Bob Tricker

Corporate Governance Principles, Policies and Practices 2e Chapter 2 Governance and management

Governance and management

in which we recognise: definitions of corporate governance the scope of corporate governance the significance of constitutions for corporate entities the difference between governance and management the performance and conformance aspects of governance alternative board structures
Tricker: Corporate Governance 2e

Governance and management

Definitions of corporate governance Definitions vary according tot the perspective of the user
operational relationship stakeholder financial economics societal

Tricker: Corporate Governance 2e

Governance and management

Defining corporate governance operational Corporate governance is the process by which companies are directed and controlled Cadbury Report 1992 and OECD 1999

Tricker: Corporate Governance 2e

Governance and management

Defining corporate governance relationship is the relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, the management and the board of directors Monks and Minow 2001 The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization such as the board, managers, shareholders and other stakeholders and lays down the rules and procedures for decision-making OECD 2002
Tricker: Corporate Governance 2e

Governance and management

Defining corporate governance - stakeholder Corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders Demb and Neubauer, 1992

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Governance and management

Defining corporate governance financial economics perspective Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment Shleifer and Vishny, 1997

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Governance and management

Defining corporate governance - societal The whole set of legal, cultural, and institutional arrangements that determine what (public) corporations can do, who controls them. How that control is exercised, and how the risks and return from the activities they undertake are allocated Blair, 1995 Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. Cadbury, 2000
Tricker: Corporate Governance 2e

Governance and management

Defining corporate governance overall

Corporate governance is the exercise of power over a corporate entities Tom Clarke, 2004

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The spheres of Corporate Governance

Other sources of finance

Stock Markets

Institutional investors CG activists Market intermediaries

Societal influences and other stakeholders

Investment analysts

Providers of debt capital

Government and other corporate regulators Contractual stakeholders: Suppliers, Customers bankers

Governing body - board of directors

Shareholders i.e. members

External auditors Management

Law courts

Investigative Media

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Governance and Management

Every corporate entity needs a constitution
THE MEMBERS Shareholders in a limited company Members of the profession in a professional body Club members in a sports, arts or other private club Registered members in a trades union Members of academic bodies Voting members of other corporate entities THE CORPORATE ENTITY Limited liability company Professional organisation Sports, arts or other club Trades union University or college Other corporate entities
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Governance and Management

Incorporating a joint stock limited liability company Companies Registrar Memorandum - name of company - objectives - registered office - share capital - liability of shareholders limited Articles of Association - detailed rules for running the entity - Table A

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Governance and Management

Types of limited liability company Private companies limited by shares Private companies limited by guarantee (Private unlimited companies) Public companies
offer to general public in UK title XYZ Plc prospectus needed to offer shares

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Governance and Management

Other forms of incorporation
Savings and loans association, building societies Co-operatives: supplier (Canada), customer (UK) State corporate entities
Federal National Mortgage Association (Fannie Mae) QUANGOs Quasi-autonomous non-governmental organisation

Not for profit entities

e.g. Charities, sports associations, arts and cultural societies Trust law, friendly societies law, charities law etc.

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Governance and Management

The essence of governance
The members

Governing body

Corporate entity

Management

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Governance and Management

Management involves an organisational hierarchy

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Governance and Management

Governance is different from management

governance

management

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Governance and Management

INED

Board Structure

ED Investment Manager Co. Secretary (Compliance Officer) General Manager

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Governance and Management

Management runs the business: the board ensures that the business is well run and running in the right direction

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Governance and Management

Wherever management is separate from ownership or membership, organisations need governing
Public listed company board of directors Small/medium company - board of directors Subsidiary/associate/joint venture board Company limited by guarantee University, college council, governing body Charity, club, hospital board, committee Quasi-governmental bodies council, committee, board Family firm

Many corporate governance ideas are universal and can be applied to any governing body

(contrast organisations where management and governance are in the same hands sole traders, small partnerships)

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Governance and Management

The basic board processes
Outward looking Accountability Strategy formulation

Supervising executive activities Inward looking Past and present focused

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Policy making

Future focused

Governance and Management

Outward looking

Providing Accountability

Strategy Formulation

Approve and work with and through the CEO

Monitoring and Inward looking Supervising Past and present focused

Policy Making Future focused

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Governance and Management

The conformance and performance roles of the unitary board

conformance

performance

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Governance and Management

Guidelines for a board strategy seminar or workshop Careful planning, well in advance, is essential Agree a time when all directors can attend Fix a location where all directors can participate Define the objectives clearly, for example: - to explore the strategic situation - to discuss the implications - to consider alternative strategies - to determine the next steps to be taken (but not to take strategic decisions immediately) All directors must be fully informed about the objectives All directors should be supportive of the event All directors need briefing with relevant data in advance

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Governance and Management

Guidelines for a board strategy seminar or workshop (continued)
Do not hold the event in the board-room (the board-room culture is decision orientated) Decide who is going to run the event (this need not be the chairman) Decide whether other people should be invited to participate (senior executives to brief the directors, external experts to give briefings, experts to contribute to process) At the first session establish the ground-rules - this is not a board meeting to make decisions, but a freeranging exchange of views and insights - strategic decisions will not be made - call for imaginative contributions however unusual - discourage negative comment ('we tried that - it won't work', 'no good for us') The output of the strategy session should be an agreed list of next actions, and who is responsible for taking them and by when.

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Alternative board structures

All executive board Majority executive board Majority non-executive board All non-executive board Supervisory board Two-tier board Board structures around the world Some complex structures

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The all-executive board

O O O O = executive
directors

O O

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The majority-executive board

N N O N
executive directors non-executive directors

O O O O O

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The majority non-executive board

N N N O N non-executive directors O executive directors O O N N

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Directors and board architecture

Board Structure Exercise Group 1

ED MCM BCOM Excel Technology Esprit Holding Giordano Percentage 3 3 4 5 3 NED 8 3 1 2 4 INED 0 0 3 3 0 Total 11 6 8 9 7

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Directors and board architecture

Two-tier board

N N N N N N N N N

N non-executive directors O executive directors

O O O
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Governance and management

We have considered definitions of corporate governance the scope of corporate governance the significance of constitutions for corporate entities the difference between governance and management the performance and conformance aspects of governance alternative board structures
Tricker: Corporate Governance 2e