History of Corporate Governance by M.H.M.Faizer

1. History of Corporate GovernancebyM.H.M.Faizer

2. ENTERPRISE GOVERNANCE Dimensions Dimensions CORPORATE GOVERNANCE BUSINESS GOVERNANCE (Conformance) (Performance) The two dimensions need to be in balance !

3. 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.

4. 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.

5. 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.

6. 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

7. Cadbury, Greenbury & Hampel (UK) 1980/90’S • Integrity – honest, balanced and complete financial reporting • Accountability – directives to set up by FRC, the stock exchange & accountancy profession • The code was based on three principles • Openness – subject to commercial confidentiality • Integrity – honest,balanced and complete financial reporting • Accountability- directors to provide quality information & shareholders to exercise their powers.

8. 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

9. Greenbury (Jan 1995) • Initiative of CBI (Confederation of British industry) • Emphasis on determining directors pay • Role of Non Executive Directors

10. 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”

11. Combined Code • Directors • Directors remuneration • Accountability & Audit • Relations with shareholders

12. 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

13. 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

14. 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 externalauditors

15. 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

16. Corporate governance in South Asia

17. 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 )

18. Bangladesh contd….. • Awareness was low (2002) but now….. • Legal framework : company’s Act 1994 • SEC Act 1993

19. 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 )

20. 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)

21. 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

22. 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)

23. Sri Lanka Contd… • Areas Covered • Effectiveness of the board • The Chairman • Non – Executive Directors • Professional Advice • Directors’ Training • Directors Responsibilities for Financial Statements • Compliance Report • Internal Controls • Committee structure for Board

24. 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)

25. Sri Lanka Contd… • Areas Covered • Effectiveness of the board • The Chairman • Non – Executive Directors • Professional Advice • Directors’ Training • Directors Responsibilities for Financial Statements • Compliance Report • Internal Controls • Committee structure for Board

26. 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)

27. 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

28. 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

29. Further Revision (code of best practice) • 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

30. Major Corporate Collapses • UK : The Maxwell publishing group BCCI Marconi • USA : Enron World Com Tyco • Germany : Berliner Bank Babcok • Australia : OneTel Ansett Airlines

31. 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.

32. 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.

33. Thank You ! mhm_faizer@yahoo.com