Corporate governace


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Corporate governace

  1. 1. 22/2/2012Corporate Governance, Developments and Current 1. Introduction and evolution of CG Status 2. Code of Best Practices Presents by Group 02 Date : 19th Feb 2012 3. Learnings from the Corporate Sector 4. Best Practices and addressing issues MBA Weekday Program ,Semester I – Second half (2011/2013) MBA 539 Financial Reporting and Management Control System (Course Lecturer: Mr. R.M.R.B Rajapakshe, Senior Lecturer) 5. Conclusion 2 Corporate governance (CG) Right & Expectations of Stakeholders CG is "the system by which companies are directed and controlled" (Cadbury Committee, 1992) What is the importunacy? It involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders; it deals with prevention or mitigation of the conflict of interests of stakeholders. 1
  2. 2. 22/2/2012 Development of Corporate Governance ENTERPRISE GOVERNANCE The Cadbury Report (UK, 1992) Dimensions Dimensions after the collapse of the Maxwell publishing group the structure and composition of the main board and board committees and highlighted the importance of nonexecutive directors. Importantly, it established the ‘comply or explain’ principle CORPORATE BUSINESS GOVERNANCE GOVERNANCE whereby companies should comply with the Code or give (Conformance) (Performance) reasons for any areas of non-compliance. The two dimensions need to be in balance ! Development of CG Cont… Development of CG Cont…• The Greenbury Report,1995 - dealt with directors remuneration The Sarbanes-Oxley Act of 2002 (US, 2002)• The Hample Report, (combined code) 1998 – Highlighted the role of With the collapse of Enron and Worldcomcorporate governance as contributor to business prosperity • Concept of independence of external auditors• The Turnbull Committee, 1998 - prepared guidelines for corporategovernance • Reinforced the duties of CEOs and CFOs by imposing strict penalties for mis- interpretation the financial position in• The Higgs Report, 2003- New code emphasizing internal control, Financial reports listed companiesaudit committee, the board, chairman and nonexecutive directors etc; • Majority must consist with independent directors and they must adopt and disclose code of business ethics and if any waivers reasons for the same 2
  3. 3. 22/2/2012 The Principles of Corporate Governance Development of Corporate Governance (OECD, 1998 and 2004) 2004 additionsI. Ensuring the basis for an effective corporate governance frameworkII. The rights of shareholders and key ownership Main Agents in SL functionsIII. The equitable treatment of Shareholders ICASL SEC CSE CBSLIV. The role of stakeholders in corporate governanceV. Disclosure and transparency Corporate Governance in SL Code of best Practices in Sri Lanka The board Directors’ Remuneration Chairman and CEO Disclosures of 2006 /2008 2004 SEC set Revised on Chairman’s Role Remuneration guidelines for 2003 Best Audit and Code of Best Financial Acumen Relations with Practices on CG Audit Practices on Board balance shareholders jointly by ICASL committees of CG by ICASL and SEC listed and SEC Supply of Information Accountability and Audit 2002, ICASL companies Financial Reporting Code of Best *Mandatory Appointments to the Internal Control Practices on Audit Listing Rules Board Audit Committee 1997, ICASL on CG issued voluntary Committee Re-Election Adheres to Corporate Code of Best Practices Appraisal of Board Governance performance Appraisal of CEO 3
  4. 4. 22/2/2012Responsibility keep the organizational sustainability. CO-OPERATIVE GORVERNANCE Shareholders Owners Owner (providers of capital) Elects, reports, delegates Board of Directors Board of Directors Other Governance ) parties CEO CEO Appoints, reports, delegates Executives Executive management Managers Employees Operations Responsibility is to keep the organizational sustainability. Board of directors & Remuneration Committee • Should include at least two non- executive directors or one third Responsibilities of Directors Chairman’s role of non-executive directors, which ever is higher in the board. • Majority of Non executive directors should be independent. Formulate business Chairman should conduct • Board should be required to assess performance of the CEO. strategies board proceedings Adoption of an effective With effective participation • Details of the directors to be published in the annual report. strategy for CEO and of the board • Board of directors should set up a remuneration committee only management team All directors are from non executive directors to review remuneration policy and Ensuring compliance with encouraged to contribute advice to the board. laws, regulations ethical effectively • Responsible to structure remuneration packages , to attract, standards Balance of power among retain, & to motivate high caliber individuals to lead the directors organization. 4
  5. 5. 22/2/2012 Accountability Audit committeeFinancial reporting Responsibilities:• Company’s financial position & prospects• Business going concerns • Ensure objectivity and effectiveness of the audit • Overlook on preparation and presentation of FSInternal Control • Supervise company’s compliance• System of internal controls • Ensure internal controls & risk management procedures• Risk management • Involve in appointing and removal of external auditors • Discuss the Company’s annual audited FSAudit • Regular meetings with the external and internal auditors;• Board should establish formal and transparent arrangements • Report regularly to the Board of Directors• The Audit Committee - a minimum of two independent non- executive directors or exclusively by non-executive directors which ever is higher Relationship with Shareholders Benefits of CG• The Board maintains healthy relationships with its • Corporate success and economic growth key shareholders – individual & institutional. • A system of internal control • Brand formation and development• Maintain a dialogue with potential shareholders. • Business for a longer period • Trust of its stakeholders• The Annual General Meetings to communicate • Effective monitoring (corporate website, the annual report, quarterly financial statements and press releases) with the • Equity investors shareholders and encourage their participation. • Higher market valuation • Security on Shareholders’ investment 5
