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Agenda

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Agenda

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    2. 2 Agenda CG : International Reform – Issues and Insights US & US Case studies – What went wrong? The Thai Story on CG – Is it working? The CG Healthcheck : “How do you stack up?" Self explanatorySelf explanatory

    3. 3 CG : International Reform Issues and Insights

    4. 4 Definition of corporate governance?

    5. 5 One definition… “A set of structure and process of relationships between a company’s management, its board and its shareholders to enhance its competitiveness towards business prosperity and long term shareholders to enhance its competitiveness towards business prosperity and long term shareholder value by taking into consideration the interests of others.” Corporate Governance Guidelines 2006, the Stock Exchange of Thailand Process and structure: Entity’s processes, policies and procedures and organisational practices Business prosperity: Profit and cash flows Corporate accountability: Responsibilities as a corporate citizen Shareholder value: interests of shareholdersProcess and structure: Entity’s processes, policies and procedures and organisational practices Business prosperity: Profit and cash flows Corporate accountability: Responsibilities as a corporate citizen Shareholder value: interests of shareholders

    6. 6 “Process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders.” Chapter 4, Report on Corporate Governance by the Finance Committee on Corporate Governance (February 1999) Malaysia Process and structure: Entity’s processes, policies and procedures and organisational practices Business prosperity: Profit and cash flows Corporate accountability: Responsibilities as a corporate citizen Shareholder value: interests of shareholdersProcess and structure: Entity’s processes, policies and procedures and organisational practices Business prosperity: Profit and cash flows Corporate accountability: Responsibilities as a corporate citizen Shareholder value: interests of shareholders

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    9. 9 What is “bad governance”? “The business community now looks at things in terms of what they can get away with, not what is right” Arthur Levitt - former SEC Chairman The concept of as long as others do not discover the discrepancies, the wrongdoings committed are acceptableThe concept of as long as others do not discover the discrepancies, the wrongdoings committed are acceptable

    10. 10 International governance reforms US Sarbanes-Oxley legislation (2002), SEC and NYSE Rules (2002-2003): Prescriptive, black-letter law approach attempting to provide essential ‘best practice’ procedures. UK New Revised Combined Code (2003): Based on the Higgs Report + Smith Report, with an ‘if not, why not’ reporting approach. Aims to improve and develop board effectiveness and investor confidence. Financial Services Authority Review (2005) : New listing rules proposed which empowers FSA to disqualify directors for serious listing rules breaches. AUS ASX Principles of Good Corporate Governance and Best Practice Recommendations (2003): Non-prescriptive best practice recommendations with an ‘if not, why not’ reporting approach. CLERP 9 (2003/04): Reforms to the corporate reporting and disclosure laws. US Sarbanes-Oxley legislation (2002), SEC and NYSE Rules (2002-2003): Prescriptive, black-letter law approach attempting to provide essential ‘best practice’ procedures. UK New Revised Combined Code (2003): Based on the Higgs Report + Smith Report, with an ‘if not, why not’ reporting approach. Aims to improve and develop board effectiveness and investor confidence. Financial Services Authority Review (2005) : New listing rules proposed which empowers FSA to disqualify directors for serious listing rules breaches. AUS ASX Principles of Good Corporate Governance and Best Practice Recommendations (2003): Non-prescriptive best practice recommendations with an ‘if not, why not’ reporting approach. CLERP 9 (2003/04): Reforms to the corporate reporting and disclosure laws.

    11. 11 A Comparison of Selected Governance Practices Self explanatorySelf explanatory

    12. 12 A Comparison of Selected Governance Practices Self explanatorySelf explanatory

    13. 13 A Comparison of Selected Governance Practices Self explanatorySelf explanatory

    14. 14 A Comparison of Selected Governance Practices Self explanatorySelf explanatory

    15. 15 Governance, risk and control - An integrated model Self explanatorySelf explanatory

