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15/07/2016

IBU5GW

Governance
in a Globalising World

Week 1
Background to concepts of
governance

Welcome
Unit co-ordinator: Dr Suzanne Young
Department of Management
E-mail: S.H.Young@latrobe.edu.au
Instance coordinator: Josephine Thi Hoang
Consultations: Thursday 14.00 15.00.
HU3 Building, room 119.
Email: thi.hoang@latrobe.edu.au
Prescribed text:
Steen, T. & Conyon, M., 2012,
Corporate Governance: Mechanisms and
Systems
Berkshire: McGraw-Hill.

Assessments
In order to qualify for a pass this subject, students
must:
submit ALL assessment items AND
achieve a MINIMUM aggregate mark of 50% for the
subject
Assessment task Limit Marks Due date
Individual assignment 2000 words 30% Week 4
2000w
Group Assignment 30% Week 9
/student
Take-home exam 2000 words 40% Week 12

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Assessment 1
Due date: Week 7 ( 5 September 2016)
Choose a newspaper or magazine article (not a case study)
that is corporate governance related and published in the last
2 months and complete the following:
Outline and summarize the arguments made in the article.
Discuss the corporate governance issues raised
Why are these arguments being made in the media?
Conclude by providing your opinion about the corporate governance
issues raised in the article.

Please include a copy of the article as an Appendix.

Assessment 2 (Group Assignment)


Choose one contemporary governance topic below:
Topic
Unitary board structures provide better control over management
decisions than do two-tiered board structures
Do you think there is a role to be played by institutional investors in
corporate governance? Discuss with reference to two corporate
governance systems ie Anglo, Continental Europe, Asia.
In Anglo governance systems the CEO and director remuneration has
risen dramatically in the last few decades. Is this beneficial for
companies and investors? Discuss. Compare remuneration across 2
corporate governance systems.

Assessment 2 (Group Assignment)


In your answer include:
the international context;
corporate governance theory and practice; and
recent government, business, industry and organizational examples.
Make recommendations in relation to improvements to corporate governance
practice in terms of the issue you choose.
Please include each students initial individual contribution to the task as an
Appendix to the group assignment. This contribution will be marked individually
and graded out of 10%. This will often be a draft contribution as the group
assignment will build on each students individual contribution to form the
whole. Each contribution is to be referenced.

Due date: Week 9 (25 September 2016)

Due date: Week 9 (9 May 2016)

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Assessment 3

The take-home final exam allows students to


undertake it at home and be in open book format.

The exam questions will be handed out in Week 12.


Students are required to demonstrate their
acquisition, assimilation and synthesis of the body
of knowledge by providing a considered response
to the questions provided. Referencing of all
sources is required.

Assessment is to be submitted on LMS by on 23


October 2016.

Our classes

Lecture
Case studies
Discussion
Group work

A thought:

It is necessary only for the good man to do


nothing for evil to triumph.

[Edmund Burke, 18th century philosopher]

Keith B. Darrell

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...and another

Business will only be legitimate in the eyes of


stakeholders if it behaves in an accountable
way. Companies cannot behave as if they
operate in a vacuum.

[CIPD Professional Standards]

Toshiba CEO resigns over massive


accounting scandal:
The company had overstated its
operating profit by 151.8 billion yen
($1.22 billion) over several years

"There existed a corporate culture at


Toshiba where it was impossible to
go against the boss' will,"

Corporation A Definition
An instrument through which capital is assembled
for the activities of producing and distributing goods
and services and making investments. It should have
as its objective the enhancement of profit and gains
for shareholders.
Monks R 2004 Corporate Governance Carlton; Blackwell Publishing

An organisation engaged in mobilising resources


for productive uses in order to create wealth and
other benefits [and not to intentionally destroy
wealth, increase risk, or cause harm] for its multiple
constituents or stakeholders.
Du Plessis, McConvill, Bagaric 2005 Principles of Contemporary Corporate
Governance

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Five Characteristics
Limited liability;
Individual members not liable for debts on bankruptcy
Transferability;
Transfer ones holdings freely [shares]
Legal personality;
Lives for as long as it has capital, difficult to prosecute members
acting on behalf of the corporation e.g health and safety,
corporations cannot be sent to prison.
Centralised management;
Power to determine direction given to directors, power to control
day to day activities given to managers
Perpetual lifeline;
Assets and structure exist beyond the lifetime of any of its
members.

