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To: Mum and Dad
Preface
Corporate governance is an area that has grown rapidly over recent decades. The global financial crisis, corporate scandals and collapses, and public concern over the apparent lack of effective boards and perceived excessive executive remuneration packages have all contributed to an explosion of interest in this area. The corporate and investment sectors, as well as public, voluntary, and non-profit organizations, are all placing much more emphasis on good governance. More and more universities, both in the UK and internationally, are offering corporate governance courses on undergraduate or postgraduate degree programmes. Some universities have dedicated taught masters in corporate governance and/or PhD students specializing in this as their area of research.
Corporate governance is now an integral part of everyday business life and this book provides insights into its importance not just in the UK, but also globally, including the USA, Europe, Asia, South Africa, Latin America, Egypt, India, and Australia. The book is designed to provide an understanding of the development of corporate governance over the past 30 years and to illustrate the importance of corporate governance to the firm, to directors, shareholders, and other stakeholders, and to the wider business community. It also seeks to shed light on why there are continuing incidences of corporate scandals, to what extent these are a corporate governance failure, and in which ways corporate governance—and the behaviour of those involved in ensuring good governance and an ethical culture in their business—may be improved in the future.
At the time of writing, the UK is on course with Brexit and plans to exit the European Union in 2019. The UK has a good reputation for its sound corporate governance framework and as can be seen in this book, the UK and the EU’s corporate governance and company law are closely related. It will be essential going forward for the UK to maintain its reputation for transparency, accountability, and integrity in business and to continue to ensure that its corporate governance framework is fit for purpose in a changing world.
CAM July 2018
Acknowledgements
I would like to thank everyone who has encouraged and supported me in writing this book.
First, thanks go to those who have encouraged me to research and write about corporate governance. In the early 1990s, Sir Adrian Cadbury inspired me to undertake research in the field of corporate governance and was always very supportive. Other leading figures who have influenced me with their contributions to the development of corporate governance include Robert (Bob) A.G. Monks, Nell Minow, Jonathan Charkham, Steve Davis, and Professor Bob Tricker, to name but a few.
Thank you to everyone at Oxford University Press who has contributed to the publication of this book. Thanks also go to the anonymous reviewers who constructively reviewed earlier drafts of the book and gave many helpful comments.
A heartfelt thanks to family and friends who have encouraged me to write this book, and have always been there for me, especially to: Paul; Rita, Bernard, and Christopher; Pam and Tom; Liz; Alice, Yu Loon, and Thorsten; Ioana, Costin, and Mara; and Jane. Also a special thank you to Ben. Finally, to Merlin and Harry (‘the two magicians’) for their patience, devotion, and sense of fun at all times.
How to use this book
Learning objec tives
● To understand the various main theories that underlie th corpor ate governance
● To be aware of the impact of the form of legal system cap ow nership structure on the developmen t of corpor ate go
Learning objectives
Introducing you to every chapter, learning objectives outline the main concepts and themes covered in each chapter to clearly identify what you can expect to learn. They can also be used to review your learning and effectively plan your revision.
examples and Mini Case studies
This is an example of a family firm that grew over time, developed an a became an international business Today, Cadbury is a household name in homes across the world. It the nineteenth century when John Cadbury decided to establish a bu and marketing of cocoa. His two sons joined the firm in 1861 and, ov joined, and subsequently the firm became a private limited liability c A board of directors was formed consisting of members of the family
Questions
The discussion questions to follow cover the key learning points the additional reference material will enhance the depth of stud of these areas.
1. Critically discuss the main theories that have influenced the governance.
2. Do you think that different theories are more appropriate t ? Useful websites
www.accaglobal.com The website of the Association of Charte information about corporate governance and their related a www.bankofengland.co.uk The website of the Prudential Reg a part of the Bank of England and responsible for the pruden banks, building societies, credit unions, insurers, and major i
Topical, diverse examples and cases illustrate the theories and concepts discussed in the chapter with events at real-life organizations, prompting you to analyse how organizations actually apply these ideas in practice.