    16. 16 CG and responsibilities of the Audit Committee Audit committee – responsibilities & duties under Bursa Malaysia listing requirements Review external and internal audit scope and plan Review external and internal audit reports, including restrictions of the scope of audit Nomination, appointment, resignation and performance of the external auditors Review internal control framework and information systems Review investigation reports Quarterly results and year end financial statements prior to approval by the Board Related party transactions Transaction entered into by a PLC or its subsidiaries which involves the interest, direct or indirect, of a related party “Related party” is defined as a director, major shareholder or person connected with such director or major shareholder. Audit committee – responsibilities & duties under Bursa Malaysia listing requirements Review external and internal audit scope and plan Review external and internal audit reports, including restrictions of the scope of audit Nomination, appointment, resignation and performance of the external auditors Review internal control framework and information systems Review investigation reports Quarterly results and year end financial statements prior to approval by the Board Related party transactions Transaction entered into by a PLC or its subsidiaries which involves the interest, direct or indirect, of a related party “Related party” is defined as a director, major shareholder or person connected with such director or major shareholder.

    17. 17 CG and Corporate social responsibility (CSR) reporting Self explanatorySelf explanatory

    18. 18 What other companies are doing as responsible corporate citizens? Self explanatorySelf explanatory

    19. 19 What other companies are doing as responsible corporate citizens? Self explanatorySelf explanatory

    20. 20 Triple bottom line reporting in CSR Self explanatorySelf explanatory

    21. 21 Changing market focus

    22. 22 Sustainable value and confidence

    23. 23 Enterprise governance: Getting the balance right Enterprise governance – Definition Conformance – corporate governance Performance – business strategy and value creation Enterprise governance – integrated framework which focuses on both conformance and performance. A balance between control and oversight helps company to succeed. Enterprise governance – Definition Conformance – corporate governance Performance – business strategy and value creation Enterprise governance – integrated framework which focuses on both conformance and performance. A balance between control and oversight helps company to succeed.

    24. 24 Enterprise governance: 27 international case studies from 10 countries Self explanatory Self explanatory

    25. 25 US & UK Case Studies What went wrong?

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    27. 27 UK case studies- what went wrong?

    28. 28 Lessons learnt from the Enron…. Independence of board & committee members Conflicts of interest Board & management relationship Executive & non-executive remuneration Auditor independence

    29. 29 However, corporate governance failures continues

    30. 30 How is business responding?

    31. 31 How is business responding? (cont.)

    32. 32 Summary of analysis on case studies: What went wrong? Key themes Ethics/Culture/Tone at the top By their own poor example and failure to uphold high ethical standards, the top management encouraged a culture of secrecy, rule-breaking and fraudulence. Chief Executive Officer: Dominant, charismatic chief executive wielded unchallenged influence and authority over the board of directors. Board of Directors Board of directors failed to challenge the chief executive and to adopt an inquisitive and independent approach to matters presented by the management. Internal Control/Compliance/ Risk Management This weakness is a logical outcome of the above 3 factors. Management took excessive risk in their pursuit of growth projects. They compromised on internal controls in their relentless pursuit on earnings and share performance. Aggressive Earnings Management Management adopted fraudulent accounting practices to achieve unrealistic or over aggressive earnings target. Key themes Ethics/Culture/Tone at the top By their own poor example and failure to uphold high ethical standards, the top management encouraged a culture of secrecy, rule-breaking and fraudulence. Chief Executive Officer: Dominant, charismatic chief executive wielded unchallenged influence and authority over the board of directors. Board of Directors Board of directors failed to challenge the chief executive and to adopt an inquisitive and independent approach to matters presented by the management. Internal Control/Compliance/ Risk Management This weakness is a logical outcome of the above 3 factors. Management took excessive risk in their pursuit of growth projects. They compromised on internal controls in their relentless pursuit on earnings and share performance. Aggressive Earnings Management Management adopted fraudulent accounting practices to achieve unrealistic or over aggressive earnings target.

    33. 33 The Thai Story on CG Is it working?

