BUSS 3017 Global Issues For Accounting

Topic 4 – Corporate Governance

Lecture Objectives Understand what corporate governance is & why

good corporate governance systems are needed.

Agency theory.

Overview the key areas involved in corporate governance & the alternative approaches.

The role of accounting and financial reporting in corporate governance.

The role of ethics.

Corporate Governance

“The system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights & responsibilities among different participants in the corporation, such as the board, managers, shareholders & other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance”

(OECD principles of corporate governance, 2004)

Key Principles of Corporate Governance

Westpac & Corporate Governance

“Corporate governance is concerned with how the company is directed and managed; objective setting; risk management; & performance assessment.

We understand corporate governance as part of the broader corporate responsibility framework – it is about promoting fairness, transparency and accountability by setting out the rights and responsibilities of the board, management and shareholders.

Growing evidence links good governance and enhanced shareholder returns.”

& Corporate Governance

HSBC is committed to high standards of corporate governance. HSBC Holdings has complied with the applicable code provisions of the combined code on Corporate Governance issued by the Financial Reporting Council ('the Combined Code') throughout the year save for code provision A 2.2 as the Group Chairman did not on appointment meet the Combined Code's independence criteria.

HSBC Holdings has complied with all applicable code provisions of the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the year.

& Corporate Governance

The Board has appointed a number of committees consisting of certain Directors, Group Managing Directors and, in the case of the Corporate Sustainability Committee, certain co-opted non-director members. The following are the principal committees:

Group Management Board Group Audit Committee Remuneration Committee Nomination Committee Corporate Sustainability (CS) Committee

The Directors are responsible for internal control in HSBC and for reviewing its effectiveness.

HSBC regularly updates its policies and procedures for safeguarding against reputational and operational risks.

Agency Theory

Agency relationship is where a principal delegates decision-making authority to an agent.

Monitoring Costs Behaviour of the agent

Bonding Costs Incurred by agent

Residual Loss Reduction in wealth caused by the agent’s non optimal

behaviour

Agency Problems

Risk aversion Dividend retention Horizon disparity

To reduce these problems we need to link management’s rewards to certain conditions.

Bonus Plans

Bonus Plan Hypothesis: if a managers’ remuneration is tied to accounting profit through a bonus plan, they will adopt accounting policies that shift reported income from future periods to the current period.

Key assumption: Individuals act in self interest

Elements of Good Corporate Governance

OECD 6 Principles

i. Ensuring the basis for an effective corporate governance framework.

ii. The rights of shareholders & key ownership functions

iii. The equitable treatment of shareholders

iv. The role of stakeholders in corp. governance

v. Disclosure & transparency

ASX 10 Principles

1. Lay solid foundations for management & oversight

2. Structure the board to add value

3. Promote ethical & responsible decision making

4. Safeguard integrity in financial reporting

5. Make timely & balanced disclosure

Elements of Good Corporate Governance (Cont).

OECD 6 Principles

vi. The responsibilities of the board

ASX 10 Principles

6. Respect the rights of shareholders

7. Recognise & manage risk8. Encourage enhanced

performance9. Remunerate fairly &

responsibly10. Recognise the legitimate

interests of stakeholders

Approaches to Corporate Governance

Two broad approaches: Rules based Principles based

In practice, for most countries, corporate governance involves combinations of the above.

Role of Accounting & Financial Reporting in Corporate Governance

Use of accounting information to promote appropriate decisions

Disclosures

Informing shareholders & stakeholders

Financial Reporting Problems

Financial reports should be transparent & accurate

Management remuneration

Share prices

Ethics

The standards of conduct that indicate how one should behave based on moral duties & virtues.

Need to set the tone at the top

Key Question: If your friends or family were to read about your behaviour in the newspaper, what would they think?

Ethical Principles

Honesty and Integrity: We act with honesty and integrity.

Professional Behaviour: We operate within the letter and the spirit of applicable laws.

Competence: We bring appropriate skills and capabilities to every client assignment.

Objectivity: We are objective in forming our professional opinions and the advice we give.

Confidentiality: We respect the confidentiality of information.

Ethical Principles (Cont)

Fair Business Practices: We are committed to fair business practices.

Responsibility to Society: We recognize and respect the impact we have on the world around us.

Respect and Fair Treatment: We treat all our colleagues with respect, courtesy and fairness.

Accountability and Decision-Making: We lead by example, using our Shared Values as our foundation

(Deloitte Touche Tohmatsu)

BUSS 3017 Global Issues For Accounting

Topic 5 – International Corporate Governance

Lecture Objectives Global focus on corporate governance

Understand why there are differing corporate governance systems worldwide

Discuss the characteristics of the insider & outsider systems of corporate governance

Global Focus on Corporate Governance

OECD The United Nations Conference on

Governance EU The Business Roundtable (BRT) APEC World Bank & IMF IASB IFAC

Cadbury Report

Principal Recommendations: Boards should have checks & balances to ensure

that no one individual has unfettered powers of decision.

A board should have at least 3 non-executives, of whom at least 2 should be fully independent.

A board should have an audit committee composed exclusively of non-executive members

A board should explain its corporate governance procedures.

CalPERS

Large institutional investor US$248 Billion Global Corp. Gov. Principles -1997

Accountability & Transparency Voting method improvements Codes of best practice Long term vision International comparability

Publishes list of “best” & “worst” companies

Outsider System

Market based

Dispersed ownership

Principal/agent problems paramount

Dominant force in international corporate gov.

“Outsider” - Strengths

Dispersed ownership Primacy of shareholder interests in

company law Protection of minority shareholder

interests Strong disclosure requirements Fluid capital investment

“Outsider” - Weaknesses

Over dominant & over paid CEOs Board composition Failures in reporting & transparency Short term focus Instability of governance Agency problems

European Insider System

Different corporate history & values More dependent on debt than equity Close business networks Diverse board composition Agency problem almost non-existent

“European Insider” - Strengths

Representation of diverse interests on board

Less agency problems Recognition of a wider group of

stakeholders Close relationship with banks Stability of ownership Facilitates longer-term business

strategies

“European Insider” - Weaknesses

Lack of institutional investors Less emphasis on public disclosure Voting restrictions Elaborate governance procedures can

be time-consuming Business networks can create

complacency Weak investor protection by company

law

Relationship Based – Insider System

Asia Pacific region Family control Close relationships with:

Creditors, suppliers & major customers Regulators & state officials

Minimal disclosure & transparency Very little external monitoring Finance dominated by banks

“Relationship Based – Insider System” - Strengths

Principal/agent problem eliminated

Commercial strength through “sister” companies

Strength & stability of tradition

“Relationship Based – Insider System” - Weaknesses

Neglect of minority shareholders Dominant shareholders control

company Lack of board independence/diligence Minimal disclosure & transparency Regulators unable to act Enforcement of contracts is difficult

Summary

Reasons for Differences in Corp Governance:

Business practices Company structure & ownership Level of share ownership Institutional investors Financing