Example

ENRON
USs 7th largest publicly traded corporation until its
bankruptcy in late 2001.
Was an energy, commodities, and services company
with 20,000 staff and presence in 40 countries.
How did things go wrong:
Traded in electronic energy markets
Used convoluted financial and accounting structures such
as forward, prepaid contracts, hedge, etc. and created
off-balance entities to hide debt.

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Arthur Andersen
Was founded in 1918; offered
accounting services and
management consultancy to
businesses.
Think Straight
1997-2000: Tension between Talk Straight.
auditing vs management teams
=> Break-away of the consultancy
group to form a new company
named Accenture => A weaker,
smaller Andersen

Arthur Andersen
In early 2000: Increase of revenue
top priority
Enron and fast-growing, high risk-
taking: targeted clients
Enron paid $1mil per week =>
Compromised Andersens motto

The end: On 15 June 2002 Andersen


was convicted of obstruction of
justice for shredding documents
relating to its audit of Enron.

Example
The Barings Bank:
Founded in 1762 by Sir France Baring
The oldest merchant bank in England until
its collapse in 1995
Nick Leeson in 1990s lost of $1.4 billion
speculating -Primarily on futures contracts

Nick Leeson
- Appointed general manager of a new operation
in futures markets on the Singapore
International Monetary Exchange (SIMEX)
In charge of both making deals and overseeing
the paperwork on these deals
Caused the collapse of the Baring Bank

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How Leeson Broke Barings?


Arrived in Singapore in 1992

Arbitrage opportunities of Nikkei 225 futures


between SIMEX and OSE

Leesons Singapore office is terribly


understaffed errors frequently occurred

Error account 88888 created by a new phone


clerk: Loss of 20,000

Barings Inadequate Controls

Lesson controlled both the dealing desk and the


back office

Leeson removed account 88888 from daily


accounts sent to Barings

Barings ignored internal auditors reports

Introducing governance

What is corporate governance?

(Shleifer & Vishny 1997): The ways in which


suppliers of finance assure themselves of getting a
return on their investment

(Cadbury 1992): The system by which companies


are directed and controlled

Or even broader (Charkham 1994): The way


companies are run

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Definition of
Corporate Governance
To protect and advance the interests of
shareholders through setting the strategic direction
of a company and appointing and monitoring capable
management to achieve this.
[Walker Review of Corporate Governance 2009]

Corporate governance describes the framework of


rules, relationships, systems and processes within,
and by which, authority is exercised and controlled
in corporations
[Justice Owen Report of Royal Commission on HIH]

Key Elements of Definition

Monitor and assess risk;


Optimise performance;
Create value;
Provide accountability.

What corporate governance is not

Not about management as such but about


steering managers

Not a religion but a field of practice

Not synonymous with governance codes or


Sarbanes-Oxley like regulation?

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Why good governance is


important
Separation of ownership and control
Gap between investor expectations and corporate
performance
Rise of corporate take-overs
Perceived priorities of managers changed from
professionalism to own careers
Tension between managers desire for growth and
investors desire for maximum return on investment

Corporations Act 2001


[Amended 2010]
Auditing independence;
Conflict of interest;
Continuous disclosure;
Director duties & responsibilities;
Due care;
Insider trading;
Voting;
Remuneration;
Shareholding.

Bosch Reports 1991-1995


Recommendations Only
Annual Reports confirm directors will adhere to
good corporate governance principles
If not then explain
Identify most important functions of the Board
Chairman/Chief Executive roles separated
Audit Committee with majority of non-executives
Produce code of ethics
Directors disclose contracts with corporation
Compensation and nomination committees

Henry Bosch

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Hilmer Report 1993

Recommendations Only
Board strive for above average performance
Monitor own Board performance
Chairman non-executive
Audit Committee
Independent outside auditor
Calibre of Board
Incentives for above average performance

Fred Hilmer

Principles of Good Corporate Governance and


Best Practice Recommendations

Lay solid foundations for management


oversight
Structure the Board to add value
Promote ethical and responsible decision
making
Safeguard integrity in financial reporting
Make timely and balanced disclosure
Respect shareholder rights
Recognise and manage risk
Encourage enhanced performance
Remunerate fairly and reasonably
Recognise legitimate interests of stakeholders
[ASX Code]

But!!

