Download Seminar Presentation - Capital Market Development Authority

History of Corporate
Governance
by
M.H.M.Faizer
ENTERPRISE
GOVERNANCE
Dimensions
CORPORATE
GOVERNANCE
(Conformance)
Dimensions
BUSINESS
GOVERNANCE
(Performance)
The two dimensions need to be in balance !
Enterprise Governance
Defined as the set of responsibilities &
practices exercised by the board &
executive management with the goal of
providing strategic decision, ensuring that
objectives are achieved, ascertaining that
risks are managed appropriately and
verifying that organizations resources are
used responsibly.
Corporate governance &
Performance governance
• CG covers issues such as board structures
& roles, internal controls & executive
remuneration. The performance dimension
focuses on helping the board to make
strategic decisions; understand its appetite
for risk and its key drivers of performance.
• Corporate Governance is necessary but not
sufficient for success. Bad governance can
ruin a company but cannot on its own
ensure success hence the need for
enterprise governance.
Treadway & COSO (USA)
• Issued a report on fraudulent financial
reporting in 1987 which confirmed the role
& status of Audit committees (a listing
requirement) with a majority of non
executive directors
• Frame work for internal controls
Cadbury, Greenbury & Hampel
(UK) 1980/90’S
o Integrity – honest, balanced and complete financial
reporting
o Accountability – directives to set up by FRC, the
stock exchange & accountancy profession
• The code was based on three principles
o Openness – subject to commercial confidentiality
o Integrity – honest,balanced and complete financial
reporting
o Accountability- directors to provide quality
information & shareholders to exercise their
powers.
Cadbury (contd)
• Report on financial reporting &
accountability of corporate governance
• Responsibility of Executive & Non
Executive directors
• Case for Audit committees
• Principal responsibilities of Executive &
Non Executive Directors
• Links between shareholders, board &
auditors
Greenbury (Jan 1995)
• Initiative of CBI (Confederation of British
industry)
• Emphasis on determining directors pay
• Role of Non Executive Directors
Hampel (Nov.1995)
• Initiative of FRC, Stock Exchange, the CBI
& CCAB
• Review Cadbury & propose amendments
• Review greenbury & propose
amendments
• Review role of directors
• Address the roles of shareholders &
auditors in the CG
• The committee produced a “ Combined
Code”
Combined Code
•
•
•
•
Directors
Directors remuneration
Accountability & Audit
Relations with shareholders
Directors
• Balance of Executive & Non Executive
Directors
• Clear division of responsibilities between
Chairman & CEO
• Appointments be formal, rigorous &
transparent
• The Board evaluate its own performance on
an annual basis
• Re- election at regular intervals
Directors’ Remuneration
• Remuneration necessary to recruit & retain
directors
• Significant portion of Executive Directors’
pay should be performance related
• Policy on remuneration to be clear &
transparent
• No director should be involved in
determining his/her remuneration
Accountability & Audit
• Board is responsible for presenting a
balanced and understandable assessment
of the company’s financial position &
prospects
• Board is responsible to maintain a sound
system of internal controls to safeguard
company’s assets & S/H investments
• Financial reporting
• Relationship with external auditors
Benefits of Corporate
Governance
• Reduces risk – it provides a mechanism to review
risk. It helps to reduce the risk of fraud
• Stimulates performance – it institutes clear
accountability & effective links between
performance & rewards.
• Improves access to capital markets- corporate
governance is seen as protecting shareholders
rights.
• Enhances the marketability of goods & services – it
creates confidence among the shareholders,
customers & suppliers, etc…
• Improves leadership – appointments of NED’S
- wider pool of knowledge
• Demonstrating transparency & social accountability
Corporate governance
in South Asia
Bangladesh
• Market Capitalization USD 3.8 Billion (6.8%
of GDP )
• 277 Securities listed in DSE
• 198 Securities listed in CSE
• 49 Banks & 28 Non Banking Institutions
• 44 State owned enterprises
(60 Privatized )
Bangladesh contd…..
• Awareness was low (2002) but now…..
• Legal framework : company’s Act 1994
• SEC Act 1993
Corporate Governance
Initiatives
• Bangladesh Bank directives
• National
Taskforce
on
corporate
governance
• Code of corporate governance
• SEC guidelines
• Role of World Bank & Asian Development
Bank
• In 2002, Bangladesh Enterprise Institute
examined the current state of corporate
governance & practices in South Asia
(OECD Principles of Corporate governance
as benchmark )
India
• Securities scam involving large no of banks leading
stock market crash in 1992
• Initiative from confederation of Indian industry
(1998) (voluntary code – only 20% of companies
followed.
• Therefore intervention by the regulators Eg;
securities & exchange board & Ministry of company
affairs
• 15,000 listed companies
• 23 registered stock exchanges but only two
matters
Bombay stock exchange & National stock
exchange
• SEBI Corporate governance guidelines (1999)
(Substantial aspects of SEBI Code are mandatory)
Sri Lanka
• Numerous company failures specially
finance companies in late 1980’s & 1990’s
• Taskforce set up in 1992 by ICA followed by
a committee in 1996
• Code of best practice on CG – 1997 by ICA
• Setting up of the SL Accounting & Auditing
Standards (ICL) Act No 15 of 1995
• SEC – to develop standards of financial
reporting
Sri Lanka Contd….
• 1997 – Initiated by Institute of Chartered
Accountants together with
• Colombo Stock Exchange
• Securities Exchange Commission
• Ceylon Chamber of Commerce
• Institute of Directors of Sri Lanka
• ( voluntary best practice code)
• Listed companies, unit trusts, fund
management companies, finance
companies, Banks, insurance companies
were expected to adopt the code.
• ( Primarily based on Cadbury Report)
Sri Lanka Contd…
•
1)
2)
3)
4)
5)
6)
Areas Covered
Effectiveness of the board
The Chairman
Non – Executive Directors
Professional Advice
Directors’ Training
Directors Responsibilities for Financial
Statements
7) Compliance Report
8) Internal Controls
9) Committee structure for Board
Sri Lanka Contd….
• Code of best practice on Audit Committees
(2002)
 Initiated by ICL
 A separate code covering Audit committees
was introduced
 Based on the combined code (UK)
Sri Lanka Contd…
•
1)
2)
3)
4)
5)
6)
Areas Covered
Effectiveness of the board
The Chairman
Non – Executive Directors
Professional Advice
Directors’ Training
Directors Responsibilities for Financial
Statements
7) Compliance Report
8) Internal Controls
9) Committee structure for Board
Sri Lanka Contd….
• Code of best practice on Audit Committees
(2002)
 Initiated by ICL
 A separate code covering Audit committees
was introduced
 Based on the combined code (UK)
SL Contd…
• Revision of Corporate Governance Code
1997
•
In 2003
• Applicability to all companies under
companies Act
• Functions of the board – revisited
• Disclosure of major transactions
• Introduced performance evaluation
Sri Lanka contd
• Guidelines for listed companies
(Audit or Audit Committees)

