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Chapter 3

Chapter 3. Corporate Governance. Corporate Governance. Corporate governance is the formal system of oversight , accountability and control for organizational decisions and resources. Major issues: Shareholder rights Executive compensation Mergers and acquisitions

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Chapter 3

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  1. Chapter 3 Corporate Governance

  2. Corporate Governance • Corporate governance is the formal systemof oversight, accountabilityand control for organizational decisions and resources. • Major issues: • Shareholder rights • Executive compensation • Mergers and acquisitions • Board composition and structure • Auditing, control and risk management • CEO selection and executive succession plans

  3. Models ofCorporate Governance • Shareholder model • Maximizes of wealth for investors and owners. • Develops and improves the formal system of performance accountability between management and the firm’s shareholders. • Makes decisions based on “what is best for investors”.

  4. Models ofCorporate Governance (cont.) • Stakeholder model • Considers the interests of employees,suppliers, government agencies, communities,and other groups which with the firm interacts. • Assumes a collaborative and relationalapproach to business.

  5. Boards of Directors • Assume legal responsibility for firm’s resources and decisions. • Appoint top executive officers. • Maintain a fiduciary duty. • Monitor decisions made by managers on behalf of the company.

  6. Boards of Directors: Issues • BOD composition/independence: Non-executive directors. • Growing interest in hiring ‘outside directors’ to bring in more independent thought and action. • BOD qualification/competency/inputs

  7. Shareholder Activism Encompasses engaging in: • dialog with management, • attending annual meetings, • submitting shareholder resolutions, • bringing lawsuits, and • other mechanisms designed to communicate shareholder interests to corporation. Aim: Greater input on company strategy and decisions

  8. Characteristics of a Successful Shareholder Activism Campaign

  9. Shareholder Activism – Social Investment • Social investment Refers to the use-of-stock ownership as a strategy for promoting social objectives; also called social responsibility investment (S.R.I.) • Social screening of stock • Some stock purchasers choose stocks based on social or environmental criteria, called social screens • In 2005, $2.3trillion invested in socially responsibility funds; approximately 1 in 10 investment dollars • Rapid growth in similar funds in Europe and U.K.

  10. Examples of Social Index • USA • Domini 400 Social Index (DS400) • Calvert Social Index • South Africa • JSE-SRI • UK • FTSE4Good Index

  11. Social Investment – Socially Responsible Investment Index Malaysia • Useful in attracting funds into Malaysia from international SRI investors as well as raising the general profile of CSR and SRI amongst Malaysian companies • SRI Product range • Malaysia SRI Index Assessment (social screens) • SRI myth & fad (?)

  12. General Issues in Social Investing • Environmental • Workplace equity and safety • Product safety and testing • Global operations • Human rights

  13. Internal Controland Risk Management Controls • To compare between actual performance and planned goals/objectives • Controls are used to safeguard corporate assets and resources, protect the reliability of organizational information, and ensure compliance with regulations, laws and contracts. • Ensure that board members have access to timely and quality information.

  14. Internal Controland Risk Management Risk Management • Process used to anticipate, alert and shield the organization from unnecessary or overwhelming circumstances. • Recognizing the possibility of a possible misfortune that could jeopardize or even destroy the corporation. • Minimize negative situations. • Uncertainty needs to be hedged.

  15. Executive Compensation • The average executive makes 600 times the average worker’s salary. • Up from 40 times the average salary in the ’60s. • Plans that base achievement on several performance goals are growing in popularity.

  16. Executive Compensation: Is it Justified? • Arguments for high executive pay • Well-paid managers are simply being rewarded for outstanding performance • High salaries provide an incentive for innovation and risk-taking • Not many individuals are capable of running today’s large, complex organizations • Critics for high executive pay • Inflated executive pay hurts the ability of firms to compete with foreign rivals • Multi-million-dollar salaries cause resentment, sap the commitment of hardworking lower and midlevel employees • As many extravagantly compensated executives preside over failure as they do over success

  17. Corporate Governance Malaysia • Code of corporate governance establish and governed by SC • 3 main areas: • Directors - appointment, formal and transparent; timely information • Shareholders - AGM • Accountability and audit – internal control; auditor relations

  18. Corporate Governance Malaysia • Malaysia Institute of Corporate Governance (MICG) • To be an authoritative facilitator and the organization for advisory, technical and support services on implementation of corporate governance best practices and to work in collaboration with relevant authorities and regulatory agencies to pursue this objective. • Some research about investment and CG.

  19. Securities and Exchange Commission (SEC) • Government agency charged with protection of stockholder interests • Mission is to protect stockholders’ rights by making sure that the stock markets are run fairly and that investment information if fully disclosed • Giving stockholders more and better company information is one of best ways to safeguard investor interests

  20. Securities Commission Malaysia (Suruhanjaya Sekuriti Malaysia) • Established on 1 March 1993 under theSecurities Commission Act 1993 • Self-funding statutory body with investigative and enforcement powers. • Reports to the Minister of Finance and its accounts are tabled in Parliament annually. • Website: http://www.sc.com.my/

  21. SC Malaysia • The SC's many regulatory functions include: • Supervising exchanges, clearing houses and central depositories; • Registering authority for prospectuses of corporations other than unlisted recreational clubs; • Approving authority for corporate bond issues; • Regulating all matters relating to securities and futures contracts; • Regulating the take-over and mergers of companies • Regulating all matters relating to unit trust schemes; • Licensing and supervising all licensed persons; • Encouraging self-regulation; and • Ensuring proper conduct of market institutions and licensed persons.

  22. Future ofCorporate Governance • Boards will be held responsible fordeveloping company purpose statementsthat cover stakeholder interests. • Annual reports will include more nonfinancial information. • Boards will be required to perform self-assessments. • Board member selection process will become increasingly formalized. • Boards will need to work more as teams.

  23. Future ofCorporate Governance (cont.) • Board membership will require more time. • Focus will move from a shareholder model to a stakeholder model. • Systems will ensure greater organizational-level accountability and control. • General support for corporate governancewill rise. • Governments will play a more significant role.

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