Market control;
Regulatory control;
Political and cultural control.

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China stock
market hit by
biggest one-day
fall since 2007

30 June: Greek
failure to make IMF
payment deals
historic blow to
eurozone

Components of Corporate Governance


Component Examples
Board of Directors, CEO, Management,
Parties Shareholders, other stakeholders.
Good corporate citizen, Performance
reporting, Monitoring & evaluation,
Principles Compliance & risk management,
Independent review & verification.
Honesty, integrity, openness, performance
Culture &
orientation, responsibility, mutual respect,
Values commitment to organisation.
Codes, charters, committees, delegations,
Tools policies & procedures, KPIs.

Corporate Crimes

Fraud;
Ray Williams,

Embezzlement; HIH

Price fixing;
Health and safety;
Tax evasion;

Rodney Adler, One.Tel, HIH
Bribery;
Undisclosed political donations.

Trevor Flugge, AWB

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Punishment?

White collar crime considered not serious


but what about Enrons CEO!;
Fines paid by the business;
Defining who is ultimately responsible;
Cannot send a company to prison;
Corporate manslaughter.

Balance Effectiveness
Approaches
Stakeholder Owners Financial return
Approach the Employees
Satisfaction, pay,
supervision
satisfaction of groups
that have a stake in Customers Quality

organisational Creditors Creditworthiness


performance can be Contribution to
Community
assessed as an community affairs
indicator of Suppliers
Quality of goods,
timeliness
performance Obedience to laws,
Government
regulation

Corporate Governance Issues


Quality of directors;
Performance; Seven key issues
Shareholder rights; for 2014?
1. Strategy
Executive compensation; 2. Organisational culture
3. The economy
Structure of Board of Directors; 4. The new government and
Auditing; regulatory change
5. Mergers and
Financial reporting; acquisitions
6. Emerging directors and
Stakeholder participation; diversity
Organisational ethics. 7. Executive remuneration

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Challenges After GFC

Improve public
confidence & trust;
Communicate more
clearly to all stakeholders;
Develop more
transparency;
Participation of
shareholders;
Maintain ethical
standards.

The basic governance problem


Dilemma of main concern is the agency problem
Arises as a consequence of the separation of
ownership and control
Owners (principals) hire managers (agents) to run
the firm in the best interest of the owners
How ensure that managers really act in
accordance with the principals interest?
Agency theory seeks to raise efficient solutions to
the agency problem; law, reputation, monitoring,
incentives etc.

The extended agency problem

The firm has


more than two
actors (owners
and managers)

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The extended agency problem

Boards: elected by shareholders to perform


monitoring of management
Owners: private individuals, institutional
investors, hedge funds. Differing incentives
and agendas.
Stakeholders:
Creditors
Employees
Suppliers
Customers
Governments

Why governance?
Crucial for financial performance
Aims to ensure good decision making
Create checks and balances and prevent
abuse of power
The rise of institutional investors have led
corporate governance to become a
fashionable topic
Corporate failures and scandals attracted
additional attention to the field

Summary
Corporate governance essentially concerns
how various mechanisms contribute to the
creation of value in corporations
The variety of mechanisms available is
important, as it allows investors and
managers to make choices suitable for the
individual firm
Some corporate governance essentially
concerns finance: how to best utilise the
huge savings accumulated by institutional
investors

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Conclusion
[Justice Owen, Report of the HIH Royal Commission]

For me, the key to good corporate governance


lies in substance, not form. It is about the way
in which the directors of a company create
and develop a model to fit the circumstances
of the company and then test it periodically
for its practical effectiveness.
One thing is clear, though. Whatever the model,
the public must know about it and how it is
operating in practice. Disclosure should be a
central feature of any corporate governance
regime.
The Hon Justice Neville Owen

Final Thought

Corporate Governance is a key element


in improving economic efficiency and
growth, as well as in enhancing investor
confidence.

[OECD 2004
Principles of Corporate Governance.]

Final, Final Thought!!

If you have got the right sort of people in the


place you are not going to have a problem. If
they have the right moral fibre, you are just
not going to have a problem.

[Young S & Thyil V [2008] Principles-Based Anglo Governance Systems is not a Science but
an Art Corporate Ownership and Control Vol. 6 Issue 1 Fall pp 127-137]

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Next week

Corporate governance theories


Form groups for Assignment 2

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