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ACT 4193 CORPORATE GOVERNANCE Presented by: YEAP KOH SIN (111214) CHAN PE NI (111215) WONG KEING LEH (111232) PENG AI LIN (111273)
INTRODUCTION • Accounting today as an objective way of presenting economic reality is suffering from a real crisis of confidence. • Central to the corporate governance, where its impartiality and objectivity is being questioned.
In Malaysia, the public confidence then was badly shaken by the collapse of the deposit-taking cooperatives, and by the Bank Bumiputra and Pan-Electric fiascos.
Malaysia Code of Corporate Governance • In March 2000, The Malaysia Institute of Corporate Governance (MICG) has introduced the Malaysia code on corporate governance approved by the High Level Finance Committee. It adopted the hybrid approach between the prescriptive and non-prescriptive models.
The Code essentially aims to encourage disclosure by providing adequate, timely and relevant information to the investing public so as to facilitate informed investment decisions being made and to evaluate the performance of the company.
What is corporate governance? • refers to the manner in which a corporation is directed, laws and customs affecting that direction. It includes the laws governing the formation of firms, the bylaws established by the firm itself, and the structure of the firm.
Objectives • enable us to have a better understanding regarding corporate governance and study in depth the issues that face by the accounting profession.
This paper is divided into three sections. • Introduction • Issues • Conclusion
How would non-executive directors play their roles of corporate governance? • Several corporate scandals and allegations of corruption (e.g., Enron, WorldCom, and others) in the last decade prompted legislative and regulatory reforms enacted by the Securities and Exchange Commission (SEC), Congress, and the major U.S. stock exchanges.
These reforms have intensified scrutiny of audit committees, whose role as protectors of investors’ interests now attracts substantially higher visibility and expectations. • As a result, audit committees face the formidable challenge of effectively overseeing the company’s financial reporting process
Non-executive directors • those directors who, do not hold any executive or management position in the company in addition to their role as a member of the board. • do not take part in day-today management of the company
Role of non-executive directors • resolving potential conflicts of interest between the company executives • ensuring that there are adequate systems to safeguard their interests of the company where such interests may conflict with the personal interests of the directors.
To be effective, non-executive directors must be given free access to the records and information of the company as well as independent legal advice if they find this to be necessary to fulfill their duties.
Continue… • non-executive directors may provide specific expertise or experience in planning process of the development strategy. • To be effective, they must develop a clear understanding of the ways in which the board can add value to the company and the management’s role in providing the good information.
Conclusion • Fundamentally, non executive directors should contribute independent views to the board’s deliberations and decisions, while identifying strongly with the company’s business.
Recommendations • non executive directors must have the strength of character and be able to stand back from the issue being considered, and the ability to exercise impartial judgment or conflicts between the company and its executives
fees that non executive directors received from the company from his services must not form a significant part of his income, otherwise his independence could be perceived to be compromised.
OWNERSHIP CONCENTRATION Will ownership concentration cause agency problem and conflict of interest or simply act as protections to shareholders’ rights?
INTRODUCTION • Most discussions on corporate governance have focused on ownership structure, shareholder control and protection, the market for corporate control and the role of market competition.
INTRODUCTION • Two key aspects of corporate ownership structure, which are : • Ownership Concentration * • Ownership Composition
OWNERSHIP CONCENTRATION • The degree of ownership concentration in a company determines the distribution of power between its managers and shareholders.
OWNERSHIP CONCENTRATION • When ownership is dispersed, shareholder control tends to be weak because of poor shareholder monitoring. • When ownership is concentrated, large shareholders could play an important role in monitoring management.
Possible Impacts • Conflict of Interest • Agency Problem • Protection against erosion and violation of shareholders’ rights
1. Conflict of Interest • In a privately owned company, the owner rules the roost and controls the decision-making process. • Control shifts to the hands of executives responsible for the assets of the shareholder.