Questions
Check your progress and test your knowledge with these end-of-chapter questions, which cover the key learning points of each chapter.
Useful Websites
Advance your learning and further develop your understanding with relevant and recommended websites that can assist your research and revision.
Example: Cadbury Plc, UK
Financial Times Clippings
Rothschild’s chair man bank’s dynastic reins to
Change coincides with effort to help ride out lean periods in European M&A market
Hannah Murphy Financial Times, 27 February 2018
operations an sizeable acqu bank.
The elder M born in New the then sepa
Part Two case study Institutional investor
This case study illustrates some of the complex issues of a country tran how, when an influential group of institutional investors work togethe of their investee companies which are in a country where there are hum instability and unacceptable risks. This action was part of the SRI rem Finally it summarizes recent developments relating to corporate gover The political instability and human rights abuses make Myanmar
Further real-life, topical examples of corporate governance reported in the FT demonstrate how frequently the subject permeates our daily news and highlight the most recent and significant governance issues from the last couple of years.
end-of-Part Case studies
Longer, integrative case studies pull together ideas from across different chapters to better contextualize how businesses navigate the range of issues in corporate governance.
How to use the online resources
Supporting content for both students and registered lecturers of the book is available in the online resources. Students can test themselves with fill-in-the-blank questions or explore the subject further with web links to relevant content. Lecturers can download PowerPoint slides and access additional case studies for use in their teaching.
There is also a link to the Corporate Governance blog, regularly updated by Christine Mallin and Bob Tricker, offering comment on current events in the world of business, economics, and finance, from the perspective of corporate governance. Visit www.oup.com/uk/mallin6e/ to find out more.
List of examples and case studies
11.1
11.5
11.6
12.1
12.2
12.3
12.4
12.5
12.6
13.1
13.2
13.3
13.4
List of abbreviations
ABI Association of British Insurers
ACGA Asian Corporate Governance Association
AFG L’Association Française de la Gestion Financière
AFL-CIO The American Federation of Labor and Congress of Industrial Organizations
AITC Association of Investment Trust Companies
APEC Asia-Pacific Economic Co-operation
ASIC Australian Securities and Investments Commission
ASX Australian Stock Exchange
BEIS Department for Business, Energy & Industrial Strategy
BIS Department for Business, Innovation & Skills
BVCA British Private Equity and Venture Capital Association
CACG Commonwealth Association for Corporate Governance
CalPERS California Public Employees’ Retirement System
CEO Chief executive officer
CEPS Centre for European Policy Studies
CFO Chief financial officer
CLERP Corporate Law Economic Reform Program
CLR Company Law Review
CR Corporate responsibility
CSR Corporate social responsibility
CSRC China Securities Regulatory Commission
Defra Department for Environment, Food and Rural Affairs
DVCA Danish Venture Capital and Private Equity Association
ecoDa European Confederation of Directors’ Associations
EFAMA European Fund and Asset Management Association
EIRIS Ethical Investment Research Service
FESE Federation of European Securities Exchanges
FRC
FSA
FTSE
Financial Reporting Council
Financial Services Authority
Financial Times Stock Exchange
ICGN International Corporate Governance Network
IIC Institutional Investor Committee
ILO International Labour Organization
IMA Investment Management Association
IMF International Monetary Fund
IoD Institute of Directors
ISC Institutional Shareholders’ Committee
IWG International Working Group of Sovereign Wealth Funds
KPI Key performance indicator
MOF Ministry of Finance
NAPF National Association of Pension Funds
NCVO National Council for Voluntary Organisations
NEST National Employment Savings Trust
NGO Non-governmental organization
NHS National Health Service
OECD Organisation for Economic Co-operation and Development
OPSI Office of Public Sector Information
PBOC People’s Bank of China
PIRC Pensions Investment Research Consultants
PLSA Pensions and Lifetime Savings Association
PSPD People’s Solidarity for Participatory Democracy
QCA Quoted Companies Alliance
RREV Research recommendations electronic voting
SE Societas Europaea
SETC State Economic and Trade Commission
SID Senior independent director
SRI Socially responsible investment
SVWG Shareholder Voting Working Group
SWF Sovereign wealth fund
UKSIF UK Sustainable Investment and Finance Association
UN United Nations
UNPRI United Nations Principles of Responsible Investment
Glossary
Agency theory One party (the principal) delegates work to another party (the agent). In a corporate scenario, the principal is the shareholder and the agent the directors/managers. Agency theory relates to the costs involved in this principal–agent relationship, including the costs of aligning the two sets of interests.
