Compares world Models of Corporate Governance

By: Gholamhossein DavaniEMBA, University Lecture

Member of Canadian Academic accounting Association (CAAA)Member of European Accounting Association (EAA)

Member of New York Society of Certified Public Accountants(NYSSCPA)

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Corporate Governance & Accountability

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Corporate governance (CG) is a hot topic currently. It gets a lot of press, particularly in the areas of compensation and board activism. Corporate governance without accountability has no meaning. It seems corporate governance is one part of Good governance (GG) and GG &CG prefect each other.

Sustainable Corporate Governance compliance is a careful mix of economic viability, social responsibility and

sound operations.

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Importance of Ethics

“There is no such thing as business ethics….There’s just ethics; and we all have to practice them every day in everything we do.”

Peter Drucker

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Good governance defines an ideal which is difficult to achieve in its totality. However, to ensure sustainable human development, actions must be taken to work towards this ideal. Major donors and international financial institutions, like the IMF or World Bank and European Union is increasingly basing their aid and loans on the condition those reforms ensuring good governance are undertaken.

Timeline of Corporate Governance

• The Higgs Review (2003) , UK• The Cad bury Report (1992), UK • Green bury Report (1995) , UK• Hampel Report1998), UK• COSO 1998• The principles of Corporate Governance (OECD-1998& 2004)• The Smith Report (2003), UK• Information on the Company Law Review (2001)• The Company Law White Paper (2002)• Sarbanes- Oxley Act 2002 USA• The Tyson report on the Recruitment and Development of Non-

Executive Directors (2003)• The European Commission’s Action Plan for Company Law and

Corporate Governance (2003):

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Valued market• Good governance can be understood as a

set of 8 major characteristics:• Participation • Rule of law• Transparency• Responsiveness • Consensus oriented • Equity and inclusiveness • Effectiveness and Efficiency• Accountability

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The most important above factor is

• Accountability that is a concept in ethics with several meanings. It is often used synonymously with such concepts as answerability, responsibility, blameworthiness, liability and other terms associated with the expectation of account-giving. As an aspect of governance, it has been central to discussions related to problems in both the public and private (Corporation) worlds.

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• Social responsibility is a doctrine that claims that an entity whether it is state , government, corporation, organization or individual has a responsibility to society. This responsibility can be "negative," in that it is a responsibility to refrain from acting, or it can be "positive" meaning a responsibility to act.

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Corporate social responsibility (CSR) is an expression used to describe what some see as a company’s obligation to be sensitive to the needs of all of the Stakeholders in its business operations. Corporate Governance is the construct through which the provisions of a business are put in place, the way of acquiring those objectives are discussed and listed, the guidelines and expectations regarding performance are measured and the structure of resource use is outlined.

Organization under Corporate Governance Shall be:

• Have an independent internal audit function reporting directly to the audit committee of the board of directors, and administratively to executive management;

• Have board-approved charters for both their audit committees and internal audit departments;

• Have management and internal audit jointly perform risk assessments;

• Prepare annual audit plans based on the result of those risk assessments;

• Have internal audit test and report on the effectiveness of the existing control activities, and management's ongoing efforts to correct deficiencies as noted;

• Ensure that their internal auditors play the role of corporate teachers of internal control;

• Ensure that internal auditors, through their collaborative interactions with management, are part of the process of continuous improvement of the control framework. 11

Accountability pathways

• Extended accountable entities• Multi-stakeholder governance• Assurance and reporting• Ownership• Regulation

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Main Stakeholders

• Shareholders• Employees• Management• Customers• Creditors (i.e. Banks)• Suppliers• Local Communities• Others

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Two models of Corporate Governance

1- Outsider (shareholders) model

2- Insider (stakeholders) model

World CG Structures

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The Anglo-US Model

The Anglo-US model is characterized by share ownership of individual, and increasingly institutional, investors not affiliated with the corporation (known as outside shareholders or “outsiders”); a well-developed legal framework defining the rights and responsibilities of three key players, namely management, directors and shareholders; and a comparatively uncomplicated procedure for interaction between shareholder and corporation as well as among shareholders during or outside the AGM.

