Effective Corporate Governance


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Effective Corporate Governance

  1. 2. Effective Corporate Governance An Emerging Market (Caribbean) Perspective on Governing Corporations in a Disparate World AUTHOR: Vindel L. Kerr PUBLISHER: GovStrat & Outskirts Press USA DATE OF PUBLICATION: 2005 NUMBER OF PAGES: 356 pages
  2. 3. <ul><li>Effective Corporate Governance is a comprehensive study of the latest developments in corporate governance systems and practices. It is a timely work, filled with illuminating insights and practical advices on how to govern corporations in order to maximize business and economic performance. </li></ul><ul><li>Even as it highlights the need for corporate governance reform in the Caribbean market, its detailed and sound theoretical analysis of the past, present, and future of corporate governance prove globally relevant at the same time. This is a must-read for any institution or individual who understands the value and importance of corporate governance to modern management practices. </li></ul>THE BIG IDEA
  3. 4. I. Corporate Governance: Concepts and Definitions <ul><li>A corporation is an entity with a legal personality and, in most instances, has limited liability to its shareholders and managers. It plays a crucial role in the economic life of virtually every country. Unfortunately, the subject of corporate governance has remained a contentious issue. This is highly relevant, especially in light of the major policy changes wrought by globalization. </li></ul>
  4. 5. A. What is Corporate Governance? <ul><li>Corporate Governance refers to laws, regulations, and acceptable business practices that determine relationships between corporation owners and its managers, on one hand, and its investors, on the other hand. It was born and evolved in response to corporate failures, crises, and misdeeds. </li></ul><ul><li>In many types of economies, corporate governance concentrates on at least four important factors: </li></ul><ul><ul><li>Ensuring disclosures of all relevant information to shareholders and creditors; including business risk analyses; </li></ul></ul><ul><ul><li>Building a system of rules and voluntary practices that will guide the board of directors; </li></ul></ul><ul><ul><li>Establishing independent audit committees composed of outside directors; </li></ul></ul><ul><ul><li>Monitoring and controlling management. </li></ul></ul><ul><li>On the other hand, developing economies, like the Caribbean, focus on strengthening and improving the legal and regulatory systems that will help ensure better enforcement of contracts and protection of property rights. </li></ul>
  5. 6. B. Corporate Governance Environment <ul><li>The corporate governance environment largely determines the quality of corporate governance and the path that it will take. Its key players are shareholders, board of directors, top management, employees, regulators and auditors, investors, clients/customers, and suppliers. All other stakeholders are considered secondary players. </li></ul><ul><li>However, the responsibility of ensuring good corporate governance rests heavily on the shoulders of the board of directors. Regardless of the other key players in the corporate governance environment, this body acts as a major pivot around which most corporate activities revolve. </li></ul>
  6. 7. <ul><li>Corporate governance promotes greater transparency, accountability, and conformity to laws and regulations. As a result, wealth is maximized and long-term prosperity for the company, its owners, and stakeholders is assured. Moreover, this preserves company integrity and reputation, as it minimizes abuse of power, employment discrimination, mistreatment of shareholders, and poor accounting practices. Above all, it acts as a shield against widespread financial crises. </li></ul><ul><li>Nonetheless, corporate governance is not just about a commitment to such ideals. More importantly, it emphasizes the significance of ethics in business. For instance, a commitment to transparency results in better compliance to laws and regulations. Accordingly, this lessens the likelihood of fraudulent business dealings. Thus, corporations attract more investments because of the increased confidence of local and international investors in them. </li></ul>C. Relevance of Corporate Governance
  7. 8. <ul><li>From a business perspective, corporate governance is about maximizing wealth, while complying with the requisite financial, legal, and contractual obligations. Whereas, a public policy perspective views corporate governance as one of ensuring corporate accountability, while nurturing growth and profitability. The ensuing discussions are just some of the important issues pertaining to corporate governance: </li></ul><ul><li>1. Shareholder vs. Stakeholder Argument </li></ul><ul><ul><li>The shareholder argument posits that corporations should be governed in behalf of its principals, the shareholders. It maintains that corporations have a responsibility, through its managers (agents), to maximize shareholders’ wealth and nothing more. </li></ul></ul><ul><li>2. Volunteered vs. Enforced Governance: Self-Regulation Redefined </li></ul><ul><ul><li>Under volunteered governance, corporations willingly adopt existing best practices, such as the Cadbury Report (1992), to guide their activities. These firms and business also develop and implement their own guidelines to enhance their reputation and ensure business prudence and transparency. </li></ul></ul>D. Perspectives on Corporate Governance
