Copyright © 2008 McGraw-Hill Ryerson Ltd. 1 Chapter Twelve Corporate Governance Prepared by Mark Schwartz, York University Canadian Business and Society:

Chapter 12 Copyright © 2008 McGraw-Hill Ryerson Ltd. 1

ChapterTwelve

Corporate Governance

Prepared by Mark Schwartz, York University

Canadian Business and Society: Canadian Business and Society: Ethics & ResponsibilitiesEthics & Responsibilities


Chapter Outline

Rights of Shareholders Responsibilities of Board, Membership, and

Structure Disclosure and Transparency Evaluating Board and Director Performance Corporate Governance and Performance Criticism of Corporate Governance Reform Rebalancing Power in the Corporation Corporate Governance and Stakeholders


Corporate Governance: Definition The processes, structures, and relationships

through which the shareholders, as represented by a board of directors, oversee the activities of the business enterprise.


Rights of Shareholders

Secure ownership registration

Capability to transfer ownership

Access to relevant corporate information

Participation and voting at shareholder meetings

Election and removal of board members

Share in profits of the corporation

Knowledge of extraordinary transactions or decisions

Disclosure of dual-class shares

Capability to exercise ownership rights

Source: OECD, 2004


Responsibilities of Board

Board of Directors: group of individuals elected by shareholders to govern or oversee the corporation’s affairs.

Fiduciary duties: obligations of directors to shareholders that are prescribed by laws or regulations.


Responsibilities of Board

Board’s written mandate must include board’s satisfaction with integrity of CEO and other executives and that they are creating a culture of integrity (Canadian Stock Exchanges)

Board must apply high ethical standards and take into account the interests of stakeholders (OECD, 2004)


Board Membership

Independent director: A director who is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the corporation.


Board Structure

Board committee examples: audit; finance; human resources; pension;

compensation; nominating; governance; and strategic planning.

Audit committee is required to have independent members.

Most experts recommend separation between the role of the board chair and the CEO.


Disclosure and Transparency Disclosure requirements for Canadian public

companies (National Instrument 58-201): Disclose whether board has adopted written code Describe steps board takes to encourage and promote a

culture of ethical business conduct Disclosure of executives’ compensation

Board’s audit committee oversees internal and external accounting auditing function to ensure accurate financial statements


U.S. Sarbanes-Oxley Act (2002) Public Company Accounting Oversight Board Auditor independence Corporate responsibility Enhanced financial disclosures Corporate and criminal fraud accountability White-collar crime penalty enhancements


Evaluating Board and Director Performance Criteria for evaluating board performance:

Legal Strategic and social Financial Business Human resources Governance

Source: Belcourt and Kluge, 1999


Corporate Governance and Performance Some research suggests that good corporate

governance affects firm performance Annual rankings of governance practices:

Criteria: board composition, compensation, shareholder rights, disclosure, returns (Report on Business, The Globe and Mail)

Criteria: returns, independence, accountability, disclosure (Canadian Business Magazine)


Criticism of Corporate Governance Reform Audit fees have increased Management attention diverted away from operation

of business Additional costs have made North American

business less competitive in global market Changes may not make a difference to firm

performance or in protection of shareholders Approach should be principles-based, not rule-

based


Rebalancing Power in the Corporation CEOs have been too powerful New balance of power emerging among

management, board, professional services (e.g., lawyers, auditors) Directors now playing bigger role in strategic

decision making and ethical responsibilities Auditors more cautious Legal counsel representing everyone Some shareholders more active in pressuring

boards


Corporate Governance and Stakeholders

OECD Principles of Corporate Governance (2004): Rights of stakeholders are to be respected Effective redress for stakeholders when rights

violated Stakeholders should have access to information Stakeholders should be allowed to blow whistle

on illegal or unethical practices to board


The Corporation and Democracy At the shareholder level, voting rights are based

upon share ownership and abuses occur, infringing upon the rights of some shareholders.

Most employees have no say in the governance of the enterprise.

The general public is removed from any access to the system of corporate governance.

A number of stakeholders therefore not involved.


Mintzberg’s Democratization of the Corporation Mintzberg proposed formal devices to

broaden the governance of the corporation. Two means: representative democracy and

participative democracy. Two groups involved: employees (internal)

and interest groups (external).


Mintzberg’s Democratization of the Corporation Four basic forms of corporate democracy:

1. Worker Representation - workers have representatives on the Board of Directors. I.e. European ‘Co-Determination’.

2. Pluralistic Representation - ‘public interest’ representatives are elected to the Board of Directors.

3. Worker Participation - workers are given some control of decision making, I.e. worker councils.

4. Pluralistic participation - external influence groups are somehow included in internal decision making.


Problems - Pluralistic Participation Seen with non-profit institutions. How to do you ascertain representation?


Problems - Co-determination Leads to politicization of decision making. Increases bureaucracy Hampers entrepreneurial drive Dilutes responsibilities Delays decision Endangers the unity and flexibility of management. Considered incompatible with the free market system

and existing concept of private property rights.


Problems -Worker-Representation Minor impact on business. Does not increase participation by workers. Concentrate power on the top (only labour is

involved and selection of representatives is not easy).

Representative may be remote from their constituents


Mintzberg’s Democratization of the Corporation Representative Democracy (Positives) Gives air of legitimacy to the governance of

the corporation. Opens channels of communication, gets

management to look at the human side, greater access to management information.


Corporate Governance Reform Types of Governance Structure Issue #1 - ‘Inside’ Versus ‘Outside’ Members

of the Board and Board Leadership.


Corporate Governance Reform Rechner (1989) Type 1 - Majority Outsides and

Independent Board Leadership. Considered this the ideal type of structure for

effective governance. Avoids the lack of independence associated with insiders and the vested interest leadership of the combined CEO/Chairperson.


Corporate Governance Reform Type 2 - Majority Outsiders and CEO

Duality. Common among large industrial corporations. CEO exercises too much power? I.e. Type

and quality of information presented, board’s agenda.


Corporate Governance Reform Type III - Majority Insiders and CEO

Duality. Rubber-stamp Board Total management control.


Corporate Governance Reform

Type IV - Majority Insiders and Independent Board Leadership.

Dominance of insiders is offset. However, least likely to occur.

Documents

Copyright © 2008 McGraw-Hill Ryerson Ltd. 1 Chapter Twelve Corporate Governance Prepared by Mark Schwartz, York University Canadian Business and Society: