Transcript Slide 1

Corporate Governance
TRUST IS THE NAME OF THE
GAME
A legal Analysis of the Corporate Governance
Survey Results
by
Nada Abu-Samra and Chadia El-Meouchi
“The genius of the corporation is its
internal dynamic of accountability”
The corporation's vitality is based on trust bridging law, tradition,
and management theory trust
-managers will work loyally and effectively to realize the full potential
of value for the owners,
-the owners can be counted on to ensure that the venture operates
in their interest, their interest standing for everybody's interest.
• If the corporate structure is inadequate to
maintain that trust, then all of the changes in
laws, monetary policy, and trade agreements
cannot solve the problem…
Robert A.G. Monks and Nell Minow
2
Where do we stand in Lebanon?
Trust in what or in whom ?
the management ?
the system ?
the community in general ?
Perception and Trust
• Trust from within the Company
– The management
– The Shareholders
– The Auditors
• Trust in the System
–
–
–
–
Anti-competitive behavior
Corruption
The judiciary/legal system
Monitoring agencies, associations and SRO’s
4
Trust from within.
Corporate Governance is key in
attracting investors
Survey analysis: ~62% consider Access to Finance as a
major, severe or moderate impediment for the
Operations and Growth of Businesses.
OECD recent review of CG principles, 2004:
• Access to finance can be improved by good corporate
governance practices, hence contributing to the growth
of the business.
• The degree to which corporations observe basic
principles of good corporate governance is an
increasingly important factor for investment decisions.
5
Our approach shall mainly focus on
the Rights of Shareholders
and
The Impartiality of Management
Shareholders’ Rights
Putting Answers in Perspective (1)
• Form of the companies:
51.9% are sole proprietorship and partnerships
27% are limited companies
8.4% are joint stock companies
8.7% are publicly listed companies
• The largest stakeholders:
Families, in 57.8% of the companies.
Individuals, in 37.4% of the companies.
Foreign investors, in 6.2% of the companies.
• Number of full time employees:
68.2% have15 full time employees or less
21.8% have between 16 and 50 employees
4.5% have between 51 and 99 employees
4.5% have between100 to 800 employees
1% have between 1000 and 8500 employees
7
Shareholders’ Rights
Putting Answers in Perspective (2)
• Persons who were interviewed in the survey
were mainly Chairmen, executive directors and
general managers.
• The position of the interviewed must be taken
into consideration when analyzing all answers
relating to shareholders’ rights.
• It would actually be interesting to run a similar
survey with shareholders who are not part of the
management, and compare the results to those
of the present survey.
8
The Rights of Shareholders
OECD 2004 Principles
A- The corporate governance framework should protect and
facilitate the exercise of shareholders’ rights;
such basic rights including the right to:
1) secure methods of ownership registration;
2) convey or transfer shares;
3) obtain relevant and material information on the corporation on a timely and regular basis;
4) participate and vote in general shareholder meetings;
5) elect and remove members of the board;
6) share in the profits of the corporation.
B- Shareholders should have the right to participate in, and to be
sufficiently informed on decisions concerning fundamental
corporate changes such as:
1) amendments to the statutes, or articles of incorporation or similar governing documents of the company;
2) the authorization of additional shares;
3) Extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the
sale of the company.
C- Shareholders should have the opportunity to participate
effectively and vote in general shareholder meetings and
should be informed of the rules, including voting procedures,
that govern general shareholder meetings.
9
Shareholders’ rights
Analysis of Survey Results
• 73.5% agree that Companies have regular shareholder
meetings
• Only 71% (noting that management was interviewed)
agree that Shareholders obtain information on the
company upon request and without delay.
• Only 69.5% (noting the position of the interviewed) agree
that Shareholders are sufficiently informed on decisions
concerning fundamental issues like amendments of
statutes or articles of incorporation, authorization of
additional shares.
10
What’s the point in having shareholders’
meetings and upholding shareholders’ right to
vote, if shareholders are not sufficiently
informed on the issues they are voting?
• The right combination?
-Transparency is at the heart of good
corporate governance.
-Confidentiality is important and business
secrets are one of the components of
success.