  8. 9. <ul><li>3. One-tier vs. Two-tier Board Models </li></ul><ul><ul><li>A one-tier (unitary) board is composed of both executive and non-executive directors (NEDs), which perform both strategic and monitoring roles. As such, it allows for both executive and non-executive directors to become intimately involved in the core processes and operations of the company. </li></ul></ul><ul><li>4. On Chairman/CEO Duality </li></ul><ul><ul><li>The idea of formally separating the positions of Chair and CEO has been gaining ground among scholars and critics of corporate governance. It is presumed that separating these two positions will minimize the risk of director inaction and ineffective monitoring of management functions. </li></ul></ul><ul><li>5. The Independent Director </li></ul><ul><ul><li>Independent directors are people who do not have significant familial, personal, and financial ties with the management. They are the ones most likely to make the best business decisions due to their objectivity and lack of “interest.” </li></ul></ul><ul><li>6. Corporate Governance Models </li></ul><ul><ul><li>Two of the corporate governance models can be found on opposite extremes of the corporate governance spectrum. </li></ul></ul>D. Perspectives on Corporate Governance
  9. 10. <ul><li>Corporate governance structures encompass: </li></ul><ul><ul><li>generally accepted best practices </li></ul></ul><ul><ul><li>pertinent corporate laws and legislations </li></ul></ul><ul><ul><li>government regulatory bodies </li></ul></ul><ul><ul><li>stock exchange listing rules </li></ul></ul><ul><ul><li>accounting standards </li></ul></ul><ul><ul><li>corporate transparency and disclosure </li></ul></ul><ul><ul><li>professional and business associations </li></ul></ul><ul><ul><li>chambers of commerce </li></ul></ul><ul><ul><li>watchdog groups </li></ul></ul><ul><li>On the other hand, corporate governance practices refer mainly to issues concerning ownership and control, board composition, Chair/CEO duality or separation, board dynamics and board attitude. </li></ul>E. Corporate Governance Structures and Practices
  10. 11. <ul><li>Corporate governance is not just a concern among developing countries. In the America for instance, questions about the independence of “independent audits” are being raised. However, compared to their more advanced neighbors, there is greater urgency among developing nations to forge clear, strong, and viable corporate governance systems and structures. </li></ul>II. Emerging Trends in Corporate Governance in the Caribbean
  11. 12. <ul><li>Good corporate governance will enable companies to grow and attract foreign investments. Caribbean companies need to embrace common international accounting standards and institute the needed structural and policy changes. Doing so will allow them to withstand investor’s scrutiny, ensure greater accountability and transparency, and allow full participation in the world economy. </li></ul><ul><li>To date, there have been significant advances made toward this goal, such as the inclusion of corporate governance statements in companies’ annual reports, and the creation of the Financial Services Commission (FSC). However, much work still needs to be done to create a more credible corporate governance system. </li></ul>A. Global Convergence of Financial and Accounting Standards
  12. 13. <ul><li>1. Towards Smaller Boards </li></ul><ul><ul><li>Smaller boards provide more challenges for each director. For instance, Grace, Kennedy and Company, Ltd. reduced its board size from 22 to 12. This enabled each director to become more intimately involved in board committee matters, thus adding greater value to the organization. In addition, this smaller board size gives junior executives greater opportunities to interact with the board and contribute ideas and strategies. </li></ul></ul><ul><li>2. Balancing NEDs vs. Executive Directors </li></ul><ul><ul><li>Majority of directors opined that a balance of executives and non-executives will improve boardroom independence and accountability. For instance, Grace, Kennedy’s board of directors now has an equal number of executive directors to non-executive directors. </li></ul></ul><ul><li>3. Duality or Separation of Chairman/CEO </li></ul><ul><ul><li>In many Jamaican companies, the duality of Chairman/CEO has proven to be successful. Take the case of Grace, Kennedy. One person holds both Chairman and CEO positions. Despite this, the two roles are quite separate. For instance, he has decided to remove himself from key roles, such as the auditing and risk management and compensation committees. </li></ul></ul>B. On Board Structure and Characteristics
