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CORPORATE GOVERNANCE

CORPORATE GOVERNANCE. Sven-Olof Collin. Sven-Olof Yrjö Collin - Professor in Business Administration with emphasis on Corporate Governance and Accounting

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CORPORATE GOVERNANCE

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  1. CORPORATE GOVERNANCE Sven-Olof Collin

  2. Sven-Olof Yrjö Collin - Professor in Business Administration with emphasis on Corporate Governance and Accounting - Teach in corporate governance, accounting, management control, corporate finance, strategy, scientific method and supervise on all levels. - Research in corporate governance, for example riding schools, municipal corporations, family firms, but also director and executive compensation, accounting choice, auditing, duty. E-mail: sven.olof.collin@lnu.se Homepage: www.svencollin.se Phone: not in use Crisis: 0708 204 777

  3. THE SUBJECT OF CORPORATE GOVERNANCE Definition ”The system by which companies are directed and controlled…” (Cadbury) …the system where the will of the owners are implemented in a company through controlling and facilitating managerial action View Property rights Production unit Relations of production Forces of production Theory domains Organisation theory, Financial economics, Economics Empirical Objects Stock market, Board of Directors, C.E.O. selection, accounting choice etc… Academic Journals Corporate Governance – An International Review, Corporate Governance and Management, Journal of Finance, Strategic Management Journal

  4. A TYPOLOGY OF CORPORATE GOVERNANCE MECHANISMS Culture Regulations State legislation Mass media INPUT TRANSFORMATION OUTPUT + Capital Debt Equity + Organisation structure (i.e., the board, F- and M-form structure) + Product markets + Internal managerial labour market + External managerial labour market + Executive compensation + Organisation strategy + Auditing

  5. FOR THE FUTURE, REMEMBER… • “…any efficient and effective governance structure needs to serve two functions: to constrain and to enable.. (Wieland 2005:77) Development Control, Monitoring Discipline

  6. CORPORATE GOVERNANCE MECHANISMS The Principal Mechanisms Governing the corporation, especially the agent Satisfyingthe principal The Agent

  7. THE OWNER OF THE FIRM, THE SHAREHOLDER OWNS • The production unit, i.e., the firm (företaget, azienda? • The legal person, the joint stock company? • The assets on the balance sheet? • The cash flow? • The profit? • The dividend? • Equity?

  8. OWNERSHIP OF THE FIRM IS AN IRRELEVANT CONCEPT (Fama) • A corporation is a set-up of rights, • A contractual nest, • where some have • The right to dividends (shareholder) • The right to manage cash flow (managers and the board) • The right to hire and fire CEO (the board) • The right to terminate the corporation (the shareholder at the shareholder meeting or the debt holders in case of bankruptcy)

  9. CG MECHANISM:EQUITY Capital Market & Ownership Capital Profit Risk Capital Rationing Take-Over Bankruptcy Client effect

  10. DO ACCOUNTING MATTERS FOR THE SHARE MARKET? • NO! • There is a lot of information out there, about markets, industry development and so on, corporate accounting information is but a small part (for example Volvo AB annual report contained 154 pages, of which 60 were financial accounting information (39%) • Corporate accounting information is manipulated by management and the board EARNINGS MANAGEMENT • Auditors are paid by the corporation, so cannot be trusted • and so on…AUDITOR MANAGEMENT

  11. DO ACCOUNTING MATTERS FOR THE STOCK MARKET? • Well, maybe yes • It is one of the major sources (38%!) • Corporate accounting information is manipulated by management and the board, but we can see through it since we know the tricks SEMI-EFFICIENT MARKETS • Auditors are paid by the corporation, but have their reputation to think about, so we can to a large extent trust them PROFESSIONALS • and so on…

  12. FUNCTIONS OF FINANCIAL ACCOUNTING • To make it possibleto make a fair and just evaluation of the agents management of the property • To make it possible for decision makersto make a rational and for the decision maker, efficient decision. • To support tax calculations Accountinginfluence power and wealth distribution in society.

