CORPORATE GOVERNANCE LECTURE 5 CORPORATE GOVERNANCE CODES by cnu54265

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									CORPORATE GOVERNANCE LECTURE 5
 CORPORATE GOVERNANCE CODES

           Rob Melville
            June 2007
                     OVERVIEW

• This lecture addresses the nature and importance of formal
  corporate governance codes, using representative examples
  from a diverse range of countries.
• Many national and international organisations (including
  governments) are developing or adapting formal guidance
  for the benefit of shareholders, stakeholders and managers.
INTERNATIONAL CODES
   OECD PRINCIPLES OF CORPORATE
        GOVERNANCE (1999)
• The OECD Principles were first developed in 1999
• In 2002, the OECD Steering Group on Corporate
  Governance (which included representation from OECD
  countries, the World Bank, the Bank for International
  Settlements and the International Monetary Fund) further
  investigated good practices.
• The Principles have been designed as practical guidance to
  assist governments ‘to evaluate and improve the legal,
  institutional and regulatory framework for corporate
  governance in their countries’
   OECD PRINCIPLES OF CORPORATE
        GOVERNANCE (1999)
• The OECD takes a broad view of corporate governance,
  seeing it as only one element of the economic context in
  which companies do business
• The view of the OECD is that governance also includes
  ‘business ethics and corporate awareness of the
  environmental and societal interests of the communities in
  which [the corporate governance framework] operates’
   THE INTERNATIONAL CORPORATE
    GOVERNANCE NETWORK (ICGN)
• The International Corporate Governance Network (ICGN)
  was established in 1995, and comprises companies,
  investors, academics and others with an interest in
  developing corporate governance practices
• Their Statement on Global Corporate Governance
  Principles was adopted in 1999
• Its mission was to provide practical guidance for boards in
  order to enhance their prospects for ‘economic prosperity,
  fuller employment, better wages, and greater shareholder
  wealth’
     THE INTERNATIONAL CORPORATE
      GOVERNANCE NETWORK (ICGN)
•   The ICGN recommend that companies adopt the OECD Principles. Specific
    issues addressed in the Statement include:
           Corporate Objective 1: ‘The overriding objective of the corporation
             should be to optimise over time the returns to its shareholders …. the
             corporation should endeavour to ensure the long-term viability of its
             business, and to manage effectively its relationships with
             stakeholders’
           Corporate Objective 4: ‘Boards should include a sufficient number of
             independent non-executive members with appropriate competencies’.
           Corporate Objective 10: ‘Where codes of best corporate governance
             practice exists, they should be applied pragmatically. Where they do
             not exist, investors and others should endeavour to develop them.’
     CACG GUIDELINES: PRINCIPLES FOR
      CORPORATE GOVERNANCE IN THE
          COMMONWEALTH (1999)
• The Commonwealth Association for Corporate
  Governance (CACG) was established in 1998 and has two
  main objectives:
   – to promote good standards in corporate governance and
     business practices throughout the commonwealth
   – to facilitate the development of appropriate institutions
     which will be able to advance, teach and disseminate
     such standards
• The Guidelines lists fifteen principles of good practice, and
  provides practical advice for compliance by the board
EUOPEAN CODES
          EASD PRINCIPLES AND
        RECOMMENDATIONS (2000)
• EASD was established in 1994 as a not-for-profit
  institution
• The Principles were designed to support rather than
  replace other European and national guidelines and address
  ten main areas
            EASD PRINCIPLES AND
          RECOMMENDATIONS (2000)
 shareholder rights                  disclosure of material
                                       information, and the
 encouragement of shareholder
                                       construction of internal control
  voting
                                       systems
 clear support for one share, one
                                      avoidance of conflicts of
  vote policies
                                       interest
 rights of minority shareholders
                                      management, the board and
 encouragement of the board to        shareholders should not be
  take a long term view                protected against market forces
 management to align their            such as take-overs
  strategies with the interests of
  shareholders
      EUROPEAN BANK FOR
RECONSTRUCTION AND DEVELOPMENT
            (EBRD)
• The EBRD was established in 1991 with a mission to
  support the introduction of democracy in eastern Europe. It
  uses its investments to support businesses and government
  ventures and is committed to enabling good corporate
  governance practices.
• Their Guidelines emphasise the importance of protecting
  all stakeholders; not only shareholders, but also customers,
  investors, employees, suppliers, the local communities and
  government. In addition, the Guidelines also recommend
  checks and balances and for the creation of a culture ‘that
  fosters sound business standards and corporate practices’.
   EUROSHAREHOLDERS CORPORATE
    GOVERNANCE GUIDELINES (2000)
• The European Shareholders Group is a confederation of
  eight member groups, founded in 1990. Its mission is to
  support European-wide initiatives on shareholder
  protection and value and to support the corporate
  governance debate in Europe.

