corporate governance.pdf

Bob Tricker

Chapter 2Governance and management

Corporate Governance Principles, Policies and Practices 2e

Tricker: Corporate Governance 2e

in which we recognise: definitions of corporate governance the scope of corporate governance the significance of constitutions for corporate

entities the difference between governance and

management the performance and conformance aspects of

governance alternative board structures

Governance and management


Definitions of corporate governance

Definitions vary according tot the perspective of the user operational relationship stakeholder financial economics societal



Defining corporate governance operational

Corporate governance is the process by which companies are directed and controlled

Cadbury Report 1992 and OECD 1999



Defining corporate governance relationshipis the relationship among various participants in

determining the direction and performance of corporations. The primary participants are the shareholders, the management and the board of directors Monks and Minow 2001

The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization such as the board, managers, shareholders and other stakeholders and lays down the rules and procedures for decision-making OECD 2002



Defining corporate governance - stakeholder

Corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders

Demb and Neubauer, 1992



Defining corporate governance financial economics perspective

Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment

Shleifer and Vishny, 1997



Defining corporate governance - societal The whole set of legal, cultural, and institutional

arrangements that determine what (public) corporations can do, who controls them. How that control is exercised, and how the risks and return from the activities they undertake are allocated

Blair, 1995 Corporate governance is concerned with holding the

balance between economic and social goals and between individual and communal goals.

Cadbury, 2000



Defining corporate governance overall

Corporate governance is the exercise of power over a corporate entities

Tom Clarke, 2004



The spheres of Corporate Governance

Societal influences and other stakeholders

Contractual stakeholders:Suppliers,Customersbankers

External auditors

Shareholders i.e. members

Institutional investorsCG activists

Law courts

Investment analysts

Government and other corporate regulators

Investigative Media

Management

Stock Markets

Market intermediaries Providers of

debt capital

Other sources of finance

Governing body - board of directors


Every corporate entity needs a constitution

Governance and Management

THE MEMBERSShareholders in a limited company Members of the profession in a professional bodyClub members in a sports, arts or other private clubRegistered members in a trades union Members of academic bodiesVoting members of other corporate entities

THE CORPORATE ENTITYLimited liability company Professional organisationSports, arts or other clubTrades union University or collegeOther corporate entities


Incorporating a joint stock limited liability company

Companies Registrar

Memorandum- name of company- objectives- registered office- share capital- liability of shareholders limited

Articles of Association- detailed rules for running the entity- Table A



Types of limited liability company

Private companies limited by shares Private companies limited by guarantee (Private unlimited companies) Public companies

offer to general public in UK title XYZ Plc prospectus needed to offer shares



Other forms of incorporation Savings and loans association, building societies Co-operatives: supplier (Canada), customer (UK) State corporate entities

Federal National Mortgage Association (Fannie Mae) QUANGOs Quasi-autonomous non-governmental

organisation

Not for profit entitiese.g. Charities, sports associations, arts and cultural societies Trust law, friendly societies law, charities law etc.



The essence of governance


The members

Governing body

Management

Corporate entity



Management involves an organisational hierarchy


Governance is different from management


governance

management



Board Structure INED

ED

InvestmentManager

Co. Secretary(ComplianceOfficer)

GeneralManager


Management runs the business: the board ensures that the business is well run

and running in the right direction



Wherever management is separate from ownership or membership, organisations need governing Public listed company board of directors Small/medium company - board of directors Subsidiary/associate/joint venture board Company limited by guarantee University, college council, governing body Charity, club, hospital board, committee Quasi-governmental bodies council, committee, board Family firm

Many corporate governance ideas are universal and can be applied to any governing body

(contrast organisations where management and governance are in the same hands sole traders, small partnerships)



The basic board processes


Accountability Strategy formulation

Supervising executive activities Policy making

Outward looking

Inward looking

Past and present focused Future focused



Outwardlooking Providing

AccountabilityStrategy

Formulation

Approve and work withand through the CEO

Inwardlooking

Monitoring andSupervising

PolicyMaking

FuturePast andpresent focused focused


The conformance and performance roles of the unitary board


conformance performance


Guidelines for a board strategy seminar or workshop Careful planning, well in advance, is essential Agree a time when all directors can attend Fix a location where all directors can participate Define the objectives clearly, for example:

- to explore the strategic situation- to discuss the implications- to consider alternative strategies- to determine the next steps to be taken(but not to take strategic decisions immediately)

All directors must be fully informed about the objectives All directors should be supportive of the event All directors need briefing with relevant data in advance



Guidelines for a board strategy seminar or workshop (continued)

Do not hold the event in the board-room (the board-room culture is decision orientated)

Decide who is going to run the event (this need not be the chairman) Decide whether other people should be invited to participate

(senior executives to brief the directors, external experts to give briefings, experts to contribute to process)

At the first session establish the ground-rules- this is not a board meeting to make decisions, but a free-ranging exchange of views and insights- strategic decisions will not be made- call for imaginative contributions however unusual - discourage negative comment ('we tried that - it won't work', 'no good for us')

The output of the strategy session should be an agreed list of next actions, and who is responsible for taking them and by when.



All executive board Majority executive board Majority non-executive board All non-executive board

Supervisory board Two-tier board

Board structures around the world Some complex structures

Alternative board structures


The all-executive board

O = executive directors

OO O

O O


The majority-executive board

O executive directorsN non-executive directors

N

N N O O

O O O


The majority non-executive board

N non-executive directors O executive directors

NN N

N N O

O O


Board Structure ExerciseBoard Structure ExerciseGroup 1Group 1

ED NED INED Total

MCM 3 8 0 11 BCOM 3 3 0 6 Excel Technology 4 1 3 8 Esprit Holding 5 2 3 9 Giordano 3 4 0 7

Percentage

Directors and board architecture


Two-tier board

N non-executive directors O executive directors

Directors and board architecture

NN N

N NN N

N N

OO O

O


We have considered definitions of corporate governance the scope of corporate governance the significance of constitutions for corporate

entities the difference between governance and

management the performance and conformance aspects of

governance alternative board structures


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corporate governance.pdf

Documents

scope of corporate governance

corporate governance

eevery corporate entity

corporate entities tom

performance of corporations

board of directors monks

various participants

stakeholders demb