11
Shareholders’ Right to Information and
The Lebanese Code of Commerce (1)
Partnerships
The LCC doesn’t expressly provide for the
shareholders’ right to access information.
Recommendation: Although it may be argued
that the right to information is implicit to the
unlimited liability of the shareholders, this
remains only an argument and no legal provision
expressly regulates, protects or enforces this
right.
12
Shareholders’ Right to Information and
The Lebanese Code of Commerce (2)
Limited Liability Companies
Pursuant to Article 21 of DL35, each shareholder may at his appreciation
review the documents relating to the management of the last 3 years. Also,
the managers must deposit at the company’s headquarters twenty days
prior to the shareholders’ assembly, the following documents:
-report on the activity of the company
-inventory, a general investment account
-profit and loss account, as well as the financial statements.
-The auditors’ report, if any.
Recommendation: The current text concerning the shareholders’ right to
review documents on the management of the company during the last three
years, remains vague and general. The text does not specify the documents
that shareholders may review, nor does it provide for a penalty if the
management refuses to give access to such information or documents.
- Access to information must be timely and on an on-going basis.
- Procedures and penalties must be expressly provided for.
13
Shareholders’ Right to Information and
The Lebanese Code of Commerce (3)
Joint-Stock Companies
Art 197 of the LCC provides for the shareholders’ right to review or take a copy
of, the following documents withini 15 days of the yearly ordinary general
assembly:
-
Inventory
Financial statements (and the consolidated, if any)
Profit and loss statement (and the consolidated, if any)
List of shareholders
Board of directors’ report
Auditors’ report
Recommendation: The provisions of article 197 should be amended to:
-
increase the scope of the documents and information that a shareholder is
entitled to obtain within “the right combination” (possibly link the right to
information to the percentage ownership right)
Provide for a procedure including delays and penalties for exercise of the
right to information
14
Provide for timely access to information and on an on-going basis.
Shareholders’ Right to decide on Major
Issues
and the Lebanese Code of Commerce
Only 69.5% (noting the position of the interviewed) agree that
Shareholders are sufficiently informed on decisions
Joint Stock Companies
Lebanese law requires that resolutions concerning any amendment
to the by-laws (for example increase of capital) as well as mergers,
be taken in an Extraordinary general assembly with a quorum of 2/3
(1/2 and 1/3) and a majority vote of 2/3 of the present shareholders.
Limited Liability Companies
Pursuant to Art 26 of the LCC, a majority vote of ¾ of the company’s
share capital is required for any amendment to the company’s bylaws.
15
But Again,
What’s the point in having shareholders’
meetings and upholding shareholders’
right to vote, if shareholders are not
sufficiently informed on the issues they
are voting?
16
Shareholders’ Right to decide on
Major Issues.
Loopholes of the LCC Provisions
Both SAL’s and SARL’s require a qualified quorum and majority for
the amendment of the by-laws.
However, there is no specific legal requirement on the detailed
information that should be made available to the shareholders
prior to voting such decisions.
Concerning SAL’s, Article 190 of the LCC is a catch all provision that
grants shareholders representing ¼ of the assembly, the right to
postpone the meeting if they deem to be insufficiently informed on
the issues to be resolved upon, regardless of the subject matter of
the resolution.
However, this article is seldom used and shareholders are rarely
aware of the existence of such right. Also, abuse may still occur
given the minimum number of shareholders required for the exercise
of such right.
17
Shareholders’ Right to make Informed
Decisions on Major Issues.
Suggested Amendments.
• Specific disclosure requirements should be introduced
concerning important decisions such as amendment to the by-laws
in general, increase of capital, mergers, sale of substantial assets of
the company…
• Speedy and efficient enforcement procedures for enforcing
disclosure requirements must be enacted.
• Penalties for breaching disclosure requirements must be provided
for and efficient redress measures must be included.
• A “miranda” like requirement to expressly mention shareholders’
right to information either on the minutes or at the outset of a
shareholders’ meeting should be considered.
18
Management’s Impartiality
Related Parties Dealings (1)
• ~51% of the Companies don’t Have a Statutory Rule
Preventing Concerned Board Members and Managers
from Participating in Decisions Where Conflicts of
Interest May Arise.
• The legal provisions under the LCC?
