Corporate Governance
other director issues
a director must give the corporation the right of first refusal on corporate opportunities - investments in activites that are within the corporation's normal business activities
fiduciary duty
a fiduciary has a legal duty to act primarily for the benefit of another person ( the corporation), requires the directors to ( act in the corporation's best interest, be loyal, use due diligence in exercising duties, disclose conflicts of interest)
Four pillars of corporate governance
accountability, fairness, transparency, independence
board of directors
all major decisions are made or approved by the board
annual shareholder meeting
amend articles of incopration, vote on matters (mergers or other fundamental changes), elect (or remove) board of directors
Audit Committee Responsibilities
overseeing the financial reporting and disclosure process, monitoring choice of accounting policies and principles, overseeing hiring performanc and independence of the external auditors
Audit committee responsibilities
oversight of regulatory compliance ethics and whistlblower hotlines, monitoring the internal control process, overseeing the performance of the interal audit function , discussing risk mgmt policies and practices with mgmt
business judgment rule
an officer or director is not held personally liable if he/she; acted in good faith, was not motivated by fraud or conflict of interest, was not grossly negligent (must educate themselves about issues, must be free of conflicts of interest, must have a rational basis to support their position), directors may rely on info from officers
Audit Committees
are required for all SEC registrants, 3-6 independent outside directors, at least one financial expert, may not receive compensation other than director's fees
benefits of stron corporate governance
better to access to external finance, lower costs of capital - interest rates on loans, improved company performance- profitability and sustainability, higher firm valuation and share performance, reduced risk of corporate crisis and scandals
good board structure
clearly defined roles and authorities (duties and responsibilities of directors understood, committees) appropriate composition and mix of skills (independent directors), compensation in line with best interest of the company, well-defined nomination and election process, mechanism to report conflicts of interest, board self-evaluation and training conducted
other entities
corporate governance applies to all types of organizations ( non-proits, schools, hospitals, pension funds, charities)
independent directors
directors with no other role in the company (not mgmt) remember to think about the CEO and chairman of the board
other countries
most other developed and emerging market countries have adopted best practice codes ( combined code in the UK, kodex in Germany, King code in south africa, OECD principles of Corporate Governance
accountability
ensure that mgmt is accountable to the board; ensure that the board is accountable to shareholders
transparency
ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance (OECD principles, chapter 5)
directors
guardians of the company's assets for the shareholders
control environment
internal control procedures, independent external auditor conducts audits, indpendent audit committee established, internal audit department, code of ethics
well-defined shareholder rights
minority shareholder rights formalized, well-organized shareholder meetings conducted, policy on related party transactions, policy on extraoridnary transactions, clearly defined and explicit dividend policy
independence
procedures and structures are in place so as to minimize conflicts of interest, independent directors
fairness
protect shareholders rights, treat all shareholders including minorities equitably, provide effective redress for violations, see OECD princples chapter 2
Transparent disclosure
relevant financial info disclosed, relevant non-financial info disclosed, financials prepared according to appropriate standards (GAAP), company's registry filings up to date, high-quality annual report published
Corporate Governance Structure
see slide 7
duties of the board
selection and removal of officers, decisions about capital structure, initiation of fundamental changes, decisions regarding dividends, setting management compensation, coordinating audit activities, avaluating and managing risk
stakeholders
shareholders, customers, vendors, community, employees, lenders, regulators
corporate governance
the systems and processes an organization has in place to protect and enhance the interest of its diverse stakeholder groups
shareholders
those that own the company common shareholders have voting rights
managers
those who use the company's assets