  13. 14. <ul><li>A. Core Qualities of an Effective Chairman </li></ul><ul><ul><li>Although it is difficult to prescribe a set of core qualities that a Chairman should have, s/he must at least be able to demonstrate leadership, integrity, good judgment, and enterprising skills. In addition, s/he must also possess excellent communication and interpersonal skills, possess in-depth knowledge of pertinent laws and regulations; possess business-specific knowledge and acumen; and the ability to harness the collective skills of the board and executive teams. </li></ul></ul><ul><li>B. Key Elements of an Effective Board </li></ul><ul><ul><li>An independent and objective leadership is required for a board to be effective. In addition, it should be accountable to its members, as well as its stakeholders. It should also strike a balance between executive and non-executive directors. At the very least, it should possess: </li></ul></ul><ul><ul><li>a well-defined system of internal control; </li></ul></ul><ul><ul><li>systems to enforce the appraisal of the performance of senior management and itself; </li></ul></ul><ul><ul><li>a formal program of induction and development in order to strengthen the skills of each director; </li></ul></ul>III. On Building Effective Boards
  14. 15. <ul><ul><li>a process of appointment and development for executive management; </li></ul></ul><ul><ul><li>the facility to adopt technology and seek external skills and talents; </li></ul></ul><ul><ul><li>the facility to manage corporate risks; </li></ul></ul><ul><ul><li>the objective to promote a healthy corporate culture; </li></ul></ul><ul><ul><li>commitment to social and environmental responsibility; and, </li></ul></ul><ul><ul><li>an acknowledgment and recognition of the need to protect members’ rights and obligations. </li></ul></ul><ul><li>C. Roles and Responsibilities of Key Board Committees </li></ul><ul><li>1. Corporate Governance Committee </li></ul><ul><ul><li>The Corporate Governance Committee will nominate to the board and its committees criteria for board membership. It will also monitor and preserve board independence, as well as make constant review and suggestions for improvement in the corporation’s approach to information distribution. </li></ul></ul>III. On Building Effective Boards
  15. 16. <ul><li>2. Compensation/Remuneration Committee </li></ul><ul><ul><li>This committee generally sets the compensation of CEO and senior management. It will also oversee the firm’s overall compensation structure to determine whether the company provides appropriate incentives for management and employees at all levels. </li></ul></ul><ul><li>3. Audit Committee </li></ul><ul><ul><li>An audit committee exists to objectively view published accounts and internal controls of the company. It also has to ensure that a reliable financial reporting is done, as well as ensure compliance with regulatory bodies and the Corporate Codes of Conduct. Moreover, it has to make both internal and external audits, and perform other responsibilities as may be required. However, as a committee of the board, it should make regular reports to the board. </li></ul></ul><ul><li>4. Induction, Orientation, and Director Development Committee </li></ul><ul><ul><li>Generally, this committee should determine the “fitness” of potential directors. It is also tasked to make sure that new directors are informed properly of their responsibilities and that they are provided with all essential tools and materials for their new jobs. </li></ul></ul>III. On Building Effective Boards
  16. 17. <ul><li>It takes a leader who can craft farsighted business strategies to guarantee long-term prosperity of a business. The greatest challenge to corporate governance lies in the ability of companies to meet and satisfy the needs and divergent views of all its constituents. Among publicly listed companies, a greater degree of transparency, accountability, and conformity to rules and regulations is expected of them. </li></ul><ul><li>In small companies, corporate governance may prove unnecessary. However, larger companies must contend with the growing need to adopt high standards of governance mechanisms for effective monitoring and control. </li></ul><ul><li>Nonetheless, the responsibility of ensuring effective corporate governance should also take in shareholders’ active participation. These people can be helpful in lobbying for and formulating best practices voluntary guidelines for adoption by the companies in which they invest in. </li></ul>IV. Challenges to Corporate Governance
  17. 18. BusinessSummaries.com is a business book Summaries service. Every week, it sends out to subscribers a 9- to 12-page summary of a best-selling business book chosen from among the hundreds of books printed out in the United States. For more information, please go to http://www.bizsum.com. ABOUT BUSINESSSUMMARIES