-Partnership
-Limited Company
-Joint-Stock Company
19
Management’s Impartiality
Related Parties Dealings (2)
• Partnerships
- Article 59 of the LCC prohibits managers from
entering with the company into any contract, where
they have a personal interest, and such without the
prior special approval of the partners. This restriction
does not apply to transactions that are usually
undertaken by the company with its clients.
• Limited Liability Companies
- Art 18 of the LCC expressly prohibits shareholders and
managers from obtaining from the company loans,
guarantees or other undertakings in their favor or for the
account of their spouse, ascendant and descendants.
20
Management’s Impartiality
Related Parties Dealings (3)
•
Joint-Stock Companies
- Article 158 of the LCC prohibits the directors from entering into any contract with the company
without the prior approval of the shareholders’ general assembly. This restriction does not apply to
contracts usually entered into by the company with its clients.
-The same article further prohibits any physical director from obtaining a loan or guarantee from
the company.
-Article 187 LCC prohibits any shareholder from voting when the resolution aims at granting
him/her a special advantage, or when the resolution relates to a dispute between the shareholder
and the company.
In practice, most companies (including banks to a certain extent) grant a
general authorization at the annual shareholders’ meeting without actually
being informed on the specific related transactions.
This practice violates the law to the extent that the law requires such
authorization to be specific and made upon two special reports, one
prepared by the board of directors and the other by the auditors.
Recent corporate governance scandals in Lebanon were about hidden
related parties’ transactions: Bank al Madina, UBL…
21
Perceptions Corporate Governance Reform
The following factors are considered as important or very important in
the Process of Corporate Governance Reform in Lebanon
•
•
•
•
•
•
•
•
98.4% Enforcing laws, rules, and procedures
96.1% Tax and financial disclosure
93% Accounting standards (100% for banks)
93% Independent judiciary
93% Monitoring bodies to ensure compliance (100%)
80.5% Boardroom politicization
81.2% Financial market regulation.
57.8% Privatization of state owned enterprises
22
TRUST IN THE SYSTEM
• Does the Private Sector Trust Itself ?
• Does the Private Sector Trust the Public
Sector?
23
Trust in the System
Factors perceived as constituting severe, major
or moderate impediment for the growth of
businesses
• Tax Administration: 77.5%
• Corruption: 76.1%
• Anti-competitive Practices: 74.4%
• the Legal/judiciary system: 46.7%
24
Does the Private Sector Trust
Itself ?
• Anti-competitive Practices:
74.4% of the companies consider anti-competitive practices as a
severe, major or moderate impediment for the Operations and
Growth of Businesses.
• Code of Conduct:
81.3% don’t have a formal written policy or code of conduct
combating corruption.
• Recommendations:
- Business ethics should guide companies.
- Regulations must be enacted and enforced to sanction anticompetitive behavior.
- Monitoring bodies should be put in placee.
25
The Faces of Corruption
Factors deemed to have a severe, major, or
moderate Impact on Businesses.
• ~ 30% Private Payments to Parliamentarians
• ~32% Private Payments to Judges and Judiciary
Assistants
• 45.3% Bribes Paid to Public Officials to Avoid Taxes and
Regulations
• 55.2% consider that If a government agent acts against
the rules they can never or rarely go to another official or
to his superior and get the correct treatment without a
recourse to unofficial payments.
26
The Cost of Corruption (2)
• ~71% agree that firms in their line of business have to
sometimes, frequently, or always pay some irregular
`additional payments` to get things done.
• 33.8% consider that Gifts or Informal Payments to Public
Officials would Cost a Typical Firm 1%-9.9% of Annual
Sales.
• “Reliable” corruption?
68.5% agree that sometimes, frequently or always, If a
firm pays the required `additional payments`, the service
is usually also delivered as agreed.
27
Fighting Corruption
Analysis of Survey Results
• Do we want to eliminate corruption, at
what price?
• Do we have the power to eliminate
corruption?
• What to do?
28
The Price that companies are
willing to pay for fighting corruption
86.2% of the companies consider that Tax Rates are a
severe, major or moderate impediment for the growth of
businesses
Yet,
47.8% of the companies are Willing to
Pay additional taxes if the Government
Eliminates corruption.