Key Players in the Anglo-US Model

Players in the Anglo-US model include management, directors, shareholders (especially institutional investors), government agencies, stock exchanges, self-regulatory organizations and consulting firms which advise corporations and/or shareholders on corporate governance and proxy voting.

The outsider model A priority to market regulation the owners of firms tend to have a transitory interest

in the firm The absence of close relationships between

shareholders and management the existence of an active `market for corporate

control´ - takeovers, particularly hostile ones the primacy of shareholder rights over those of other

organizational groups

The insider model

The priority to stakeholders control The owners of firms tend to have an enduring

interest in the company They often hold positions on the board of directors

or other senior managerial positions The relationships between management and

shareholders are close and stable There is little by way of a market for corporate

control the existence of formal rights for employees to

influence key managerial decisions

European Social Model of Corporate Governance

• Rights and equitable treatment of shareholders• Interests of other stakeholders• Role and responsibilities of the board• Integrity and ethical behavior• Disclosure and transparency

OECD principles

AuditingBoard and management structure and

processCorporate responsibility and complianceFinancial transparency and information

disclosureOwnership structure and exercise of control

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CG Background in USA• Corporate Governance is the system by which

businesses are directed and controlled. Corporate Governance has a long history in the US, dating back to the 19th century.

• Within corporate governance the board assumes the responsibility for managing the business, controlling the risks to its assets and developing the business.

• Since the year 2000 there has been an increased interest in Corporate Governance due to the high profile collapse of major brands including Enron and MCI, which led to the US Government passing the Sarbanes-Oxley Act (SOX) in 2002.

What is COSO

The Committee of Sponsoring Organizations (COSO) was formed by several professional groups, including the Institute of Internal Auditors (IIA), Financial Executives Institute (FEI), American Institute of Certified Public Accountants (AICPA), American Accounting Association (AAA), and Institute of Management Accountants (IMA).  COSO's goal was to develop findings and recommendations for an integrated framework of corporate internal control. This was accomplished by first publishing the Report of the National Commission on Fraudulent Financial Reporting (popularly referred to as the Tread way Commission) in 1987, and the definitive Internal Control - Integrated Framework in 1992. 25

Base of modern Corporate governance

• Shareholder Rights• Transparency• Board Accountability• Ethical Behaviour

Sarbanes-Oxley Act 2002

• The Sarbanes-Oxley Act of 2002 , also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; is a United States Federal Law enacted on July 30, 2002

• Sarbanes Oxley, often abbreviated to 'SOX' came about following the high-profile collapse of several large companies, including Enron, Tyco International, Adelphia, and WorldCom.

• The Sarbanes-Oxley (SOX) Act of 2002 had fundamental governance implications for listed American companies, their foreign subsidiaries and foreign companies that have US listings. It applies to all Securities and Exchange Commission (SEC) registered organizations, irrespective of where their trading activities are geographically based.

Requirements of the Sarbanes-Oxley Act

• The act contains 11 sections outlining corporate board responsibilities with the general aim of increasing board accountability for their actions, increasing auditor autonomy and increasing the penalties for fraudulent financial activity.

• SOX is different from the UK's Combined Code, and from codes of corporate governance adopted elsewhere in the OECD, in that compliance is mandatory, rather than ‘comply or explain’. This aspect, combined with significant potential sanctions for individual directors, is driving SOX compliance requirements through the supply chain.

• While the Act lays down detailed requirements for the governance of organizations, the three highest profile and most critical sections – which were implemented in phases - are 302, 404 and 409.

