Transcript Slide 1
History of Corporate Governance by M.H.M.Faizer
ENTERPRISE GOVERNANCE Dimensions Dimensions CORPORATE GOVERNANCE (Conformance) BUSINESS GOVERNANCE (Performance) The two dimensions need to be in balance !
Enterprise Governance
Defined as the set of responsibilities & practices exercised by the board & executive management with the goal of providing strategic decision, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that organizations resources are used responsibly.
Corporate governance & Performance governance
• CG covers issues such as board structures & roles, internal controls & executive remuneration. The performance dimension focuses on helping the board to make strategic decisions; understand its appetite for risk and its key drivers of performance.
• Corporate Governance is necessary but not sufficient for success. Bad governance can ruin a company but cannot on its own ensure success hence the need for enterprise governance.
Treadway & COSO (USA)
• Issued a report on fraudulent financial reporting in 1987 which confirmed the role & status of Audit committees (a listing requirement) with a majority of non executive directors • Frame work for internal controls
Cadbury, Greenbury & Hampel (UK) 1980/90’S
o o • o o o Integrity – honest, balanced and complete financial reporting Accountability – directives to set up by FRC, the stock exchange & accountancy profession The code was based on three principles Openness – subject to commercial confidentiality Integrity – honest,balanced and complete financial reporting Accountability- directors to provide quality information & shareholders to exercise their powers.
Cadbury (contd)
• • • • • Report on financial reporting & accountability of corporate governance Responsibility of Executive & Non Executive directors Case for Audit committees Principal responsibilities of Executive & Non Executive Directors Links between shareholders, board & auditors
Greenbury (Jan 1995)
• • • Initiative of CBI (Confederation of British industry) Emphasis on determining directors pay Role of Non Executive Directors
Hampel (Nov.1995)
• • • • • • Initiative of FRC, Stock Exchange, the CBI & CCAB Review Cadbury & propose amendments Review greenbury & propose amendments Review role of directors Address the roles of shareholders & auditors in the CG The committee produced a “ Combined Code”
Combined Code
• • • • Directors Directors remuneration Accountability & Audit Relations with shareholders
Directors
• • • • • Balance of Executive & Non Executive Directors Clear division of responsibilities between Chairman & CEO Appointments be formal, rigorous & transparent The Board evaluate its own performance on an annual basis Re- election at regular intervals
Directors’ Remuneration
• • • • Remuneration necessary to recruit & retain directors Significant portion of Executive Directors’ pay should be performance related Policy on remuneration to be clear & transparent No director should be involved in determining his/her remuneration
Accountability & Audit
• • • • Board is responsible for presenting a balanced and understandable assessment of the company’s financial position & prospects Board is responsible to maintain a sound system of internal controls to safeguard company’s assets & S/H investments Financial reporting Relationship with external auditors
Benefits of Corporate Governance
• • • • • Reduces risk – it provides a mechanism to review risk. It helps to reduce the risk of fraud Stimulates performance – it institutes clear accountability & effective links between performance & rewards.
Improves access to capital markets- corporate governance is seen as protecting shareholders rights.
Enhances the marketability of goods & services – it creates confidence among the shareholders, customers & suppliers, etc… Improves leadership – appointments of NED’S - wider pool of knowledge • Demonstrating transparency & social accountability
Corporate governance in South Asia
Bangladesh
• • • • • Market Capitalization USD 3.8 Billion (6.8% of GDP ) 277 Securities listed in DSE 198 Securities listed in CSE 49 Banks & 28 Non Banking Institutions 44 State owned enterprises (60 Privatized )
Bangladesh contd…..
• • • Awareness was low (2002) but now…..
Legal framework : company’s Act 1994 SEC Act 1993
Corporate Governance Initiatives
• • • • • • Bangladesh Bank directives National Taskforce on governance Code of corporate governance corporate SEC guidelines Role of World Bank & Asian Development Bank In 2002, Bangladesh Enterprise Institute examined the current state of corporate governance & practices in South Asia (OECD Principles of Corporate governance as benchmark )
India
• • • • • • Securities scam involving large no of banks leading stock market crash in 1992 Initiative from confederation of Indian industry (1998) (voluntary code – only 20% of companies followed.
Therefore intervention by the regulators Eg; securities & exchange board & Ministry of company affairs 15,000 listed companies 23 registered stock exchanges but only two matters Bombay stock exchange & National stock exchange SEBI Corporate governance guidelines (1999) (Substantial aspects of SEBI Code are mandatory)
• • • • •
Sri Lanka
Numerous company failures specially finance companies in late 1980’s & 1990’s Taskforce set up in 1992 by ICA followed by a committee in 1996 Code of best practice on CG – 1997 by ICA Setting up of the SL Accounting & Auditing Standards (ICL) Act No 15 of 1995 SEC – to develop standards of financial reporting
Sri Lanka Contd….
• • • • • • • • 1997 – Initiated by Institute of Chartered Accountants together with Colombo Stock Exchange Securities Exchange Commission Ceylon Chamber of Commerce Institute of Directors of Sri Lanka ( voluntary best practice code) Listed companies, unit trusts, fund management companies, finance companies, Banks, insurance companies were expected to adopt the code.
( Primarily based on Cadbury Report)
Sri Lanka Contd…
• 1) 2) 3) 4) 5) 6) 7) 8) 9) Areas Covered Effectiveness of the board The Chairman Non – Executive Directors Professional Advice Directors’ Training Directors Responsibilities for Financial Statements Compliance Report Internal Controls Committee structure for Board
Sri Lanka Contd….
•
Code of best practice on Audit Committees (2002) Initiated by ICL A separate code covering Audit committees was introduced Based on the combined code (UK)
Sri Lanka Contd…
• 1) 2) 3) 4) 5) 6) 7) 8) 9) Areas Covered Effectiveness of the board The Chairman Non – Executive Directors Professional Advice Directors’ Training Directors Responsibilities for Financial Statements Compliance Report Internal Controls Committee structure for Board
Sri Lanka Contd….
•
Code of best practice on Audit Committees (2002) Initiated by ICL A separate code covering Audit committees was introduced Based on the combined code (UK)
SL Contd…
• Revision of Corporate Governance Code 1997 • In 2003 • • • • Applicability to all companies under companies Act Functions of the board – revisited Disclosure of major transactions Introduced performance evaluation
Sri Lanka contd
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Guidelines for listed companies (Audit or Audit Committees) In 2004 Deals mostly with external Auditor related issues (Qualification & appointment, power, Remuneration, Rotations, conflict of interest).
Audit committees, Financial reporting requirements
Further Revision (code of best practice)
I.
II.
III.
IV.
In 2006
To include latest developments of the combined code (UK) & NYSE listed co. manual, Singapore, Malaysia, India etc..
Specific new inclusions: Code of ethics for directors & senior managers Specific board related Disclosures Audit committee aspects are strengthened Director Independence criteria is specified
Major Corporate Collapses
UK : The Maxwell publishing group BCCI Marconi USA : Enron World Com Tyco Germany : Berliner Bank Babcok Australia : OneTel Ansett Airlines
Lessons of Experience
Lesson i : Corporate Governance cannot be introduced in isolation from a range of other reforms. Nor can these reforms achieve all their objectives without CG initiatives Lesson ii : The need to monitor the trends in different sectors of the market so as to try & avoid a “perfect storm” Lesson iii : need for range of players to improve CG.
Lesson iv : a degree of “stick” may be needed with “carrots” of increased investment & performance Lesson v : critical importance of company & contract laws & efficacy of the legal system