  6. 6. 22/2/2012 Learnings from Corporate Sector Major Corporate Collapses UK : The Maxwell publishing group BCCI (Bank) Marconi (Telco) USA : Enron (Energy Company) World Com (Telco) Tyco Germany : Berliner Bank Babcok Australia : HIH Insurance OneTel Ansett Airlines , Harris Scarfe SL Context •Golden Key Italy: Parmalat •Premuka Savings & Dev. BankThe Maxwell publishing group (1991) Enron - Energy Company (2001) • America’s most innovative company ranked in the US’CG deficiencies Fortune Top 10 companies based on turnover – Heavy borrowing to led to unsustainable levels of debt. • 30000 employees • Debts of GBP (Sterling Pound) 4 billion • $111 billion revenue in 2000 – Robert Maxwell held the positions of both chairman • World leading company and chief executive. • CG deficiencies – The effectiveness of the non executive directors was • Board has allowed to Off-the book transaction also questioned • 50% of assets ($27b)were moved off the balance sheet• Consequence • Increased risk and liabilities without proper disclosure • Excessive compensation plans – Suicide of Robert Maxwell, leading to greatest fraud in – Paid $750 bonuses , though net income was $975 in 2001. 20th Century • Questionable of the role of the Auditor – Arise CG issues in public ,business and political arena. • Consequences: – Implemented Cadbury Report (1992) – One of the largest bankruptcies in US history – US quickly implanted CG reforms (NYSE listing requirements) 6
  7. 7. 22/2/2012 WorldCom Impact of the Fraud• WorldCom was the darling of Wall Street and the Telecom Industry of the 90’s Executives and Accounting Staff Grew rapidly through acquisitions and from increased demand for telecom 6 individuals convicted of fraud / conspiracy / false filings services Ebbers – CEO 25 years in prison • 1996: Acquired MFS (including internet backbone) Sullivan – CFO 5 years in prison • 1998: Acquired MCI (more than twice it’s size) Myers – Controller 1 year in prison Yates – Dir of Acctg 1 year in prison• Accounting Fraud Vinson – Acctg Dept 5 months in prison $11 Billion Accounting Fraud over 3 year period (1999 – 2002) Manager 5 months house arrest Understatement of operating expenses of $7B Normand –Acctg Dept 3 years probation Overstatement of revenues of $1B. Manager• Impact Above 6 individuals agreed to pay a total of $24-34M to $180B of shareholder value lost (based on peak stock price) settle securities class action case $180B of shareholder value lost (based on peak stock price) 57,000 employees lost jobs 25 26 Golden Key Reasons for collapse • Many depositors lost their savings, • Directors arrested and CEO remand • High rate of interest • FCs related to the Ceylinco conglomerate (Shriram, • Interest paid not from Interest F&G, etc.) also affected.. • Decline in new deposit • Credibility issue on Ceylinco group of company • Unable to return deposit – Over 300 subsidiary more than 350 offices • Asset over valuation – Over 20,000 employees • Dubious Investment • Property market was affected, construction sector • Not invest in profitable ventures suffered, etc. • Not issued properly audited account • All this contributed to the financial instability 7
  8. 8. 22/2/2012Pramuka Savings & Development Bank Business Today To 20, 2010/11 First banking failure in Sri Lanka in Oct 2002 – Total No. Of Accounts - 15, 886 – Total Deposit Liabilities - Rs. 2,2 bn Reasons for collapse • Irregularities of financial reporting – External Auditors • Inadequate internal controls and risk • Non or under performing loan • Disclosure & Transparency • Mismanagement of the chairman & the MD – Money withdrawal Five companies do not comply with separation of Chairman and CEO How to practice CG How to practice CG • “ Public Policy ” rather than narrow interest of • Balancing of conflicting stakeholder expectations shareholders • Provide additional financial information even not • Sound legal framework mandatory • The difference between “ Managing ” and • Avoid weaker environments by adopting voluntary “Governing” CG measures • Non Executive Directors say “ Yes people” • Rotation of External Auditors • Bottom line profit analysis • Build a reputation in business world 8
  9. 9. 22/2/2012 Set the Trend by Set the Trend by doing it right cont.. doing it rightPublic enterprises should have a mission statement summarizing objectives rather than activities Senior Management should have operational independence without influences Audit Committees empowered by the Management. A legal entity must seriously take action to implement the current CG to attract the hearts of potential investors to the country True independence and effectiveness of an independent Director can only Responsibility of CSE / ICASL Financial Regulatory body to encourage the be measured by the Director’s action in the board room companies to implement CG and make it compulsory. Implementation voluntarily is most needed For diversified business future all Boards of Directors to put their thoughts to practice good CG Q&A Thank you Pls note that If any one needs ppt file, let me know, can’t upload as it’s a heavy. 9