    34. 34 Development of Corporate Governance in Thailand

    35. 35 Principles of Corporate Governance - Thailand Self explanatorySelf explanatory

    36. 36 Principles of Corporate Governance – Thailand (Cont.) The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. Self explanatorySelf explanatory

    37. 37 Principles of Corporate Governance – Thailand (Cont.) The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. Self explanatorySelf explanatory

    38. 38 Principles of Corporate Governance – Thailand (Cont.) The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperations and stakeholders creating wealth, jobs, and the sustainability of financially sound enterprises. Self explanatorySelf explanatory

    39. 39 Principles of Corporate Governance – Thailand (Cont.) The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. Self explanatorySelf explanatory

    40. 40 Principles of Corporate Governance – Thailand (Cont.) The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. Self explanatorySelf explanatory

    41. 41 Principles of Corporate Governance – Thailand (Cont.) Self explanatorySelf explanatory

    42. 42 Principles of Corporate Governance – Thailand (Cont.) Self explanatorySelf explanatory

    43. 43 Scoring Criteria for Corporate Governance Report Thai listed companies are evaluated according to 123 criteria in the following five categories derived from the OECD principles of corporate governance: Self explanatorySelf explanatory

    44. 44 Scoring Criteria for Corporate Governance Report (Cont.) Self explanatorySelf explanatory

    45. 45 Scoring Criteria for Corporate Governance Report (Cont.) Self explanatorySelf explanatory

    46. 46 Scoring Criteria for Corporate Governance Report (Cont.) Self explanatorySelf explanatory

    47. 47 The CG Healthcheck How do you stack up?

    48. 48 Performance reviews Training for directors Communicating with shareholders Corporate Disclosure Key messages – going forward… Self explanatory Self explanatory

    49. 49 Selected Corporate Governance Best Practices Self explanatory Self explanatory

    50. 50 Red Flags of Weak Corporate Governance There is no independent leader of the board, whether that leader has the title of chairman, lead director, or presiding director. There is a lack of open dialogue at board meetings. The board does not retain its own outside experts for counsel on important issues such as compensation, risk management, and governance. Meeting materials are not sent to directors sufficiently ahead of time to assimilate. Non executive directors are overly reliant on management for setting meeting agendas. The size of the board is overly large, retarding effective communication among directors and independent consensus building. Non executive director contact with line managers is not encouraged. There are excessive anti-takeover provisions in place that disadvantage active shareholders and unfairly protect management. Self explanatorySelf explanatory

    51. 51 Red Flags of Weak Corporate Governance (Cont.) The board does not consider shareholder proxy requests. A significant number of directors are company executives, or persons with business or personal relationships with the CEO or the company, who could be expected to follow the lead of the CEO. The board is dependent on management to identify and nominate new directors. There is little correlation between corporate performance and incentive compensation. The CEO and CFO promote a culture of aggressive growth and give lip service to the importance of “tone at the top” such that aggressive accounting policies and lack of accounting transparency is tolerated or encouraged. Mechanisms for reporting serious breaches of policy independent of management and for protecting whistleblowers are not developed or communicated effectively. Self explanatorySelf explanatory

    52. 52 By adopting the performance enhancing mechanisms of corporate governance in substance, the likelihood of a positive impact upon the bottom line is enhanced. This impact however would not be felt overnight but in the medium to long term. How will the impact be brought about? by a clear strategic focus with clearly defined implementation plans and milestones, by a risk management system which is both proactive and avoids surprises, by having access to all relevant and reliable information on a timely basis, by seeing to it that everyone gains when the company performs through performance linked remuneration above all, by leveraging on a strong board. With all these elements in place, in a backdrop of transparency and accountability (the “other limb” of corporate governance) and in a conducive setting of strong stakeholder relations, a regulatory regime which inspires confidence and knowledgeable investors, what is to prevent shareholder value from increasing, at least in the mid to long term? By adopting the performance enhancing mechanisms of corporate governance in substance, the likelihood of a positive impact upon the bottom line is enhanced. This impact however would not be felt overnight but in the medium to long term. How will the impact be brought about? by a clear strategic focus with clearly defined implementation plans and milestones, by a risk management system which is both proactive and avoids surprises, by having access to all relevant and reliable information on a timely basis, by seeing to it that everyone gains when the company performs through performance linked remuneration above all, by leveraging on a strong board. With all these elements in place, in a backdrop of transparency and accountability (the “other limb” of corporate governance) and in a conducive setting of strong stakeholder relations, a regulatory regime which inspires confidence and knowledgeable investors, what is to prevent shareholder value from increasing, at least in the mid to long term?

