history of corporate governance by m.h.m.faizer
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History of Corporate Governance by M.H.M.Faizer. ENTERPRISE GOVERNANCE. Dimensions. Dimensions. CORPORATE GOVERNANCE. BUSINESS GOVERNANCE. (Conformance). (Performance). The two dimensions need to be in balance !. Enterprise Governance. - PowerPoint PPT PresentationTRANSCRIPT
ENTERPRISEGOVERNANCE
CORPORATEGOVERNANCE
BUSINESSGOVERNANCE
The two dimensions need to be in balance !
Dimensions Dimensions
(Conformance) (Performance)
Enterprise Governance
Defined as the set of responsibilities & practices exercised by the board & executive management with the goal of providing strategic decision, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that organizations resources are used responsibly.
Corporate governance & Performance governance
• CG covers issues such as board structures & roles, internal controls & executive remuneration. The performance dimension focuses on helping the board to make strategic decisions; understand its appetite for risk and its key drivers of performance.
• Corporate Governance is necessary but not sufficient for success. Bad governance can ruin a company but cannot on its own ensure success hence the need for enterprise governance.
Treadway & COSO (USA)
• Issued a report on fraudulent financial reporting in 1987 which confirmed the role & status of Audit committees (a listing requirement) with a majority of non executive directors
• Frame work for internal controls
Cadbury, Greenbury & Hampel (UK) 1980/90’S
o Integrity – honest, balanced and complete financial reporting
o Accountability – directives to set up by FRC, the stock exchange & accountancy profession
• The code was based on three principleso Openness – subject to commercial confidentialityo Integrity – honest,balanced and complete financial
reportingo Accountability- directors to provide quality information &
shareholders to exercise their powers.
Cadbury (contd)• Report on financial reporting & accountability of
corporate governance• Responsibility of Executive & Non Executive
directors• Case for Audit committees• Principal responsibilities of Executive & Non
Executive Directors• Links between shareholders, board & auditors
Greenbury (Jan 1995)
• Initiative of CBI (Confederation of British industry)
• Emphasis on determining directors pay• Role of Non Executive Directors
Hampel (Nov.1995)
• Initiative of FRC, Stock Exchange, the CBI & CCAB
• Review Cadbury & propose amendments• Review greenbury & propose amendments• Review role of directors• Address the roles of shareholders & auditors in
the CG• The committee produced a “ Combined Code”
Combined Code
• Directors • Directors remuneration• Accountability & Audit• Relations with shareholders
Directors
• Balance of Executive & Non Executive Directors• Clear division of responsibilities between
Chairman & CEO• Appointments be formal, rigorous & transparent• The Board evaluate its own performance on an
annual basis• Re- election at regular intervals
Directors’ Remuneration
• Remuneration necessary to recruit & retain directors
• Significant portion of Executive Directors’ pay should be performance related
• Policy on remuneration to be clear & transparent
• No director should be involved in determining his/her remuneration
Accountability & Audit
• Board is responsible for presenting a balanced and understandable assessment of the company’s financial position & prospects
• Board is responsible to maintain a sound system of internal controls to safeguard company’s assets & S/H investments
• Financial reporting
• Relationship with external auditors
Benefits of Corporate Governance
• Reduces risk – it provides a mechanism to review risk. It helps to reduce the risk of fraud
• Stimulates performance – it institutes clear accountability & effective links between performance & rewards.
• Improves access to capital markets- corporate governance is seen as protecting shareholders rights.
• Enhances the marketability of goods & services – it creates confidence among the shareholders, customers & suppliers, etc…
• Improves leadership – appointments of NED’S - wider pool of knowledge
• Demonstrating transparency & social accountability
Bangladesh
• Market Capitalization USD 3.8 Billion (6.8% of GDP )
• 277 Securities listed in DSE• 198 Securities listed in CSE• 49 Banks & 28 Non Banking Institutions• 44 State owned enterprises
(60 Privatized )
Bangladesh contd…..