Audit The examination by an independent external auditor to determine whether the annual report and accounts have been appropriately prepared and give a true and fair view.
Audit committee A subcommittee of the board that is generally comprised of independent non-executive directors. It is the role of the audit committee to review the scope and outcome of the audit, and to try to ensure that the objectivity of the auditors is maintained.
Auditor rotation The audit firm is changed after a number of years in order to help ensure that the independence of the external auditor is retained. There are disparate views on the effectiveness of auditor rotation.
Bank-oriented system Banks play a key role in the funding of some companies and so may be able to exercise some control via the board structure, depending on the governance system.
Board diversity Gender, ethnicity, and other characteristics considered to make the board more diverse.
Board evaluation Boards should be evaluated annually to determine whether they have met the objectives set. The board as a whole, the board subcommittees, and individual directors should each be assessed.
Board subcommittees The board of directors may delegate various duties in specific areas to specialized committees, such as the audit committee, remuneration committee, and nomination committee.
Chair Responsible for the running of the board and chairing board meetings.
Chief executive officer Responsible for the running of the company.
Civil law Tends to be prescriptive and based on specific rules. Generally gives less protection to minority shareholders.
Co-determination The right of employees to be kept informed of the company’s activities and to participate in decisions that may affect the workers.
Common law Based on legal principles supplemented by case law. Generally gives better protection to minority shareholders.
Comply or explain A company should comply with the appropriate corporate governance code but, if it cannot comply with any particular aspect of it, then it should explain why it is unable to do so.
Controlling shareholders Those who have control of the company, although this may be indirectly through their holdings in other entities, and not directly.
Corporate social responsibility Voluntary actions that a company may take in relation to the management of social, environmental, and ethical issues.
Directors’ remuneration Can encompass various elements, including base salary, bonus, stock options, stock grants, pension, and other benefits.
Directors’ share options Directors may be given the right to purchase shares at a specified price over a specified time period.
Dual board A dual board system consists of a supervisory board and an executive board of management.
Fiduciary duty This is an obligation to act in the best interests of another party, for example, directors have a fiduciary duty to act in the best interests of the shareholders.
Hard law Legally binding pronouncements such as laws, regulations, and directives.
Inclusive approach The company considers the interests of all of its stakeholders.
Independent directors who have no relationships with the business, or its directors and management, or other circumstances, which could affect their judgement.
Information asymmetries Different parties may have access to different levels of information, which may mean that some have a more complete or more accurate picture than others.
Insider system Ownership of shares is concentrated in individuals or a group of individuals, such as families or holding companies.
Institutional investors Generally large investors, such as pension funds, insurance companies, and mutual funds.
Internal controls Policies, procedures, and other measures in an organization that are designed to ensure that the assets are safeguarded, that systems operate as intended, that information can be produced in a timely and accurate manner, and that the business operates effectively and efficiently.
Market-oriented system The influence of banks does not tend to be prevalent and does not impact on the company’s board structure.
Minority rights The rights of shareholders who own smaller stakes in a company. They should have the same rights as larger shareholders but often this is not the case.
