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.