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Transcript of Corporate Governance
Introduction to Corporate Governance
UK Corporate Governance Code
Influence on board structure
Definitions Of Corporate Governance
Cadbury Report 1992
Keasey & Wright 1993
Corporate Governance Handbook 1996
Proposed by Milton Friedman as:
“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud.”
This theory is primarily based on the idea that shareholders are but one of a number of important stakeholder groups. The theory incorporates philosophy, ethics and law. *
Is it shareholder theory or stakeholder theory that applies to the current UK regulatory environment?
The UK regulatory code is shareholder, but UK business mindset is slowly edging towards stakeholder theory because of the pressures of corporate and social responsibility.
Why Is It Important?
Poor decisions can occur, even in the strongest firms.
Risk is essential and unavoidable.
Investors and stakeholders need assurance.
Principle Agent Model
Main aim of the company is to maximise shareholders profits.
Central element of governance is the stock market.
Shareholders own the company.
This theory should work well in public listed companies.
Asymmetric information main problem with the theory.
Myopic Market Model
Shares many characteristics of the Principle Agent Model.
Maximize short run value of the company.
Can be harmful in the long run.
Managers may take short term excessive risks.
The principal–agent problem concerns the difficulties in motivating one party (the "agent"), to act in the best interests of another (the "principal") rather than in his own interests.
Created by asymmetric information, which can lead to moral hazards and adverse selection.
Two sources of the agency problem are perquisites and empire building.
Solutions to the Agency Problem
Having non executive directors on the board.
Employees pay related to performance.
Different goals and objectives from different groups.
BP - Case Study
Oil spill in 20th April 2010.
Shareholder V Stakeholder
Corporate Governance in the UK
Is corporate governance mandatory or voluntary?
Corporate Governance has changed since its importance has been highlighted.
The Combined Code 2008
The UK Corporate Governance Code 2012
The Cadbury Report 1992
Greenbury Report 1995
How does Corporate Governance influence board structure?
Chairman and Chief Executive Roles
"the roles of the chairman and chief executive should not be exercised by the same person"
Non- Executive Directors
One board responsible for all decisions and actions.
Neo - Classical Theory
Impact & Significance
Avoid Agency Problems
Following collapse of Enron more companies introduced ethics committees as a board subcommittee which improves their corporate social responsibility
Parmalat highlights the need for independent directors on the board
Corporate Governance failures in one country can have knock on effects around the globe.
Largest bankruptcy in US history
Ranked in USA's Fortune top 10 list of companies
Accounts for Dec 2000 showed a profit of $979 mil with no signs of distress
Dec 2001 they filed for bankruptcy
Corporate Governance Problems in Enron
Unrestricted power in the hand of the Chief Executive
The function of non executive directors in Enron was weak
Italian company specializing in long-life milk
In late 2003 there was difficulty making bond payment, even though they were said to have a large cash reserve
Cash reserve was non existent
Guilty of falsifying accounts and misleading investors
"Corporate governance failure can happen in even the strongest company"
Frc.org.uk. 2013. Untitled. [online] Available at: https://www.frc.org.uk/getattachment/1db9539d-9176-4546-91ee-828b7fd087a8/The-UK-Approach-to-Corporate-Governance.aspx [Accessed: 7 Nov 2013].
Financial Reporting Council. (2011). Guidance on Board Effectiveness.Available: http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Guidance-on-Board-Effectiveness.aspx. Last accessed 4th November 2013.
Fontrondona, J. Sison, A. (2006) ‘The Nature of the Firm, Agency Theory and Shareholder Theory: A Critique from Philosophical Anthropology’ Journal of Business Ethics, 66(1), pp. 33-42, ABI/INFORM Complete [Online]. Available at: http://ezproxy.napier.ac.uk:2334/docview/198207188?accountid=16607 (Accessed: 19th October 2013).
London Stock Exchange. (2013). BP plc. Available: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary-chart.html?fourWayKey=GB0007980591GBGBXSET0. Last accessed 4th Nov 2013.
Mallin, C. 2013. Corporate governance. Oxford: Oxford University Press.
Ross, A and Crossan, K. (2012).A review of the inﬂuence of corporate governance on the banking crises in the United Kingdom and Germany. 12 (2), 4-8.
Solomon, J. 2007. Corporate governance and accountability. Chichester, England: Wiley.
The Chartered Quality Institute, E. 2013. Corporate governance - Chartered Quality Institute. [online] Available at: http://www.thecqi.org/Knowledge-Hub/Knowledge-portal/Corporate-strategy/Corporate-governance/ [Accessed: 7 Nov 2013].
Corporate Governance Failure in Parmalat
The chairman and chief executive positions were not separated
One of Parmalat's non executive directors was not independent
Group of shareholders controlled the company but the directors were not independent from the controlling shareholders
Cadbury provides ideas on:
Separation of Roles
Non - Executive Directors