Sarbanes Oxley Act Sections 302, 404, 409

DesSarbanes-Oxley 302Sarbanes-Oxley 404Sarbanes-Oxley 409

Required:

Quarterly certification of financial reports

Disclosure of all known control deficiencies

Disclose acts of fraud

Management annually certify internal controls

Independent accountant must attest report

Quarterly change reviews

Monitor operational risks

Material event reporting

‘Real-time’ implications – 4 business days for report to be filed

Responsible: CEO CFO

Management Independent auditor

Management Independent auditor

Sarbanes-Oxley Internal Controls and Audit

• Under SOX, management is required to certify the company’s financial reports and both management and an independent accountant are required to certify the organization’s internal controls. In almost every organization, financial reporting depends on the IT infrastructure, whether it is for the rendering of an invoice, the effective operation of an ERP system, or an integrated, organization-wide management information and control system.

• Unless appropriate internal controls are built into this infrastructure, management will not be able to make the required certification.

• The SEC has mandated US companies to use a recognized internal control framework that has been established by an organization that developed the framework through a due process, including inviting public comment.

The Committee od Sponsoring Organization of Tread way Commission Framework

One widely used framework is known as the COSO framework or, to give it its own title, the ‘Internal Control – Integrated Framework’, which contains the recommendations of the Committee od Sponsoring Organization of Tread way Commission Framework.

The COSO sponsoring organizations included the AICPA, the Institute of Internal Auditors, the Institute of Management Accountants and the American Accounting Association.

The PCAOB (Public Company Accounting Oversight Board, at www.pcaobus.org , created under SOX to oversee the activity of the auditors of public companies in the United States) expects the majority of public companies to adopt the COSO framework and its Auditing Standard No 5, dealing with audit of internal control over financial reporting, assumes that the COSO framework (or one substantially like it) will have been adopted.

Top 10 Countries by average overall rating in CG

RankCountryCompaniesAverage Overall Rating

1 UK3947.60

2Canada1327.36

3 Ireland197.21

4 USA1,7617.16

5 New Zeeland106.70

6 Austria1946.65

7 Netherland306.45

8Finland286.38

9 Sought Africa436.09

10 Sweden405.88

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Iran Capital Market Structure

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Key point CG Iran

• Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.

• There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

Chairman and Non-Executive

• The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.

• As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

All Committees

The Audit Committee, Compensation & Management Development

Committee, Corporate Governance & Nominating

Committee, Public Responsibility Committee, Risk Policy Committee

Iran Corporate Governance Includes

• Partner Rotation-Transition Questions• Audit Partner and Partner Rotation-Other

Matters• Non-audit Services• Audit Committee Pre-approval• Audit Committee Communications• Fee Disclosures• "Cooling Off" Period

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Audit firm shall be have minimum conditions as follow:• Minimum 5 partners• All auditors shall be member of IACPA• Minimum total issued audit report before

admission shall not be less than 50 • Quality control of audit firm with more than 10

listed clients will be every year and between 5 till 10 clients every two years and less than 5 clients every three years

• Prohibition of Audit & non-audit services for clients onetime.

• Auditors' Quality control and supervision will be done by joint committee of TSE and Iranian Association of Certified Public Accountants (IACPA)

• Members shall keep appropriate records and submit copies of such on request of the TSE.

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Accountability & Corporate Governance

• Role of chief of the board(CEO)• Role of audit committee• Role of non-Executive managers• Role of internal audit• Role of shareholders annual meeting• Human resources control

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Tehran Stock Exchange

• 415 listed company• Market Value $ 83 Billion • Non-Active Shares 100 Listed

Co.• Audit firm registered firm 154• 10 Biggest listed Co.

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Useful links

1- http://www.tse.ir/en/marketwatch.aspx2- http://www.seo.ir/3-http://www.csdiran.com/4-http://www.investiniran.ir/default.htm

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Sources

1-ww.gmiratings.com/Images/GMI_Country2-www.dayarayan.info3- www.en.wikipedia.org/wiki/Aktiengesellschaft

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