29
The Power to change the System
Entities deemed to have a decisive, dominant or moderate influence on
recently enacted laws having a substantial impact on businesses.
Companies
•
66.2% Syria (28.4% no influence)
•
62% Dominant Firms in Key
Sectors of The Economy
•
54.9% International Development
Agencies.
•
54.5% Business Associations (note:
37.4% of the Companies are not Members
of Trade Association or Lobby Group)
•
Banks
•
100% International Development
Agencies.
•
89% Business Associations
(banking association)
•
55.6% Dominant Firms in Key
Sectors of The Economy
•
33.3% Syria (and 54% consider it
had no influence)
31.3% consider that Domestic
Firms
30
What to do?
Analysis of Survey Results
• Only 50% consider that Information on the laws and
regulations affecting their firm is easy to obtain. (v.s.
banks: 89% of the banks consider that that
information on the applicable laws is readily
available.)
• 36.2% consider that Interpretations of regulations
affecting their firm are not consistent neither predictable.
(v.s. banks: 0% of banks conside that interpretations
of regulations affecting them are not consistent
neither predictable)
31
What to do?
• Improve Public Governance (improving public accountability, the
quality of the administration)
• Transparency of the Public Sector
•
Access to Laws and Information
•
Creation of Monitoring Agencies
•
Raising Awareness
• Aligning the reform to international standards, especially the12
Key Standards For Sound Financial Systems developed by the
Financial Stability Institute.
32
12 Key Standards For Sound
Financial Systems
•
•
•
•
•
•
•
•
•
•
•
1. MONETARY and FINANCIAL POLICY and TRANSPARENCY: Standard is formulated in the
form of a Code of Good Practices on Transparency in Monetary and Financial Policies issued by
the IMF.
2. FISCAL POLICY TRANSPARENCY: Standard is the Code of Good Practices in Fiscal
Transparency issued by the IMF.
3. DATA AND DISSEMINATION: Standards are the Special Data Dissemination Standard (SDDS)
and the General Data Dissemination System (GDDS), IMF.
4. INSOLVENCY AND BANKRUPTCY PROCEDURES- World Bank
5. ACCOUNTING- Standard is the International Accounting Standards (IAS).
6. AUDITING- the Standard is the International Standards on Auditing (ISA).
7. PAYMENT AND SETTLEMENT: Standards are the Core Principles for Systemically Important
Payment Systems and the Recommendations for Securities Settlement Systems issued by BIS,
IMF and World Bank
8. MARKET INTEGRITY: Standard is the 40 Recommendations and the 8 Special
recommendations against terrorist financing- Financial Action Task Force (FATF).
9. BANKING SUPERVISION: Standard is the Core Principles for Effective Banking SupervisionBIS
10. SECURITIES REGULATION: Standard is the Objectives and Principles of Securities
Regulation issued by IOSCO
11. INSURANCE SUPERVISION: Standard is the Insurance Core Principles (ICP)- IAIS
12. PRINCIPLES OF CORPORATE GOVERNANCE- World Bank and OECD
33
The Court System
•
67.8% consider the Court System As Being never, rarely or only sometimes Fair and impartial in
Resolving Business Disputes.
(banking: 88.9%)
•
68.5% consider that Court System is never, rarely or only sometimes Honest & uncorrupt in
Resolving Business Disputes
(banking 77.8%)
•
92.5% consider that the Court System is never, rarely or only sometimes Quick in Resolving
Business Disputes. (this perception is not confined to corrupt countries. Even in developed
countries, there is a perception that the court system is lengthy. This is one of the factors that
explain the popularity of arbitration.)
(banking 100%)
•
72.5% consider that the Court System is never, rarely or only sometimes Affordable in Resolving
Business Disputes (banking: 88.9%)
•
75.6% consider that the Court System is never, rarely or only sometimes Consistent & reliable in
Resolving Business Disputes (banking: 88.9%)
•
54.4% consider that the Court System is never, rarely or only sometimes Able to enforce its
decisions in Resolving Business Disputes (banking: 44.4%)
•
34.2 are not confident that the legal system will uphold their contract and property rights in
business disputes (banking: 33.3%)
34