industries, and companies; understand the history of corporate governance; identify and list the cross-country factors that differentiate corporate governance structure; identify the challenges of the global business and financial markets;...

Corporate Governance in Transition Chapter XIV 

Chapter Objectives:

• Realize that corporate governance is evolving and the structure varies across countries, industries, and companies.

• Understand the history of corporate governance.

• Identify and list the cross-country factors that differentiate corporate governance structure

• Identify the challenges of the global business and financial markets.

• Provide an overview of corporate governance worldwide.

• Recognize the initiatives taken during the past decade to improve corporate governance worldwide.

• Identify the issues to be addressed to promote convergence in global corporate governance.

• Provide an overview of corporate governance issues related to multinational corporations across different countries.

Key Terms

Information infrastructure

Keiretsu

Legal infrastructure

Market infrastructure

Regulation Fair

Disclosure

UK Financial Reporting

Council (FRC)

U.S Government

Accountability Office (GAO)

Unitary board

History Perspectives  

Concept was introduced by Berle and Means during the time of the formation of the SEC in 1933

Early references to the term “corporate governance” are

documented in a speech by Clifford C Nelson, the president of the American Assembly in 1978

The legal view of corporate governance initially appeared in the report of ALI in 1984 titled “Principles of Corporate Governance.”

Corporate Governance: Global

Perspective

The series of scandals in the United States (ZZZZ Best, Webtech, Waste Management, Sunbeam, and Cendant), in UK (BCCI, Maxwell, and Polly Peck and Barings), in Canada (Canadian Commercial Bank and Caster Holdings and Roman Corporation), in Europe (Credit Lyonnais, Metalgesellschaft, and Schneider), in Asian countries during the crisis in 1997 have ensured that corporate governance interest and reforms

are a global issue and are not confined to the borders of the United States

Corporate Governance in United

States

Best practices of corporate governance in the U.S suggest that:

1 Investors pay a premium for companies with effective corporate governance.

2 Companies with effective corporate governance and shareholder rights marginally outperform those companies with weak corporate

governance and investor rights

3 Companies with effective corporate governance tend to benefit more from regulations and rules than those with weak governance

primarily because of compliance costs

4 Effective corporate governance improves market liquidity and reduces share price volatility.

Corporate Governance in the

United Kingdom

The Financial Reporting Council (FRC) in the UK released a revised Combined Code on Corporate Governance

All companies incorporated in the UK and listed on the LSE are required

to report on whether and how they are applying the Combined Code

Companies listed on the LSE must include in their annual report (1) a narrative statement of how they have applied the principles of the Combined Code; (2) a statement as to the extent to which companies have complied during the reporting period with the provisions of the Combined Code; and (3) for companies that have not complied with any provisions of the Combined Code, a report specifying the Combined Code provisions with which they have not complied,

UK Corporate Governance vs U.S Corporate Governance

Board U.S.: boards oversight 

function separated from management 

managerial function. 

Board U.K.: board ,on the contrary,

Is responsible for the preparation of  financial statements and internal 

controls.  

CEO: assumes can assume position 

as a chairman of the board  CEO: cannot assume the position as 

a chairman of the board 

Approach: less flexible approach  Approach: more principle based, 

which requires companies to “comply 

or explain why not.”

Corporate Governance in Germany

German corporate governance is characterized by the two-tier board of director system, which creates different rights and obligations for directors of each board as specified in the German Stock Corporation Act and the German Corporate Governance Code

Two-tier board of directors system consists of the management board and the supervisory board

Two recent laws, namely, UMAG and KapMuG, were established to promote protection for German shareholders

The two laws are intended to enhance shareholder democracy in Germany and provide protection for investors

Corporate Governance in Japan

In Japan, the business structure is shaped and business practice is dominated by networks of organizations called keiretsu

The majority of outstanding shares (up to 90 percent) are in the possession of keiretsu-affiliated financial institutions or keiretsu-affiliated nonfinancial companies, SO the individual investors do not have much of

a voice in corporate governance

In 2006, Japan took several initiatives to improve the infrastructure of its capital markets , improve the investors protection, and make the financial statements more transparent

Corporate Governance in Other

Countries

Corporate governance worldwide has recently made significant progress

1. Corporate governance in Canada The Joint Committee on Corporate

Governance was established by the Canadian Institute of Chartered Accountants, the TSX, and the Canadian Venture Exchange The Committee issued “Beyond Compliance: Building a Governance Culture ”

2. Corporate governance in Singapore The Singapore code of corporate governance (the Code) was developed in March 2001 by a private sector committee appointed by the government and the corporate governance committee, and was issued by the Ministry of Finance in July 2005

Convergence in Corporate

Governance

There is no globally accepted set of corporate governance principles or global regulatory framework that governs corporations, global financial institutions, or capital markets worldwide Regulators in the United States, the SEC, IOSCO, and the World Federation of Exchanges (WFE) have yet to agree on a global regulatory framework or a global corporate governance structure

The following issues should be resolved to facilitate global convergence

in corporate governance:

Reconcilable corporate governance principles are:

(1) the majority of directors must be independent, nonexecutive directors; (2) members of the audit, compensation, and nomination committees must be independent;

(3) nonexecutive, independent directors do not receive compensation or fees other than their director fees;

(4) the audit committee, composed of truly independent directors, oversees financial reporting, internal controls, and audit activities;

(5) the audit committee is directly responsible for the appointment, retention, and compensation of the external auditor

Convergence in Corporate

Governance

Corporate Governance In

Multinational Corporations

host and home countries’ legal, political, cultural, and regulatory systems; the business practices and historical patterns of countries; the global capital, labor, and managerial markets; global institutional investors; and the boards

of directors

automatically (independently) by a management who has little if any ownership interest in the MNC or the subsidiary, then the effectiveness of parent-subsidiary corporate governance becomes more crucial in monitoring and controlling managerial actions of the subsidiary

Conclusion  

• The corporate governance structure can be differentiated across countries in terms of the degree of ownership and control

• Corporate law plays a vital role in corporate governance by determining how companies are established and in defining the rights of shareholders and the fiduciary duties of directors and officers

• For companies listed on the LSE, the UK has established annual reporting requirements on whether and how they are complying with the Combined Code

• The German board system is a two-tiered system that consists of a management board and a supervisory board

• The Japanese business structure is dominated by networks of

organizations called keiretsu that significantly influence the corporate

governance structure in Japan

• Convergence of global corporate governance would be possible if all nations would agree that the primary purpose of corporate governance is the enhancement of shareholder value while protecting the interests of other stakeholders

• The most important step in the convergence process is the statutory power to implement and enforce the globally accepted corporate governance principles, rules, or best practices

• In a multinational corporation, corporate governance mechanisms are designed not only to align the interests of subsidiaries with those of the parent company, but also to align the interests of the management of the parent company with the interests of both its majority and minority shareholders