  13. ACCOUNTING MANAGEMENT HYPOTHESES Listed firms Size Sales volatility Cash flow from operations volatility ROA Negative earnings Leverage CEO replacement Investment opportunities Cross-listing Big 4 Ownership concentration - + + - + + + - - - + Earnings Management

  14. INFORMATION INTERMEDIARIES AT THE MARKET • Financial analysts • Journalists • Information corporations Groucho Marxets Stock market 79,25 Cision Fingerprint Cards 52,25 Friday 10.17-10.34

  15. CG MECHANISM:DEBT Capital Market & Credit Capital Interest Collateral “Interest never rest” Control when facing bankruptcy

  16. CG MECHANISM:MARKET FOR MANAGERIAL LABOUR Internal versus External Recruitment Capacity of the individual (Adverse selection) Competence of the individual Characteristics of the individual and team composition (Diversity)

  17. SELECTION OF MANAGERS IN SWEDEN

  18. CG MECHANISM:THE BOARD OF DIRECTORS The functions of the board: a) Control of the firm and its management b) Strategic decision making c.) Providing service to the firm d.) Conflict resolution body Composition: Market for board directors The process of selection Operations: Control: accounts, selection of CEO, reward system Strategy: budgets, plans, selection of CEO:s, reward system Service: Advice & guidelines to the CEO Conflict resolution: Identifying important stakeholders, negotiations

  19. BUREAUCRATIZATION OF THE BOARD • Nominating committee (propose board members, chairperson, board compensation, auditor, auditor compensation • Audit committee • Finance and risk committee • Compensation committee “A committee is a group that keeps minutes and loses hours.” Milton Berle • Division of labour? • Window dressing?

  20. CG MECHANISM:ORGANISATIONAL STRUCTURE Division according to … Input Output Transformation

  21. CG MECHANISM:STRATEGY

  22. CG MECHANISM:EXECUTIVE COMPENSATION 5 – 40 IN THE PRINCIPAL – AGENT CONFLICT? Size: Goal of managers AGENT PRINCIPAL Profit: Goal of shareholders

  23. CRITERIA FOR COMPENSATION • Performance (problem of separation) • Behaviour (strategy or strategic opportunism?) • Individual characteristics (verifiability) • Labour market price (is there a market price?) • Position (control, responsibility, accountability) • Peer comparison (who is relevant peer?)

  24. NON-LINEAR RELATIONSHIPS:THRESHOLDS, FOR EXAMPLE BONUS Earnings Management Profit Bonus triggering profit level

  25. CG MECHANISM:AUDITING Publicity Rules & Regulations Auditors versus top management & board and the owners ‘True’ independence or a ‘trust’ tool for the corporation

  26. THE AUDITOR Defender of a decent capitalism that develops in cooperation between business and society … or Defender of a hard capitalism, where laws and norms should be avoided as much as possible, for the sake of profit

  27. CG MECHANISM:THE PRODUCT MARKET Slack …. to be appropriated and distributed Perfect Oligopoly Monopoly Competition

  28. CG MECHANISM:ENVIRONMENT • Mass media (reputation) • Legislation (political risk) • Regulations by associations (industry cooperation) • Culture (…flat step hierarchies and so on)

  29. CORPORATE GOVERNANCE CODES • A SET OF REGULATIONS, BEYOND GOVERNMENT REGULATIONS, WITH THE INTENT TO DIRECT THE CORPORATION AND ITS CORPORATE GOVERNANCE STRUCTURE. • DYNAMIC: COMPLY OR EXPLAIN. • Scandal driven (strength of the mass media and public opinion?) • International convergence (marketing for international investors?) • Indication of conflict and power struggle among capitalists

  30. VOLUNTARY DISCLOSURE AND CORPORATE SOCIAL RESPONSIBILITY • Voluntary disclosure: Social accounting, Environmental accounting, Sustainability accounting, Ethical accounting: Stakeholder oriented, credible commitment. • Corporate Social Responsibility: The corporations has a function in society outside its contractual relationships: From Marketing device to Strategy device

  31. SUMMARY OF CORPORATE GOVERNANCE MECHANISMS • Is there an equilibrium? • Institutional differences? • Possibility to manage? COMPARATIVE CORPORATE GOVERNANCE GOVERNANCE STRATEGY

  32. COMPARATIVE CORPORATE GOVERNANCE • Country differences • System differences • CG convergence

  33. CORPORATE GOVERNANCE DIVERSITY

  34. DIFFERENCIES INSTITUTIONAL

  35. PERFORMANCE DIFFERENCES?

  36. CG CONVERGENCE? Global CG Code of conduct Global capital markets Global markets • Convergence? National culture Investments Inertia • No convergence! Need of variety in a market economy?

  37. REGULATION, STANDARDISATION, GOVERNANCE AND DEVELOPMENT PRODUCTIVE IMPRODUKTIVE • Regulations creates predictability, if observed • Regulations protect those the regulations intend to protect Regulations reduce freedom of action (reduce productive innovation) Regulations gives incentives to counter strategies Who receives benefits and who receives costs by regulation? Who would gain by another regulation?

  38. CORPORATE GOVERNANCE, ACCOUNTING AND AUDITING Deals with - The creation of wealth • The evaluation of wealthcreation • The distribution of createdwealth Power, Politics, Productivity and Efficiency Get engaged in the governance, butuse principles.

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