corporate governance i [tt-110905][1]

7/27/2019 Corporate Governance I [TT-110905][1]

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Tony TAN 2011

Dr Tony TAN, CFA

Specially prepared forSingapore Management University

History & overview of corporate governance

Introduction to corporate social responsibility

Singapore code of corporate governance History

Principles

Types & roles of directors

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Tony TAN 2011

I have not heard of any auditcommittee that discover ofany fraud that appear in thecompany, even on those recentcases when actually there ismis-representation of theperformance of all theresults!

Male, Foreign ExchangeDealer (Age 40+)

I view that as a responsibilityand duty, especially as alisted company. Peopleinvested in your companyand the least you can do is tobe fair to the investors bybeing transparent and havereasonably good corporategovernance.

Kenny YapQian Hu Corporation Limited

Good corporate governance is theinstitutionalization of properprocedures and processes such that:the affairs of the Company willbe conducted according to properbusiness, legal and ethicalprinciples; reports on the status ofthe business are reliable, accurate,and relevant; and the boardremains in control when decisionson material issues, including majorbusiness ventures or investments,are sought. Dr Lee Boon Yang (Keppel Corp)

What I personally feel is thatthey tell you what you wantto hear instead of telling youwhat you dont want to hearand they tell you the goodinstead of the bad. If it isbad, they will tell you 10% ofit. That is where the problemis.

Male, Stock-Broker(Age 50+)4

Tony TAN 2011


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Ronald COARSE

Adolf BERLE & GardinerMEANS

Michael JENSEN & WilliamMECKLING

Eugene FAMA

Eugene FAMA & MichaelJENSEN

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CorporateGovernance

Principal-AgentModel

StewardshipModel

StakeholderModel

PoliticalModel

ResourceDependency

Model

CultureTheories

CyberneticAnalysis The mostcommon theoryused is that ofthe Principal-Agent model


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a contract under which one or more persons(the principal) engages another person (the

agent) to perform some service on their behalfwhich involves delegating some decision

making authority to the agent

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Jensen & Meckling (1976)

Due to:oHuman self-interest

oRisk aversionoIneffective enforcement of contractual

arrangements

Protection throughoGovernance structure

oDesign of optimal contracts

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The importance of corporategovernance

Source: IESE

Corporate governance in recenttimes

Source: odondo

Tony TAN 2011
http://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Corporate%20governance%20in%20recent%20times.flvhttp://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Importance%20of%20corporate%20governance.flv


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"In terms of power and influenceyou can forget about the church,forget politics. There is no morepowerful institution in societythan business... The business ofbusiness should not be aboutmoney, it should be aboutresponsibility. It should be aboutpublic good, not private greed."

Anita RoddickFounderBody Shop

As we pursue our strategies world-wide, we accept a social andenvironmental responsibility aswell. These responsibilities includethe promotion of a sustainableeconomy and recognition of theaccountability we have to theeconomies, environments, andcommunities where we do businessaround the worldJohn Smith Jr.CEO & PresidentGeneral Motors

A good company deliversexcellent products andservices, and a greatcompany does all thatand strives to make theworld a better placeWilliam Ford Jr.ChairmanFord Motor Company

I honestly believe that thewinning companies of thiscentury will be those whoprove with their actions thatthey can be profitable andincrease social value companies that both do welland do goodCarly FiorinaChairman & CEOHewlett Packard

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Five Laws of CorporateSocial Responsibility1. Comes from social power

2. Two-way communication3. Social costs & benefits to

be considered beforeimplementation

4. Social costs to be passedon to customer

5. Companies to be involvedin certain social problemsoutside normal businessoperation

1950s. Howard BOWEN

1960s. Keith DAVIS

1970s. Committee forEconomic Development

1980s. Philip COCHRAN

1990s. Archie CARROLL

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The CSR firm should striveto make a profit, obey thelaw, be ethical, and be a goodcorporate citizen


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Other nameso Triple Bottom Line; Corporate

Sustainability; Corporate Citizenship;Social & Environmental Responsibility

No definite definition

Changing parameters

Strongly influenced by global trendsand changes in international law

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Corporate responsibilities Human resource responsibilities

Safety & health management Environmental management Supply and procurement Internal & external compliance Business ethics Long-term strategies Stakeholder relationship

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3. Right to collectivebargaining

