Corporate governance codes and models Flashcards
(24 cards)
What are corporate governance codes?
Are national sanctionable and generally accepted best practice guidelines for how corporations should be run. They are often designed in response to deficiencies in current local governance practices.
Why are corporate governance codes important?
1 - countries with well established governance codes and practices many have an easier time attracting investors, corporate governance codes are therefore important in promoting economic development which creates jobs, tax revenue and improved living.
2 - corporate governance codes offer investors shareholders and broader stakeholders of the firm some assurance that their money will be invested and spent with good intentions.
3. corporate governance codes offer legitimacy.
Are corporate governance codes law?
They are not, they are considered ‘soft law’ compliance is often high as it is the interest of companies to comply, failure to comply, may send the wrong signal to investors. If a company does not comply with the corporate governance they must explain why.
This is known as the comply or explain principle of compliance.
What are the key principles to how firms should be run, with the interests of shareholders in mind?
- balanced board executives - non executive boards, mitigates conflicts of interest.
- chairman of board should not be the CEO
- board should be provided with timely and accurate info
- formal and transparent procedure for appointing directors
- balanced and decipherable financial reporting
- internal control systems that work
Who decides what a given country corporate governance code contains?
Specifics differ from country to country but generally a combination of two or more of the following - stock exchange, industry representative, organisations representing the interests of shareholders, politicians, civil servants, bankers, financers, lawyers and other stakeholder groups.
Do codes change once they’ve been written and implemented?
Yes usually in response to corporate disasters such ad Enron, Lehman brothers etc.
Broad debate about the role of corporate governance in relation to issues around sustainability and human rights are also shaping these debates.
What is corporate governance legislation?
rather than adopt a voluntary approach to corporate governance, some countries choose to legislate e.g. America, legislation is responsible - Sarbanes Oxley Act 2002.
Legislation will cover similar things to some topics covered in corporate governance codes, but sometimes legislation covers areas not traditionally dealt with in corporate governance codes e.g. corporate board demography.
Is legislation law?
legislation is enforceable by law and passed by politicians.
Corporate governance codes are voluntary in nature and are written by stakeholders in a more collaborative form than legislation
When is legislation effective?
it is effective in rectifying shortcomings in existing practices, where voluntary measures have been show to fail where legislation covers an area deemed to important for voluntary practices.
e.g. women on board in Norway, soft law practices have failed in some instances e.g. with Enron.
Does legislation change?
Yes it does in response to corporate scandals but also more subtle events such as changing political agendas
What are the advantages of codes?
- central business player focal in developing codes - more buy in and greater chance of success.
- more flexibility and potentially easier to amend
- often developed and implemented in a corporate manner.
What are the disadvantages of codes?
- voluntary, may not be implemented
- absent any negative impact of non-compliance the code can become irrelevant
- seen as a smoke screen
What are advantages of legislation?
- supported by coercive means of enforcement
- sends a strong signal to business that the legislated issue is important
- sends a strong signal to potential investors
- state backed legitimacy
What are the disadvantages of legislation?
- legislation is only effective if its enforced
- legislation may be followed on a tick box basis
- legislation can have unanticipated consequences.
What is the shareholder model?
Influential model of corporate governance, practiced in US and UK, 2 of worlds largest trading economies. Many developing and emerging companies are keen to copy all or elements of these codes.
What are features of the shareholder model?
- dispersed share ownerships, shareholders elect the board of directors. Equity is predominant form of corporate finance.
- shareholders who are unhappy with management can sell their shares. Management who perform poorly can be ousted by shareholders or the sale of firm can be sold to a acquiring company.
- unitary board structure, employees generally not represented on the board, CEO pay often inflated but published.
What is the stakeholder model?
Dominant on the continent, it is claimed to have less protection for minority shareholders, it is prevalent on continental Europe.
What are the features of the stakeholder model?
- concentrated share ownership shares less actively traded, debt the predominant form of corporate finance.
- block holders tend to represent major institutions e.g. banks. Difficult to create a market for corporate control.
- less threat for poorly managed companies being given new management, dual tired board structure with stakeholders represented on the board.
- employees often represented on the board, CFO pay is less but often shrouded in more secrecy.
What type of model is stakeholder model?
it is a descriptive model of hoe some countires organise their corporate governance practices, it is not a theory. It encompasses corporate governance practices observed in distinct countires.
What type of theory is stakeholder theory?
theory of how corporation related to its broader constituency and the normative responsibility a firm has to those who have an interest or a stake in the company but who are not necessarily shareholders. Stakeholder theory is not geographically defined.
What are the advantages of a shareholder model?
- lower cost of capital market for corporate control shareholders elect the board, more transparent reporting.
What are the disadvantages of shareholder model?
potential for agency conflict, cure worse than the disease, big investors vote with the board, transparency does not appear to change outcomes
What are the advantages go stakeholder model?
block holders have incentives to ensure long term performance, access to better information, banks often represented on the board ensures continued access to capital, block holders and employee representative mitigate rent sharing behaviour.
What are the disadvantages of stakeholder model?
block holding can lead to entrenchment and group think, private benefits, scope for crony capitalism, block holders an vote on initiatives that are advantageous to themselves but not to minority stakes.