• Their Guidelines make eight recommendations.
   EUROSHAREHOLDERS CORPORATE
    GOVERNANCE GUIDELINES (2000)
 maximisation of shareholder value
 shareholder approval of key decisions and ability to place
  items on the AGM agenda
 protection of shareholder value in the event of take-over
  defences
 regulation of the mergers and acquisitions process
 transparency of information
 independence of auditors
 improvement of the supply of information to shareholders
     EUROPEAN NATIONAL CODES

• Austria
  – The Austrian Code of Corporate Governance was
    published in 2002, and although it is a voluntary code,
    companies are strongly encouraged to report their
    compliance with it. Updated 2006
• Belgium
  – A Corporate Governance Committee was formed to
    develop a code of best practice for companies
    registered and listed on the Belgian stock exchange.
    The code was published in 2004.
    EUROPEAN NATIONAL CODES
• Cyprus
   – In 2002, the Cyprus stock exchange published their
     corporate governance code. It was designed to
     ‘strengthen the monitoring role of the Board of
     Directors, to protect small shareholders, to adopt
     greater transparency and to provide timely information
     as well as to sufficiently safeguard the independence of
     the Board of Directors in its decision-making.’
   – Listed companies are obliged to report to shareholders
     whether they are implementing the principles of the
     code, and if they are not complied with, an explanation
     of why they are not.
   – Updated 2006
    EUROPEAN NATIONAL CODES

• Czech Republic
   – The Czech republic Revised Corporate Governance
     Code was published in 2001. While it largely follows
     the OECD model, it also has links with the UK
     Combined Code. It is a voluntary code.
   – As a country that uses the dual board model, the
     guidance proposes good practice for the supervisory
     and management boards. Updated 2004.
       EUROPEAN NATIONAL CODES
• Denmark
   – Following publication of The Nørby Committee’s report
     on Corporate Governance in Denmark (2001) in 2001
     Denmark adopted a voluntary code of corporate
     governance. Updated 2003 and 2005
• Estonia
   – Corporate Governance Recommendations, 2004
• Finland
   – Improving Corporate Governance of Unlisted
     Companies January 2006
   – Corporate Governance Recommendations for Listed
     Companies December 2003
    EUROPEAN NATIONAL CODES
• France
   – The publication of The Corporate Governance of Listed
     Corporations in 2003 consolidated the earlier Vienot
     Reports of 1995 and 1999, and the Bouton Report of
     2002. Updated 2004.
   – French law enables either a dual or unitary board
     structure. Interestingly, it also does not disallow the
     combination of the roles of CEO and Chairman;
     companies are able to combine or not as they see fit.
    EUROPEAN NATIONAL CODES
• Germany
   – In 2002 a government commission chaired by Gerhard
     Cromme published the German Corporate Governance
     Code (known as the ‘Cromme Code’). This is a
     voluntary code, based on current German laws.
     Germany uses the dual board system, and the code
     contains guidance for the structure and role of both
     boards. While the Cromme Code was primarily targeted
     at listed companies, it was also expected that nonlisted
     companies would also make use of the guidance.
     Updated 2003, 2005 and 2006.
       EUROPEAN NATIONAL CODES

• Greece
   – The Principles on Corporate Governance in Greece:
     Recommendations for its Competitive Transformation
     was published in 1999 by the Capital Market
     Commission. This is a voluntary code.
   – Interestingly, the authors refer specifically to the agency
     problem: managers may work for their own benefit not
     the interests of shareholders. The Principles provide
     guidance on voting rights, transparency and auditing.
• Hungary
   – Corporate governance recommendations, 2004
       EUROPEAN NATIONAL CODES

• Ireland
   – In 1999 the Irish Association of Investment Managers
      published Corporate Governance, Share Option and
      Other Incentive Schemes. It follows the UK Cadbury
      model closely. Significantly, it proposed that director
      remuneration should be fully disclosed to bring Ireland
      into line with UK practice.
• Italy
   – Codice di Autodisciplina, 2006
   – Voluntary adoption
      EUROPEAN NATIONAL CODES

