Improving the substance of corporate governance
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Improving the Substance of Corporate Governance. Mak Yuen Teen. SIAS Corporate Governance Conference, 8 October 2008. Redefining Corporate Governance?.

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Improving the Substance of Corporate Governance

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Improving the substance of corporate governance

Improving the Substance of Corporate Governance

Mak Yuen Teen

SIAS Corporate Governance Conference, 8 October 2008


Redefining corporate governance

Redefining Corporate Governance?

Corporate governance refers to having the right people, structure and processes to direct and manage the company, in order to enhance its long-term value, through enhancing performance, accountability and risk management. It is about empowering management, while ensuring that there is adequate oversight and accountability.


Redefining corporate governance1

Redefining Corporate Governance?

  • Having the right people is as (more?) important as structure and processes

  • Robust risk management is critical to good corporate governance (and may be undermined by design of “pay for performance” schemes)

  • The board should not micro-manage


Keys to improving substance

Keys to Improving Substance

  • To improve substance, the board must:

    • believe in accountability

    • take responsibility for governance

    • seek continuous improvements

    • incorporate good governance principles into everything it does


1 setting the tone at the top

1. Setting the Tone at the Top

  • Hold directors and senior management to the highest ethical standards

    • having a code of conduct or ethics for directors and senior management is a good start

    • enforcing ethical standards on directors and senior management is critical


2 building an effective board

2. Building an Effective Board

  • Rigorous processes should be followed in:

    • recruiting the right directors, which involves assessing current mix of skills and backgrounds of directors against the desired mix, and having a robust process for identifying and selecting candidates

      • diversity in competencies and backgrounds is valuable provided it’s not “tokenism” (e.g., specialists/generalists, CEOs/non-CEOs, local/foreign directors, gender, races, private/public/non-profit, etc.)


Foreign directors pros and cons

Foreign Directors: Pros and Cons

  • Pros:

    • knowledge of overseas market in which company has a listing or significant business

    • not part of “old boys’ network” so better able to express dissenting views

    • influence the board to adopt international good practices

  • Cons

    • lack of knowledge of local laws and practices

    • difficulty in actively contributing to board and committee work

    • difficulty in paying them adequate fees or may lead to fee escalation for entire board if no policy on differential fees for foreign directors


2 building an effective board1

2. Building an Effective Board

  • Rigorous processes should be followed in:

    • inducting and developing directors

    • assessing independence of independent directors to ensure that they are independent in substance, continue to be so, and likely to be perceived to be so

    • assessing board and director performance to ensure that the board and individual directors are in fact adding value


Induction of directors

Induction of Directors

  • In the UK, the Institute of Chartered Secretaries and Administrators (ICSA) has published a guidance note on “Induction of Directors” (http://www.icsa.org.uk), divided into:

    • essential information to be provided immediately (directors’ duties, company’s business, board issues);

    • additional material to be provided within the first few months

    • additional information which the company secretary might consider making the director aware of


Assessing director independence

Assessing Director Independence

  • “Principles-based” approach to assessment of independence by the NC:

    • determines whether the director is caught by one of the 4 relationships in guideline 2.1

    • considers whether there is any other relationship or factor which may influence the director’s ability to act independently (e.g., long tenure, interlocks)

    • considers the director’s actual behaviour

    • carefully explains why director is deemed independent where threats to independence exist


Assessing board and director performance

Assessing Board and Director Performance

  • A typical board assessment questionnaire may cover:

    • board structure, roles and responsibilities

    • board meeting processes

    • board culture and relationships

    • board’s access to information and management

    • board’s involvement in strategy and planning

    • board’s involvement in monitoring

  • Committee performance should also be assessed


Assessing board and director performance1

Assessing Board and Director Performance

  • Some key issues:

    • Feedback from management

    • Feedback from key shareholders

    • Use of external party

    • Simple annual, plus more comprehensive less regular, evaluations

    • Quantitative vs qualitative

    • Benchmarking to other boards

    • Using the results of assessment


3 board management relationship

3. Board-Management Relationship

  • Board and management must have a good working relationship but without becoming too close

  • Board and management must have clear understanding of their respective roles and responsibilities

  • Board should delegate clearly, have clear reserved powers and supervise its delegation


3 board management relationship1

3. Board-Management Relationship

  • Supervising delegation requires the board to be pro-active in asking questions and seeking information

  • Certain reserved powers can be delegated to board committees but this should be explicit

  • Beware of board committees over-reaching into management


Examples of reserved powers of the board

Examples of Reserved Powers of the Board

  • Approval of vision, mission, values statement, code of ethics and strategic plan

  • Recommendation to appoint/change auditors

  • Recommendation on the remuneration of auditors

  • Approval of auditors’ engagement letter

  • Review of auditors’ recommendations and observations

  • Approval of all circulars and other documents, including those required by the stock exchange to be sent to shareholders

  • Approval of press releases on matters decided by the Board

  • Approval/review of interested party transactions


Examples of reserved powers of the board1

Examples of Reserved Powers of the Board

  • Approval of interim and final accounts and reports

  • Approval of interim dividends and recommendation of a final dividend

  • Approval of all significant changes in accounting policies and practices

  • Approval of budget

  • Approval of all changes to the organisation of senior management

  • Approval of CEO remuneration and policy

  • Approval of individual items of expenditure in excess of a stated amount


4 internal control and risk management

4. Internal Control and Risk Management

  • An internal control system should include at least the following:

    • explicit assignment of responsibilities for internal control

    • procedures for assessing the effectiveness of internal controls

    • reporting of significant risk and internal control matters to the Board and CEO

    • whistleblowing arrangements


4 internal control and risk management1

4. Internal Control and Risk Management

  • According to the ASX recommendations, a sound risk management system should include:

    • policies on risk oversight and management, which clearly describe roles and accountabilities

    • policies which cover oversight; risk profile; risk management; compliance and control; and assessment of effectiveness

    • the board’s oversight of establishment and implementation of the risk management system, and review of its effectiveness at least annually


4 internal control and risk management2

4. Internal Control and Risk Management

  • risk profile should cover material financial and non-financial risks, and should be regularly reviewed and updated

  • management’s responsibility for establishing and implementing a system for identifying, assessing, monitoring and managing material risk throughout the organisation

  • means of analysing the effectiveness of its risk management system and effectiveness of implementation


5 executive and director pay

5. Executive and Director Pay

  • There is often an over-reliance on cash bonuses based on annual profits and stock options to “pay for performance”

  • Such “pay for performance” schemes encourage senior executives to take on more risk without bearing the full consequences (they have asymmetric payoffs)

  • Relative TSR also does not properly account for risk


Annual cash bonuses

Annual Cash Bonuses


5 executive and director pay1

5. Executive and Director Pay

  • Is it time for risk-adjusted measures to be used for rewarding CEOs? (but CEOs have considerable power in influencing pay level and policy)

  • Different pay for performance schemes may be appropriate for different types of companies and for different senior executives within the company

  • Stock options are generally inappropriate for NEDs


5 executive and director pay2

5. Executive and Director Pay

  • May need to consider raising premiums for chairmen relative to NEDs in Singapore

  • NED fees are too low for some companies but may be reaching competitive levels for larger companies

  • Attendance fees may be starting to create dysfunctional incentives in some companies


Improving the substance of corporate governance

Questions?

Slides can be downloaded from www.cgfrc.nus.edu.sg

email: [email protected]; [email protected]


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