Transcript The Code of Best Practices and the Board of Directors Professor Florencio Lopez-de-Silanes Yale University School of Management International Institute for Corporate Governance April 9th, 2002.

The Code of Best Practices and the Board of
Directors
Professor Florencio Lopez-de-Silanes
Yale University
School of Management
International Institute for Corporate Governance
April 9th, 2002.
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Corporate Governance and the Code of Best
Practices
 Corporate governance is the system through which companies are directed
and controlled.
 Good corporate governance implies:
 Efficient Board of Directors.
 Adequate investors’ protection.
 International experience has shown that improved transparency and
disclosure of corporate practices increase investors’ trust in the companies.
 Different countries have found that a way to improve the corporate
governance of their companies is through the development of Codes of Best
Practices (CBP).
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The Code of Best Practices
 Although the Codes have common factors, each one emphasizes the
problems or characteristics of each country.
 In general terms, the Codes establish basic principles, of voluntary
adherence, to improve corporate governance.
 The CBPs make recommendations in five areas:
1. Board of Directors
2. Auditing and Accounting
3. Board’s Compensation
4. Selection of the Members of the Board
5. Shareholder rights
3
Code of Best Practices
SUSPENDED
33 Companies
SUBMITTED
178 Companies
14%
DEFERMEN
T
6%
15
5% Companie
s
MISSING
13
Companie
s
75%
The companies that requested a deferment have already
submitted the requested information
Total number of companies that answered the questionnaire:
239
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Composition of the Board of Directors
51%
Adopted
Not adopted
49%
1) The number of directors is between 5 and 15
2) There are not substitute Directors
3) At least 40 % of the directors are independent
4) At least 20 % of the directors are independent
89%
33%
83%
75%
Total of companies that commented on best practices: 178
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Structure of the Board of Directors
55%
Adopted
Not adopted
1)
2)
45%
The Board performs functions of compensation and evaluation, audit,
planning and financial management
72%
The audit committee is chaired by an independent director
26%
Total of companies that commented on best practices: 178
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Committees and the Board’s Functions
 It is considered important that the Board is properly informed and that the
Directors participate in the discussion of the topics of relevance.
 Recommendations:
o The creation of intermediate entities, committees, to support the
Board in the execution of its functions
• These committees are extensions of the Board
 There are at least three functions in which the Board should be involved.
These are:
 Evaluation and Compensation
 Audit
 Financial and Planning
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Compensation and Evaluation Function
54%
Adopted
Not adopted
46%
1) The evaluation and compensation committee revises the selection
of the company’s executives
58%
2) Information (structure and form) about compensation
packages for directors and executives is disclosed
33%
Total of companies that commented on best practices: 178
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Audit Function
32%
68%
Adopted
Not adopted
1) The external auditor’s fee is less than 20% of the audit firm’s revenue
83%
2) External auditor is different than the “comisario”
67%
3) The committee submits accounting policies to the approval of the board
41%
4) The board approves guidelines of the internal control system
Total of companies that commented on best practices: 178
57%
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Financial and Planning Function
36%
64%
Adopt
Not adopted
The Financial and Planning Committee evaluates the viability of the
investment and financing
63%
Total of companies that commented on best practices: 178
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Disclosure of Information to Shareholders
40%
60%
Adopted
Not adopted
1) Miscellaneus topics are omitted during the annual meeting
76%
2) Information needed for the annual meeting is available 15
days in advance
90%
3) Shareholders with enough information and voting alternatives can
instruct their agents
31%
Total of companies that commented on best practices: 178
4) Relevant aspects of the committees’ performance are included
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Benefits and Limits
 Benefits of CBP
 Provides a guideline for shareholders for some reforms
 Gives investors more information to sort good from bad
 Market push to institutionalize and professionalize companies
 To improve the image of companies that uphold the principles
recommended by the CBP
 Limits
 Only guideline, not forcing anybody
 Some principles need more bite
 Big missing point: director’s responsibilities
 Need other forces (the press) to excersice some monitoring
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Appendix
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Board of Directors
 The Board of Directors must be committed to its function, be functional and
make informed decisions.
 The CBP suggests:
o The separation of the CEO and the President’s roles
o To define more concretely the functions of the Board
o To limit the Board’s size
o That substitutes are not included in the Board
o Principles about the Directors’ duties
 It is considered as an essential element for the good operation of the Board
that it has plurality of ideas and that it acts with objectivity.
 The Code suggests:
o The appointment of independent Directors
o Minimum percentages of representation of the different categories of
directors
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Evaluation and Compensation Function
 It is necessary that the Board supervises the administration of the company,
the execution of the goals, as well as to make sure that the Directors’
compensation is not disproportioned.
 The CBP recommends:
o That the board is informed about the policies on evaluation and to
compensation of Directors
o That information is disclosed
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Audit Function
 The Board should guarantee that the financial information is revised and that
external auditors participate in this process so that the information that is
disclosed is accurate and has a high degree of transparency.
 Recommendations:
o To assure the objectivity in the selection of the auditors
o That the Chairman of the audit committee is independent
o Consistency in the company’s accounting policies
o To have an internal control system
o To make sure that the company fulfills all the legal dispositions that
are applicable
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Financial and Planning Function
 The Board should establish the company’s investment and financing
policies, guaranteeing that these are consistent with the strategic planning of
the company.
 It is recommended:
o That the Board approves the company’s investment and financing
policies, as well as the annual budget
o That the strategic position of the company is periodically revised
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Disclosure of Information to Shareholders
 Shareholders, especially the minority shareholders, should have access to all
the necessary information to be able to participate in the annual
Shareholders meeting.
 The CBP recommends that:
o The topics that will be discussed during the annual meeting are well
defined.
o The disclosure of all necessary information
o The existence of policies and mechanisms that facilitate the
communication between the shareholders and the company
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