• Latvia
   – Corporate Governance Principles And
     Recommendations On Their Implementation, 2005
• Lithuania
   – The Corporate Governance Code For The Companies
     Listed On The National Stock Exchange Of Lithuania,
     2004
    EUROPEAN NATIONAL CODES
• Luxembourg
   – The Ten Principles of Corporate Governance of the
     Luxembourg Stock Exchange, 2006
• The Netherlands
   – The Dutch Corporate Governance Code was published
     in 2003, and replaced the 1997 Peters Committee
     report.
   – The Netherlands generally have a dual board system,
     although a unitary board is also allowed in certain cases
     where there is no legislative restriction. This report also
     contains detailed guidance for best practice.
       EUROPEAN NATIONAL CODES

• Portugal
   – The Recommendations on Corporate Governance were
     published in 1999. (Updated 2003).
   – The report was initiated in order to ensure that
     Portugal’s entry into the Euro and other global systems
     was facilitated.
• Slovakia
   – OECD Code
   EUROPEAN NATIONAL CODES
• Slovenia
   – Corporate Governance Code 2004, updated 2005 and 2007
• Spain
   – The Aldama report of 20023(Informe de la Comisión Especial
     para el Fomento de la Transparencia y Seguridad en los Mercados
     y en las Sociedades Cotizadas) update the Olivencia Code of 1998.
     The earlier report recommended a system of self-regulation,
     similar to Anglo Saxon codes such as the UK Combined Code.
   – The later report addressed the effectiveness of the first, adding to it
     some guidance of transparency of information. Like other
     European codes, it specifies ‘comply or explain’.
   – Updated 2004 and 2006
      EUROPEAN NATIONAL CODES

• Sweden
   – The NBK Recommendations February 2003
   – Swedish Code of Corporate Governance Report of the
     Code Group 16 December 2004, and Swedish Code of
     Corporate Governance: A Proposal by the Code
     Group 21 April 2004
   EUROPEAN NATIONAL CODES

• United Kingdom
  – The Combined Code On Corporate
    Governance, June 2006
  – ‘comply or explain’
  – separation of the CEO and Chairman
  – a balance of independent and executive
    directors
      EUROPEAN NATIONAL CODES

• Malta
  – The Code of Principles of Good Corporate Governance
    (2001) updated 2005
  – This report was commissioned by the Malta Stock
    Exchange report to establish best practice corporate
    governance guidelines. According to the authors,
    Malta’s financial systems are a ‘unique combination’,
    as financial systems are dominated by banks yet
    corporate law holds directors as responsible to
    shareholders.
  – A series of thirteen Principles of Good Corporate
    Governance forms the second part of the report. Listed
    companies are required to ‘comply or explain’ in much
    the same manner as the Combined Code.
        EUROPEAN NATIONAL CODES
• Poland
   – The Best Practices Committee at Corporate Governance
     Forum (2002) provides guidance to members of the dual
     boards that are the usual practice in Poland. It specifies
     that at least half of the supervisory boards should be
     independent. (Updated 2004).
    EUROPEAN NATIONAL CODES
• Romania
   – Corporate Governance Initiative for Economic
     Democracy in Romania: Corporate Governance Code
     (2001)
   – This code is voluntary, although it also imposes
     stringent restrictions on potential board members: in
     particular, those who are actively involved in
     government. It recommends that board members and
     their relatives do not hold shares in the company, and
     should not hold any position with auditors, suppliers
     and other related companies.
NORTH AMERICA
                      CANADA

• The Toronto Stock Exchange (TSE) first published
  guidance on corporate governance in 1994, recommending
  voluntary compliance with the Dey Committee’s
  recommendations. Five years later, in 1999, a follow-up
  report was published, Five Years to the Dey. This report
  contains a scorecard that demonstrates levels of
  compliance with the TSE guidance.
                          CANADA

• In 2001 the Joint Committee on Corporate Governance
  published Beyond Compliance: building a governance
  culture. The three key issues addressed in this report are:
   – strengthening the capacity of the board to work with management
   – the role of the board in selecting a CEO
   – the issues faced by independent directors in companies with
     significant shareholders
• This report makes plain that the objective of corporate
  governance is to ‘promote strong, viable and competitive
  corporations’.
                            MEXICO

• Código de Mejores Prácticas Corporativas (Corporate Governance
  Code for Mexico) (1999)
• This code was developed by the Mexican Stock Exchange, the
  Mexican Bankers’ Association and the Mexican Institute of Public
  Accountants, and was the first code to be introduced in Latin America.
• Like many other codes it requires a significant proportion of outside
  directors: at least 20% of independent directors, and at least 40% of
  ‘owning’ and independent directors. (Mexican companies are typically
  owned by a small number of investors, as opposed to the fragmented
  investment more common in developed countries.)
                     USA
• Sarbanes Oxley …

								
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