4. Elimination of forced and

compulsory labour5. Abolition of child labour6. Non-discriminatory

practices

1. Protection of humanrights

2. Not complicit tohuman rights abuses

7. Precautionary approach toenvironmental challengers

8. Greater environmentalresponsibility

9. Be environmentallyfriendly

10. No corruption policies

Anti-Corruption

Environment

LabourStandards

Human Rights

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The worlds largest corporate citizenship initiative

10 principles imbedded within thecorporation

Reporting in annual report progressto meeting the 10 principles

Publicly advocating the GlobalCompact and its 10 principles

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Board responsibility

Risk management

Performance measurement

Sustainability reporting

International guidance

Independent verification

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Reduction in workplace accidents

Increasing operational efficiency

A happier workforce

Improve branding & reputation

Reduced liabilities

Better access to capital

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Source: developmentcrossing
http://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Corporate%20Social%20Responsibility%20Facts.flv


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Everyones talking corporate socialresponsibility

Source: herecomestheboss.com

Corporate social responsibility

Source: FuquaSchOfBusiness

Tony TAN 2011
http://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Corporate%20social%20responsibility.flvhttp://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Everyone%20talking%20corporate%20social%20responsibilty.flv


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Formation

of CFC1997

Formation

of SID1998

Formation

of SIAS1999

Tony TAN 2011

1st code of

corporate

governance2001

2nd code of

corporate

governance2005

MAS/SGX

takes

responsibility

for CG

2007

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BACK

Source: MAS

Tony TAN 2011


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BACK

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BACK


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Source: MAS

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Description 2001 Code 2005 Code ChangeTotal directors 1,704 1,702 -2

Female directors 111 (6.5%) 113 ( 6.6%) +2 (+0.1%)

EDs 627 (37%) 563 (33%) -64 (-4%)NEDs 297 (17%) 299 (18%) +2 (+1%)

IDs 780 (46%) 840 (49%) +60 (+3%)

Board meetings 4.2x 4.4x +0.2x

Director fees $38k $53k +$15k (+39%)

Small cap $32k $35k +$3k (+9%)

Medium cap $39K $47k +$8k (+21%)

Large cap $52k $75k +23k (+44%)

Which industry had the largest fee increase?


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Tony TAN 2011

Guidelines & Commentariesrinciple Lead & Control Responsible for

the success ofcompany

Works withmanagement

Managementaccountable toboard

Entrepreneurial leadership Strategic directions Financial & human resources Prudent & effective controls Review management performance Tone from the top Act in the interest of the company Disclosures of delegated authority Meet regularly and disclose attendance

Set approval authority Formal letter explaining duties &

obligations Appropriate training (especially first-time

directors)Who sets the strategic direction ofthe company? 31

Tony TAN 2011

Principle Strong

independent

element Objective

judgement No groupthink

One-third rule No relationship with company

o Related companies (subsidiary orparent) or officers Past employee (3-years limit) Immediate family member Receiving other compensation Interested party transactions by

substantial shareholder Board size Knowledge bank, constructive challenges Strategy development Set & review managements KPIs Meet without management

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What is independence & the rightboard size?

Guidelines & Commentaries


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Tony TAN 2011

Principle Clear division of

responsibility Balance of

power &authority

Separate roleo Agreed in writingo Disclosure of relationship

Role of Chairmano Lead the boardo Accurate, timely & clear informationo Communication with shareholderso Bridge between Board & Managemento Facilitate contribution of NEDs

o Bridge between EDs and NEDso Promote high standards of CG

Appointment of lead independent director

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Which is better, combined orseparate roles?


Tony TAN 2011

Principle Formal &

transparent

directorappointmentprocess

Establishment of Nominating Committeeo Three directors, majority (including

Chairman) independent Chairman not associated with substantial

shareholders Responsible for:

o Re-nomination (three-yearsappointment)

o Determining independence of directorso Address multiple board

representationso Selection of new directors

Disclosures in annual reports of directorsresume

34How are directors appointed?



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Tony TAN 2011

Principle Formal

assessmentprocess

Boardeffectiveness

Individualdirectoreffectiveness

Board evaluation to be undertaken by theNC

Evaluation criteria decided by NC and usedconsistentlyo Relative benchmark against ST index

and industry index Individual evaluation assess contribution

and commitment. Include other indicators like RoA, RoE and

EVA

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Should boards & directors beevaluated?