Continue… • Fundamentally, the role of management is to make decisions that help to maximize profits for these investors. • Shareholders and manager are apparentlyon the same side yet can be striving for obviously different goals.
Continue… • Self-interest is a powerful motivator. • Shareholder- seeks a decent return on investment • Executives or management - driven by desires of promotion, higher earnings and increased power and influence.
QUESTION… • Can these respective ambitions be fulfilled or can one only succeed at the expense of the other?
ANSWER TO THE QUESTION ? • Shareholder - favorable returns usually depend on company performance. • Executive ambition will often demand expansion. • But expansion equals investment, investment that risks shareholder funds.
ANSWER TO THE QUESTION ? CONFLICT OF INTEREST • SELF-CENTRED • SELFISH BEHAVIOUR • SELF-SEEKING
ANSWER TO THE QUESTION ? CONCLUSION NO COORPERATION, COORDINATION AND ALIGNMENT OF GOAL FULL OF PARADOX, AMBIGUITY AND INCONCLUSIVE RESULTS
2. Agency Problem • Agency problems arise when the management of a public company pursues its own economic self-interest instead of maximizing shareowner wealth. • Managers are susceptible to human nature and may pursue their own economic agenda ahead of those for shareowners.
Continue… • To ensure that the management of a corporation does not maximize its own wealth at the expense of shareowners’ wealth, the board of directors must establish corporate control systems. • It is the board’s job to hire and fire the CEO, to establish appropriate compensation schemes, and to reduce or eliminate conflicts of interest.
Recommendations- Protection of Shareholders’ Right • Control systems can break down in a number of ways : • Board Agenda • Board Composition • Equity Alignment • Board Size • Joint CEO/ Chairman role
CONCLUSION • Agency problem and conflict of interest among the related parties will not arise if separation of power is conducted properly and effectively. • Minority shareholders and management can comply with sound corporate governance, not because of the legal consequences that may cause them if they don’t, but only as an ethical act.
Continue… • The minority shareholders’ rights can be protected when proper authority is given to management and at the same time monitored by the shareholder. • Involvement and participation of shareholders in decision making process is important to protect their own rights.
The moral and lesson behind it… • Share ownership carries with it both rights and duties. • As a shareholder, one has the obligation to exercise ownership rights continually in pursuit of good governance.
Continue… • Sound corporate governance principles cannot be implemented overnight, this is a long-term proposition. • Share ownership is a frame of mind that encourage ongoing dialog with the officers and directors regarding proper governance practice.
The final issue How does effectiveness of corporate governance taken heed of by firms? If immense concern of this matter is involved, why does occurrences of fraud still prevail in their firms?
Almost all firms which came up with corporate governance statement claims that they have good corporate governance, which translating that they are effective in governing their firms
Players of the system • Board of Directors • Audit Committee • Shareholders • External auditors
“ the effective corporate governance is the responsibilities of all the players in the system. They should stable up their role of responsibility and the fiduciary duties.” Dato’ Mohd Azlan (former Bursa Malaysia executive chairman)
Outbreak of Asian Financial Crisis in 1997 • General perception: Crisis caused by lacking sound corporate governance framework
IMPACT • encouragement of more positive approach towards corporate governance • This new awareness took place and firms had then taken more heed of corporate governance
Malaysia Corporate Governance Survey, 2002 [PwC] • “majority of all three respondent groups agree that Malaysia’s corporate governance practice have improved since the issuance of the Code”
Malaysia Corporate Governance Survey, 2002 [PwC] • “various efforts undertaken by Malaysian regulators and market participants to strengthen Malaysia’s corporate governance framework are perceived to have raised Malaysia’s corporate governance standing within the region”
Factors that have contributed to fraud • Financial distress • Failure to follow proper control procedures • Collusion between employees and third party
Other factors • Lack of motivation • Ignorance • Greed
Conclusion • The impact of globalization and the recent finance-driven troubles in Asia and other countries have spurred the drive toward policies and institutions that address defects in corporate performance