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1
Corporate Governance: An Overview
Prof. Igor Filatotchev
Session 1
2
Corporate Governance:
An Overview
• Current debates
• New and emerging issues
• Aims and objectives of the course
• Implications for research, teaching and
practice
• Reading
• Assessment
3
“It’s only when misgovernment grows extreme
enough to produce a revolutionary agitation
among the shareholders that any change can
be effected”Herbert Spence 1854
Corporate Governance Debate: 200
Years of Controversy
4
Corporate Governance: Current
Issues
• Enron; Worldcom (USA)
• Maxwell Group (UK)
• Parmalat (Italy)
• VW (Germany)
• LukOil (Russia)
• Hyundai (Korea) etc.
Corporate failures and regulatory initiatives have placed
corporate governance systems under closer scrutiny than ever:
5
“2/3 UK investors no longer feel confident
investing in the Stock Market as a result of
fraud and accounting problems at Enron and
Worldcom”
Survey of UK investors by Cavendish Asset Management, October 2002
6
–“If fund managers are truly to fulfil their
duty of seeking to maximise value for their
shareholders, then there will be times –
certainly more than at present – where
intervention is the right action to take”
Paul Myners – Institutional Investment – March 2001
7
“It is crucial to effective corporate governance
that the owners of the company hold the
Directors to account for the Company’s
performance”
The UK Department of Trade and Industry
Modernising Company Law – July 2002
8
Areas of Concern
� Concentration of power in small number of
executive directors
� Lack of balance in Board composition: “an
executive capture of Boards”
� Deficiencies in accountability and audit
� Over-generous remuneration of the
executives: “a reward for failure”
9
• “Good Corporate Governance” provides a
system of transparent, efficient and effective
monitoring and control over strategic
decisions at all levels of management”
10
Why is Corporate Governance
so Important?
• “Good Corporate Governance” leads to better accountability and transparency
• “Good Corporate Governance” prevents managers from making “wrong” strategic decisions
• “Good Corporate Governance” facilitates the successful implementation of important strategies
11
“Good Governance” is an important driver of strategic change !
12
Corporate Governance
Shleifer, Andrei and Robert W. Vishny (1997) 'A Survey of Corporate Governance', Journal of Finance 52, 737-783.
“Corporate governance deals with the agency
problem: the separation of management and
finance. The fundamental question of corporate
governance is how to assure financiers that they
get a return on their financial investment.”
13
Corporate Governance
“ …the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies…responsibilities of the Board include setting the company’s strategic aims, providing the leadership to put them into effect, and supervising the management of the business and reporting to shareholders on their stewardship…”
The UK Department of Trade and Industry, 2005
14
The Regulator’s Response: UK
• 1992 Cadbury Code
• 1994 Greenbury Report
• 1998 Hempel Report
• 1998 Stock Exchange Combined Code
• 1999 Turnbull Report
• 2003 Higgs and Smith Reports
The UK regulation is based on a “comply-or-explain”
principle
15
Corporate Governance in the USA:
2002 Sarbanes-Oxley Legislation
Increase in directorial independence
Constraints on non-audit services of audit firms; rotation of auditors
“Section 404”
- directors report on the effectiveness of internal controls
- auditors report on management’s assessment of the controls
- potentially unlimited legal liability
Disclosure of voting records by institutions
16
Corporate Governance: Current
Debates
• Roles of non-executive directors
• Disclosure practices: “Enhanced Business
Reviews”
• Companies’ relationships with auditors
• Executive remuneration issues
• Roles of institutional investors
17
New Perspectives on
Corporate Governance• Monitoring and
control
• Resource and ‘legitimacy’
• Strategy/Service
• Access to resources
• Strategic leadership
• Strategic restructuring expertise
• Corporate venturing
18
Corporate Governance and
‘Entrepreneurial Leadership’
• “Wealth protection” and “wealth creation” roles of corporate governance
• Resource and strategy roles of corporate boards
• Boards as a “knowledge pool”
• The new roles of non-executive directors
• Individual entrepreneurship, corporate venturing and
innovation
19
Stakeholder Model of
Governance
• The roles of stakeholders in the strategy
process
• “Responsible” corporate behaviour
• Business ethics
• Stakeholders and innovation
20
Aims and Objectives of the
Course
• to enable students to achieve knowledge of
corporate governance and its practical
relevance to organisations;
• to understand the role and function of boards
of directors, the work of external and internal
auditors, audit committees
• to explain the main elements of stakeholder
theory and principles of corporate social
responsibility.
21
A “Road Map” of the Course
• Overview of the current debate on corporate governance
• The role of the Board of Directors; institutional investors
• Internal and external auditors and management in the corporate governance debate
• Recent regulatory issues
• Corporate Social Responsibility and business ethics
• International corporate governance: a comparative
analysis
22
Learning Outcomes
• An understanding of the range of corporate
governance theories and practices
• A full understanding of the current issues in corporate
governance
• An understanding of the role of corporate boards, board committees and Non Executive Directors
(NEDs) in the governance of organisations
• An understanding of Corporate Social Responsibility
• Gain an in-depth knowledge and understanding of corporate governance sufficient to give advice on
these issues to senior management.
23
Reading (Main)
• Filatotchev, I. and Wright, M. (Eds.). 2005. The
Life-Cycle of Corporate Governance. London:
Edward Elgar.
• Mallin, C. (Ed). 2006. International Corporate
Governance. A Case Study Approach. London:
Edward Elgar.
• Monks, R.G. and Minow, N. 2004. Corporate
Governance. 3rd edition (2nd edition also
acceptable). Blackwell.
24
Reading (Recommended)
• Cadbury, A. 2002 Corporate Governance and Chairmanship: a Personal View. Oxford: OUP.
• Cannon, T. 1994. Corporate Responsibility. Pitman Publishing.
• The Combined Code on Corporate Governance (June 2006)
• Grandori, A. (Ed). 2006. Corporate Governance and Firm Organization, Oxford: Oxford University Press.
• Gospel, H. and Pendleton, A. (Eds). 2005. Corporate Governance and Labour Management: An International Comparison, Oxford: Oxford University Press.
• Shleifer, A. and Vishny, R. 1997. ‘A Survey of Corporate Governance’, Journal of Finance, Vol 52, No 2, June.
25
Reading For This Session
• Monks, R.G. and Minow, N. 2004.
• Shleifer, A. and Vishny, R. 1997. ‘A Survey of
Corporate Governance’, Journal of Finance,
Vol 52, No 2, June.
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