    53. 53 Some questions to ponder What happened? TNB breached the KLSE LR [para 9.03 – disclosure of material information] for failing to make an immediate announcement to the KLSE for public release in relation to a suit filed by Union Bank of Switzerland against TNB in respect of the termination of 2 option agreements by TNB in September 2001. TNB was served a copy of the claim on 15 Feb 2002 – announcement only made on 31 May 2002 – a delay of 3.5 months. Public remand – imposed on 2 November 2002 A company of TNB’s stature cannot permit such events as they have a direct bearing on how stakeholders, both local and international, view the company. What can be done to prevent such occurrences? Solutions include: Establishment of a disclosure committee – primary task – to establish and oversee a mechanism that keeps abreast of circumstances which would trigger disclosure provisions Awareness programmes – executives and management would be aware of the salient features of regulatory requirements Strengthening of existing functions – legal / company secretarial Enhance the role played by the Corporate Governance committeeWhat happened? TNB breached the KLSE LR [para 9.03 – disclosure of material information] for failing to make an immediate announcement to the KLSE for public release in relation to a suit filed by Union Bank of Switzerland against TNB in respect of the termination of 2 option agreements by TNB in September 2001. TNB was served a copy of the claim on 15 Feb 2002 – announcement only made on 31 May 2002 – a delay of 3.5 months. Public remand – imposed on 2 November 2002 A company of TNB’s stature cannot permit such events as they have a direct bearing on how stakeholders, both local and international, view the company. What can be done to prevent such occurrences? Solutions include: Establishment of a disclosure committee – primary task – to establish and oversee a mechanism that keeps abreast of circumstances which would trigger disclosure provisions Awareness programmes – executives and management would be aware of the salient features of regulatory requirements Strengthening of existing functions – legal / company secretarial Enhance the role played by the Corporate Governance committee

    54. 54 Some questions to ponder The contributions which a NED can bring to the Board is highly contingent on the quality of board papers. Boards papers must display the following charactestics Timely Comprehensive coverage of the Group’s operations, but yet succinct An appropriate balance between balance of financial and non-financial information. Egs of non-financial areas include: Strategy Business Development Legal Human resources Competition / market share The papers should be distributed at least 1 week in advance of the meetings to allow time for study an appreciation of the issues. This would also permit efficient time management during the board meeting proper. In sum, a study may perhaps be in order to ascertain the comprehensiveness or otherwise of the information flow to the Board.The contributions which a NED can bring to the Board is highly contingent on the quality of board papers. Boards papers must display the following charactestics Timely Comprehensive coverage of the Group’s operations, but yet succinct An appropriate balance between balance of financial and non-financial information. Egs of non-financial areas include: Strategy Business Development Legal Human resources Competition / market share The papers should be distributed at least 1 week in advance of the meetings to allow time for study an appreciation of the issues. This would also permit efficient time management during the board meeting proper. In sum, a study may perhaps be in order to ascertain the comprehensiveness or otherwise of the information flow to the Board.

    55. 55 Some questions to ponder Definition of independence A strict definition of “independent director” is adopted under the KLSE Listing Requirements – i.e. a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgment or the ability to act in the best interests of a PLC. In TNB, an appropriate assessment should be made of the “degree of independence” of a director. This would ensure that the element of objectivity and impartiality would be safeguarded in decision making. The current board profile and substantial shareholders are shown in the next slide. Issue: is there sufficient representation of shareholders other than the major shareholders? Definition of independence A strict definition of “independent director” is adopted under the KLSE Listing Requirements – i.e. a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgment or the ability to act in the best interests of a PLC. In TNB, an appropriate assessment should be made of the “degree of independence” of a director. This would ensure that the element of objectivity and impartiality would be safeguarded in decision making. The current board profile and substantial shareholders are shown in the next slide. Issue: is there sufficient representation of shareholders other than the major shareholders?

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    57. 57 The last word on CG…… “ For me, the key to good corporate governance lies in substance, not form. It is about the way the directors of a company create and develop a model to fit the circumstances of that company and then test it periodically for its practical effectiveness” “One thing is clear though. Whatever the model, the public must know about it and how it is operating in practice. Disclosure should be a central feature of any corporate governance regime” Justice Owen, HIH Royal Commission Self explanatorySelf explanatory

    58. 58 Presenter’s contact details Self explanatorySelf explanatory

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