Tony TAN 2011

Principle Information to

be:o Completeo Adequateo Timely

Given:o Prior to

meetingo On-going

basis

Board to have separate independent accessto senior management

Information to contain:o Backgroundo Financial informationo Explanation of variances

Board to have separate independent accessto company secretary

Board responsibility for appointment &removal of company secretary

Ability of directors to take independentprofessional advice at companys expense

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What is informationasymmetry?



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Principle Formal &

transparentprocedure

Director notinvolved indeciding ownremuneration

Establishment of Remuneration Committeeo Members are NEDso Majority IDs

Determine remuneration frameworko Each directoro CEOo Senior management

Endorse by the entire board Seek expert advise if necessary at expense

of company

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Are remuneration practicesreasonable


Tony TAN 2011

Principle Appropriate to

attract, retain

and motivate Link between

corporate andindividualperformance

Alignment of interest between EDs andshareholders

NEDs remuneration should not compensatetheir independence

Avoid excessively long service contractsand onerous removal clauses

Avoid rewarding poor performance Use long-term incentive schemes with

vesting element Caution when using relative comparisons Notice period should be set to six months

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Are firms rewarding poorperformance?



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Tony TAN 2011

Principle Disclose

structure ofremunerationpolicy

To show linkbetween pay andperformance

Report remuneration of directors and top 5key executives

Reports in bands of $250,000 with relevantbreakdowns

Disclose remuneration if employee relatedto director/CEO and amount exceeds$150,000

Disclose details of employee share schemes

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Will disclosure of exactremuneration make a difference?


Tony TAN 2011

Principle Presentation of a

balanced &

understandableassessment

Performance,position andprospects

This extends to all relevant public reports Management to provide this information

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How do you resolve informationasymmetry problems?



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Annual meeting with auditors withoutManagement

Annual review of auditors independence Whistle-blowing considerations Report of ACs activities in annual report

Tony TAN 2011

Principle Establish an

Audit committee Clear written

terms &conditions

Detail authorityand duties

Establishment of Remuneration Committeeo Members are NEDso Majority including Chairman be IDs

Appropriate qualificationo Two members have accounting or

financial experience Full resources to discharge its duties

Scope and results of audit Independence & objectivity of auditors

Integrity of financial statements Internal controls Internal audit function Appointment & removal of auditors

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Are audit committees effective?


This extends to: Financial Operational & compliance Risk management policies Other systems

Effectiveness reviewed annually External validation done by independent

person Commentary on adequacy of internal

controls in annual reports

Tony TAN 2011

Principle Maintain sound

system of

internal controls Safeguard

shareholdersinterests

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Are auditors responsible forfailures in internal controls?



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Direct reports to Chairman of AC Qualified

o Standards for the Professional Practiceof Internal Auditing

o Institute of Internal Auditors Adequately resourced (in-house or

external) Annual review by AC

Tony TAN 2011

Principle Independent

audit unit

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Should the internal auditfunction be internal or external?


Address shareholders concerns Disclosure as descriptive as possible Avoid boilerplate disclosures Timely disclosure

Tony TAN 2011

Principle Regular Effective

Fair

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Are companies communicatingeffectively with shareholders?



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Participation and voting Avoid bundling of resolutions and to

explain if used Presence of Chair of NC, RC and AC Presence of external auditors Allow for proxy voting Make minutes of AGM available

Tony TAN 2011

Principle Encourage

greatershareholderparticipation

Allowshareholdercommunication

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Are shareholders needs met atAGMs?


Formation

of CFC1997

Formation

of SID1998

Formation

of SIAS1999

Tony TAN 2011

1st code of

corporate

governance2001

2nd code of

corporate

governance2005

MAS/SGX

takes

responsibility

for CG

2007

46


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14 proposed changes, two new principles &statement on The Role of Shareholders Independence definition Board composition Directors training Multiple & alternate directorship Alignment of interest (including clawback clauses) Objectivity of remuneration consultants Detailed remuneration disclosure (directors & key

management) Responsibility for risk governance Positive assurance statement Shareholder engagement policy Poll voting

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Source: NewsSingapore

Tony TAN 2011
http://localhost/var/www/apps/conversion/tmp/Useful%20Videos/Changes%20to%20Code%20of%20Corporate%20Governance.flv


