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 ᾶ 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 ᾶ 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
Tricker: Corporate Governance 2e
Governance and management Defining corporate governance ᾶ 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
Tricker: Corporate Governance 2e
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 ᾶ 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
Societal influences and other stakeholders
Institutional investors CG activists
Stock Markets
Market intermediaries
Investment analysts
Governing body - board of directors
Government and other corporate regulators Contractual stakeholders: Suppliers, Customers bankers
Law courts
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Providers of debt capital
Shareholders i.e. members
External auditors Management
Investigative Media
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 Tricker: Corporate Governance 2e
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
Tricker: Corporate Governance 2e
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
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Management
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
Board Structure
INED
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)
Tricker: Corporate Governance 2e
Governance and Management The basic board processes Outward looking Accountability
Supervising executive activities
Strategy formulation
Policy making
Inward looking Past and present focused Tricker: Corporate Governance 2e
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
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Policy Making Future focused
Governance and Management The conformance and performance roles of the unitary board
conformance
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performance
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.
Tricker: Corporate Governance 2e
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
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O O
The majority-executive board
N N O N
executive directors non-executive directors
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N
O O O O O
The majority non-executive board
N N
N
N
N O
N non-executive directors O executive directors
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O
O
Directors and board architecture
Board Structure Exercise Group 1 • • • • •
MCM BCOM Excel Technology Esprit Holding Giordano
•
Percentage
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ED
NED
3 3 4 5 3
8 3 1 2 4
INED 0 0 3 3 0
Total 11 6 8 9 7
Directors and board architecture
N
Two-tier board
N non-executive directors O executive directors
N N N N
N N N N
O 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