In 2004
 Deals mostly with external Auditor related
issues
(Qualification & appointment, power,
Remuneration, Rotations, conflict of
interest).
 Audit committees, Financial reporting
requirements
Further Revision (code of
best practice)



I.
II.
III.
IV.
In 2006
To include latest developments of the
combined code (UK) & NYSE listed co.
manual, Singapore, Malaysia, India etc..
Specific new inclusions:
Code of ethics for directors & senior
managers
Specific board related Disclosures
Audit committee aspects are
strengthened
Director Independence criteria is
specified
Major Corporate
Collapses
 UK :
 USA :
 Germany :
 Australia :
The Maxwell publishing group
BCCI
Marconi
Enron
World Com
Tyco
Berliner Bank
Babcok
OneTel
Ansett Airlines
Lessons of Experience
Lesson i : Corporate Governance cannot be
introduced in isolation from a range of
other reforms. Nor can these reforms
achieve all their objectives without CG
initiatives
Lesson ii : The need to monitor the trends in
different sectors of the market so as to
try & avoid a “perfect storm”
Lesson iii : need for range of players to
improve CG.
Lesson iv : a degree of “stick” may be needed
with “carrots” of increased investment &
performance
Lesson v : critical importance of company &
contract laws & efficacy of the legal system.
Thank You !
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