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Separation of ownership and management Company managed by or under the direction of

directors

Except where shareholder approval is required

Statutory duties - A director shall at all timesact honestly and use reasonable diligence Act in the best interest of the company

Avoid conflicts of interest Act for proper purpose

Effect of breach of fiduciary duties Directors liable for any loss caused

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Section 157A of the Act states that the

business of the company shall be managedby or under the direction of the directors.

as including any persons occupying theposition of director of a corporation

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Companies Act (Cap 50, 2006 Rev Ed) s 4)


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9. Chairman Administrative leader of the board

Usually equipped with casting vote

Sets the board agenda

Chairs the AGM

See the CG Code 2005->

5. Alternate / substitute director Steps into shoes of full director in

time of need

Not statutorily provided for, but maybe in the articles of association

Practice appointed at the sametime as main director

Same powers as main director

May have limited powers

May not have liability if not involvedin the relevant decision

Boon or bane? ->

1. Executive director Active role in the management of

the company.

Full-time employee

Paid in remuneration (not fees)

Contractual position based onshareholder election

Generally include MDs and CEOs

Role of executive director ->

2. Non-executive director Director with no operational

responsibilities

Many reasons for this position

Provides independence of views &outside perspective

Balancing the interests ofstakeholders

Supervisory function (CG code onNEDs sitting in committees)

Monitoring board performance andstrengthen leadership of board

See Higgs report ->

4. Nominee director Appointed by an appointer and

represents their interest

Appointer usually a person with alarge shareholding

Common in JVs andparent/subsidiary companies

Act as a conduit for information andto represent the interest of theappointor

May be in conflicting situationbetween good for company or goodfor appointor

See diagrammatic representation ->

3. Independent director See CG Code 2005 ->

Law treats EDs, NEDs and IDs thesame

Vigilant guardians of board

Oversight role

Cannot hide under the cloak ofignorance

Not to protect the interest ofminority shareholders, but allshareholders

Appointment of lead independentdirector

Appointment to committees

6. Shadow director Directs the actions ofthe directors

(de jureor de facto)

Directors acted in accordance withsuch instructions

Action is consistently applied overtime

Control the majority of the board

Exercise real influence in thecorporate affairs of the company

Does not apply to professionaladvisers

7. De facto director Assumes the status ofa director

o Undertook function that only adirector can do

May have also been terminated

Actually engaged in the affairs of thecompany

8. Associate directors Not regarded as a director as

defined in the Companies Act

No voting rights unless consentgiven

Training platform for future possibleappointment to the board

Similar role as nominee director, butwithout rights and liabilities

Clarity in article of association thatAD is not a director as commonlyunderstood

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Tony TAN 2011

1. Executive2. Non-executive3. Independent4. Nominee5. Alternate / substitute6. Shadow7. De facto8. Associate9. Chairman

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a. Think the unthinkable

b. Anticipate Murphys Law

c. Grow a two-headed

snaked. Practice Goldilocks

management style

e. Emphatise and inspirehope

f. Have the skills of ajuggler

g. Put first principles first

Seven habitsfor a highlyuncertain CEOBack(1)


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Strategy. Challenge and develop strategy Performance. Setting and monitoring Risk. Accuracy of financial information,

robustness of controls and systems of riskmanagement

People. Setting remuneration levels andmanagement of senior management

Attributes. Integrity, ethical, sound judgment,challenge & probing and strong interpersonalskills

Back

(2)

54 Tony TAN 2011

No relationship with company

o Related companies (subsidiary or parent) orofficers

Past employee (3-years limit)

Immediate family member

Receiving other compensation

Interested party transactions by substantialshareholder

Back

(3)

What do you think is the role of theindependent director?


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Back(4)

Appointor: Substantial shareholder JV partner Investor Creditor

Appointee: Employee Representative Director

AppointCompany

Executive ornon-executive

positions

Shareholding/Investment/JV partner

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Back

(5)


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Lead the board

Accurate, timely & clear information

Communication with shareholders

Bridge between Board & Management

Facilitate contribution of NEDs

Bridge between EDs and NEDs

Promote high standards of CG

(9)

How is the Chairman of the Boarddecided

corporate governance i [tt-110905][1]

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