• Awareness was low (2002) but now…..• Legal framework : company’s Act 1994• SEC Act 1993
Corporate Governance Initiatives• Bangladesh Bank directives• National Taskforce on corporate governance• Code of corporate governance• SEC guidelines• Role of World Bank & Asian Development Bank• In 2002, Bangladesh Enterprise Institute
examined the current state of corporate governance & practices in South Asia(OECD Principles of Corporate governance as benchmark )
India • Securities scam involving large no of banks leading stock
market crash in 1992• Initiative from confederation of Indian industry (1998)
(voluntary code – only 20% of companies followed.• Therefore intervention by the regulators Eg; securities &
exchange board & Ministry of company affairs• 15,000 listed companies• 23 registered stock exchanges but only two matters Bombay stock exchange & National stock exchange • SEBI Corporate governance guidelines (1999)
(Substantial aspects of SEBI Code are mandatory)
Sri Lanka• Numerous company failures specially finance
companies in late 1980’s & 1990’s• Taskforce set up in 1992 by ICA followed by a
committee in 1996• Code of best practice on CG – 1997 by ICA• Setting up of the SL Accounting & Auditing
Standards (ICL) Act No 15 of 1995• SEC – to develop standards of financial
reporting
Sri Lanka Contd….
• 1997 – Initiated by Institute of Chartered Accountants together with
• Colombo Stock Exchange• Securities Exchange Commission• Ceylon Chamber of Commerce• Institute of Directors of Sri Lanka • ( voluntary best practice code)• Listed companies, unit trusts, fund management
companies, finance companies, Banks, insurance companies were expected to adopt the code.
• ( Primarily based on Cadbury Report)
Sri Lanka Contd…
• Areas Covered1) Effectiveness of the board2) The Chairman3) Non – Executive Directors4) Professional Advice5) Directors’ Training6) Directors Responsibilities for Financial
Statements7) Compliance Report8) Internal Controls9) Committee structure for Board
Sri Lanka Contd….
• Code of best practice on Audit Committees (2002)
Initiated by ICL A separate code covering Audit committees was
introduced Based on the combined code (UK)
Sri Lanka Contd…
• Areas Covered1) Effectiveness of the board2) The Chairman3) Non – Executive Directors4) Professional Advice5) Directors’ Training6) Directors Responsibilities for Financial
Statements7) Compliance Report8) Internal Controls9) Committee structure for Board
Sri Lanka Contd….
• Code of best practice on Audit Committees (2002)
Initiated by ICL A separate code covering Audit committees was
introduced Based on the combined code (UK)
SL Contd…• Revision of Corporate Governance Code 1997
• In 2003
• Applicability to all companies under companies Act
• Functions of the board – revisited• Disclosure of major transactions• Introduced performance evaluation
Sri Lanka contd
• Guidelines for listed companies(Audit or Audit Committees)
In 2004 Deals mostly with external Auditor related
issues(Qualification & appointment, power,
Remuneration, Rotations, conflict of interest). Audit committees, Financial reporting
requirements
Further Revision (code of best practice) In 2006 To include latest developments of the
combined code (UK) & NYSE listed co. manual, Singapore, Malaysia, India etc..
Specific new inclusions:I. Code of ethics for directors & senior
managersII. Specific board related DisclosuresIII. Audit committee aspects are strengthenedIV. Director Independence criteria is specified
Major Corporate Collapses
UK : The Maxwell publishing group BCCI Marconi USA : Enron
World Com Tyco
Germany : Berliner Bank Babcok
Australia : OneTel Ansett Airlines
Lessons of Experience
Lesson i : Corporate Governance cannot be introduced in isolation from a range of other reforms. Nor can these reforms achieve all their objectives without CG initiatives
Lesson ii : The need to monitor the trends in different sectors of the market so as to try & avoid a “perfect storm”
Lesson iii : need for range of players to improve CG.
Lesson iv : a degree of “stick” may be needed with “carrots” of increased investment & performance
Lesson v : critical importance of company & contract
laws & efficacy of the legal system.