Minority shareholders who have smaller holdings of shares.
nominated advisor A firm or company that acts as an advisor to a company coming to/on the Alternative Investment Market.
nomination committee A subcommittee of the board and should generally comprise independent nonexecutive directors. Its role is to make recommendations to the board on all new board appointments.
non-executive director These are not full-time employees of the company (unlike most executive directors). As far as possible they should be independent and capable of exercising independent judgement in board decision-making.
outsider system There is dispersed ownership of shares and hence individuals, or groups of individuals, do not tend to have direct control.
Pay ratio The ratio of the pay of the company’s CEO to the pay of the average worker.
Private equity A private equity fund is broadly defined as one that invests in equity which is not traded publicly on a stock exchange.
Proxy vote The casting of shareholders’ votes by shareholders, often by mail, fax, or electronic means.
remuneration committee A subcommittee of the board and should generally comprise independent nonexecutive directors. Its role is to make recommendations to the board on executive directors’ remuneration.
risk assessment An assessment of the overall risk that a company may be exposed to. Overall risk can include many different types of risk, including financial risk, operating risk, and reputation risk.
say on pay Shareholder vote on the remuneration packages of executive directors, may be binding or nonbinding on the company.
shareholder value The value of the firm after deducting current and future claims.
socially responsible investment Involves considering the ethical, social, and environmental performance of companies selected for investment as well as their financial performance.
soft law Best practice or self-regulation pronouncements such as codes, principles, and guidelines.
sovereign wealth fund A fund, often very large and influential, which is owned by a government.
stakeholder theory This theory takes into account the views of a wider stakeholder group and not just the shareholders.
stakeholders Any individual or group on which the activities of the company have an impact, including the employees, customers, and local community.
supervisory board In a dual board system the supervisory board oversees the direction of the business, whilst the management board is responsible for the running of the business.
Transaction cost economics Views the firm itself as a governance structure, which in turn can help align the interests of directors and shareholders.
Unitary board A unitary board of directors is characterized by one single board comprising of both executive and non-executive directors.
1 Introduction
Businesses around the world need to be able to attract funding from investors in order to expand and grow. Before investors decide to invest their funds in a particular business, they will want to be as sure as they can be that the business is financially sound and will continue to be so in the foreseeable future. Investors therefore need to have confidence that the business is being well managed and will continue to be profitable.
In order to have this assurance, investors look to the published annual report and accounts of the business, and to other information releases that the company might make. They expect that the annual report and accounts will represent a true picture of the company’s present position; they are, after all, subject to an annual audit whereby an independent external auditor examines the business’s records and transactions, and certifies that the annual report and accounts have been prepared in accordance with accepted accounting standards and give a ‘true and fair view’ of the business’s activities. However, although the annual report may give a reasonably accurate picture of the business’s activities and financial position at that point in time, there are many facets of the business that are not effectively reflected in it.
There have been a number of high-profile corporate collapses that have arisen despite the fact that the annual report and accounts seemed fine. These corporate collapses have had an adverse effect on many people: shareholders who have seen their financial investment reduced to nothing; employees who have lost their jobs and, in many cases, the security of their company pension, which has also evaporated overnight; suppliers of goods or services to the failed companies; and the economic impact on the local and international communities in which the failed companies operated. In essence, corporate collapses affect us all. Why have such collapses occurred? What might be done to prevent such collapses happening again? How can investor confidence be restored?
The answers to these questions are all linked to corporate governance. Companies with a sound corporate governance structure should have a balanced board comprised of independent and non-independent directors with appropriate skills and knowledge to contribute to the ongoing success of the company and the confidence to question matters they feel may not be in the best interests of the company. The board should be diversified in terms of gender, ethnicity, age, education, experience to help ensure diversity of thought. The roles of CEO and Chair are generally perceived as being more appropriately vested in two individuals rather than in one individual who may then wield too much power in the company. Board subcommittees, including audit and remuneration committees, should be established and comprised of appropriately qualified individuals. There should be robust internal controls in place and an appropriate risk management structure which considers all aspects of risk, financial and non-financial, to which the business may be exposed. However a lack of
