What is corporate governance?
- Corporate governance is the system by which companies are directed and managed.
- In influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised.
What is effective corporate governance?
- Effective corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved.
- (From ASX)
Why is corporate governance important?
- Unless investors feel confident that their capital is being used appropriately they will seek out alternate investment opportunities.
- Investors only invest if they feel confident that their capital is being used 'as advertised'
No single model of good corporate governance
- This point has been made in both OECD principles of corporate governance and
- ASX principles
OECD Principles of Corporate Governance (2004)
1.Ensuring the basis for an effective corporate governance framework
2.The rights of shareholders and key ownership functions
3.The equitable treatment of shareholders
4.The role of stakeholders in corporate governance
5.Disclosure and transparency
6.The responsibilities of the board
Difference between 1999 and 2004
- added number 1
- 1.Ensuring the basis for an effective corporate governance framework
OECD 1: Ensuring the basis for an effective corporate governance framework
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
OECD 2: The rights of shareholders
The corporate governance framework should protect and facilitate shareholders’ rights.
OECD 3: The equitable treatment of shareholders.
- The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
- All shareholders should have the opportunity to obtain effective redress for violation of their rights
OECD 4: The role of stakeholders in corporate governance
- The corporate governance framework should encourage the rights of stakeholders as established by law or through mutual agreements and
- encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises
OECD 5: Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.
OECD 6: The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders
OECD principles about
- OECD based on acceptance of a view of corporation giving special status to shareholders
- (narrow view)
- Focus on governance problems that result from the separation of ownership and control.
- Aim to promote transparency, integrity and the rule of law.
- Focus on publicly traded (listed) companies
- Non-binding- corporations are subject to the laws of the nation in which they operate.
Importance of good governance
- Matter of self interest for countries and corporations to have good corporate governance regimes.
- All good corporate governance regimes give priority to the interest of shareholders.
- In a world where capital is highly mobile , corporations (and countries) cannot afford to ignore investors' (shareholders) expectations that their interests be protected.
ASX Corporate governance principles and recommendations (2010)
1.Lay solid foundation for management and oversight
2.Structure the board to add value
3.Promote ethical and responsible decision making
4.Safeguard integrity in financial reporting
5.Make timely and balance disclosure
6.Respect the rights of shareholders
7.Recognise and manage risk
8.Remunerate fairly and responsibly
ASX principles to practice
- ASX also set out how these principles are to be put into practice
- Eg. Principle 2: structure the board to add value
- How to achieve best practice
- Recommendation 2.5: the chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity.
ASX Principle 4: Safeguard integrity in corporate reporting
- How to achieve best practice
- Recommendation 4.1
- The board of a listed entity should:
- (a) have an audit committee which:
- (1) has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and
- (2) is chaired by an independent director, who is not the chair of the board,
ASX Principle 6:Respect the rights of security holders
How to achieve best practice : Recommendation 6.1
–In the digital age, investors expect information
about listed entities to be freely and readily available
- –A listed entity should include in the corporate governance area of its website links to:
- the names, photographs and brief biographical information for each of its directors and senior executives;
- its constitution, its board charter30 and the charters of each of its board committees;
- the corporate governance policies and other corporate governance materials referred to in these recommendations.
–A listed entity should also include in an appropriate area of its website links to
– • copies of its annual reports
and financial statements;
–• copies of its announcements to ASX
; • copies of notices of meetings of security holders and any accompanying documents;
–• if it keeps them, webcasts and/or transcripts
of security holders and copies of any documents tabled or otherwise made available at those meetings; and
–• if it keeps them, webcasts and/ or transcripts
of investor or analyst presentations
and copies of any materials distributed at those presentations, and keep this material available on its website for a reasonable period.
ASX Recommendation 1.5
- A listed entity should:
- (a) have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them;
- (b) disclose that policy or a summary of it; and
- (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: (1) the respective proportions of men and women on the board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or (2) if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act.16
- Not prescriptions
- Merely guidelines
- Does not subscribe 'one size fits all' approach
- ASX recognises there are significant difference in both types and size of listed companies.
- The guidelines should be used as a focus for re-examining a company's corporate governance practices.
ASX disclosure requirements
- Under ASX listing 4.10- companies required to provide a statement in their annual report disclosing the extent to which they have followed these best practice recommendations in the reporting period.
- Where companies have not followed all the recommendations they must identify the recommendations and give reasons for not following.
- The "if not why not approach"
OECD and ASX Principles
- No glaring inconsistencies between 2 sets of principles.
- ASX guidelines are more specific
- Both based on acceptance of narrow view- primacy to shareholders
- Both aim to provide increased protection for shareholder interests
Governance and regulation
- ASX guidelines on corporate governance form part of our regulatory framework.
- They require listed companies to state where their practices deviate from the ASX recommendations.
- This encourages conformity with recommendations.
- Alerts investors when and where the corp has failed to comply
- eg. a company has a chairman who is not 'independent'
- Why not?
- Is the explanation convincing/unconvincing?
Globalisation and regulation
- Globalisation raises issues for regulation of Aus business in 2 diff ways:
- 1. the impact of globalisation on the regulation of business within Aus
- 2. Problems in regulating Aus businesses operating outside Aus
Globalisation and Regulation (within Australia)
- In globalised economy, nations compete to attract investment and employment.
- A nation's regulatory framework is effectively in competition with the regulatory frameworks of other nations.
- A certain level of regulation is attractive to most businesses
- In nigeria bc of political and social instability international investment apart from oil is virtually non existent.
- Too much regulation is not attractive to many businesses.
- Australia needs an internationally competitive regulatory framework.
Regulating Aus Businesses outside Australia
- Aus companies operating in developing countries will typically be less legally constrained in respect of:
- Wages, health and safety, environmental standards
- Some argue Aus Gov should insist that they implement aus standards in respect of these matters.
- But in the absence of enforceable international regulation this would simply place Australian business at a competitive disadvantage.
The assurance problem (again)
- In the international context
- Australian companies may be willing to observe higher standards when operating in developing countries but only if they are assured that their competitors are observing those same higher standards.