Corporate Governance

Irish League of Credit Unions Foundation

T O Sullivan

Central Bank Definition

Corporate Governance: Procedures, processes and attitudes according to which

an organisation is directed and controlled. The corporate governance structure specifies the

distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.

www.centralbank.ie/regulation/pages/codes.aspx (Feb 2012)

Governance

‘the term used to describe the system by which organisations are directed and controlled’

Governance – a new concept?

“Quis custodiet ipsos custodes?”

Who Guards the Guards, themselves? Juvenal (110 A.D.) Satires No.6

‘Principal/agent gap’ theory (Agency Dilema) The double-sided principal–agent problem (a

model of corruption)

Cause

“The directors of companies, being managers of other people’s money than their own, it cannot be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery watch over their own”

(Smith 1776:V.1.107)

Why is governance important?

• Are there benefits from practising good corporate governance?

• “Companies that are consistently prosperous have governance models and boards that are effective and successful” (OECD)

• Good governance makes good business sense!

• Good governance reduces the RISK of …?

• How can we ensure good governance?

Cadbury Report

The Poly Peck £1.3bn collapse in 1990 The multi-billion B.C.C.I. collapse 1991 The discovery of £480m missing from the

Maxwell Group pension fund in 1991

These led to intense political pressure in UK to improve standards of Corporate Governance.

Long-Term Capital Management

In 1998 it lost $4.6 billion in less than four months Seeing no options left the Federal Reserve of New

York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets

$300 million: , , , ,, , , , , ,  $125 million:  $100 million: ,   declined to participate. (MORAL HAZARD!)

Failed Companies 2002Corporations: Est. Liabilities Dec.02 Worldcom $104 bn. (107NYT) Enron $74bn. Stock + 67 Creditors Conseco $61 bn. Global Crossing $26 bn. UAL $25 bn. Adelphia $24 bn. Kmart $17 bn.

Failed Companies 2008 Bear Sterns Lehman Brothers Merrill Lynch Fortis Bradford and Bingley Northern Rock Hypo Real Estate Also -AIG, Fanny Mae, Freddie Mac

Countries Argentina 2001 Iceland 2008 Hungry 2008 Dubai - December 2009 Iceland - November 19, 2008 - IMF approves $2.1bn

Iceland loan

Near Misses

Ireland 2008 - … UK 2008 –Secret emergency liquidity assistance for

two major banks (HBOS and RBS) (£850bn in total by Dec 2009 National Audit Office UK, BBC)

The Financial Aspects of Corporate Governance

Adrian Cadbury 1992

The Cadbury report was commissioned by the Financial Reporting Council and the London Stock Exchange.

Why …low level of confidence both in financial reporting and in the ability of

auditors to provide the safeguards which the users of company reports sought and expected.

  …the absence of a clear framework for ensuring that directors kept under

review the controls in their business… …competitive pressures which made it difficult for auditors to stand up to

demanding boards.

…by criticism of the lack of effective board accountability for such matters as directors’ pay…

…the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance…(Cadbury 1992:13)

CONFIDENCE

Corporate Governance defined Corporate Governance is the system by which companies are

directed and controlled.

Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and to satisfy themselves that an appropriate governance structure is in place.

The responsibilities of the board include setting the companies’ strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. (Cadbury 1992) (14)

Responsibilities of the BoardThe responsibilities of the board include

setting the companies’ strategic aims, providing the leadership to put them into

effect, supervising the management of the business

and reporting to shareholders on their

stewardship

Higgs Report - 2003 Review of the role and effectiveness of non-

executive directors, Commissioned by the UK Dept. of Trade

and Industry.

It sets out to build on the code of practice set out in the Cadbury report with its

‘Comply Or Explain’ motto. Combined Codes of Best Practice

Role of the Non-Executive Director - Higgs

Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.

Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

Role of the Non-Executive Director - Higgs

Risk: Non-executive directors should satisfy themselves that the financial information is accurate and that financial controls and systems of risk management are robust and defensible.

People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing , and where necessary removing. senior management in succession planning.(Suggested Code provision A.1.4) (Higgs 2003)(84)

Other Corporate Governance Reports Treadway Commission U.S.A. (1987) Bosch in Australia 1993 King Report in South Africa 1994 Rutteman 1994 Greenbury 1995 First Nolan Report 1995 Viérnot report France 1995 Second Nolan Report 1996 Peters’ Report Netherlands 1996 Third Nolan Report 1997 Fourth Nolan Report 1997 Hampel Report 1998 Thurnbull 1999 (CIMA 1999)

3 Myths of Corporate Governance – Garratt (Thin on Top, 2003:14)

1. The Myth of the All-Powerful Chief Executive (‘Celebrity CEO’)

2. The Myth that the Directors Primary Duty is to the Shareholders

3. The Myth of the Executive/Non-executive/Independent Directors

Non-Executive Director, Primary Duty, CEO Myth 3 - No such a thing – You are either a

director or you are not (Garratt) – (collective cabinet responsibility)

Myth 2 - “The Primary duty of any director is to their company as a separate legal entity. If they cannot live with that, then they must get off the board” (Garratt 2003:41)

Myth 1 – ‘Celebrity CEO’

Commonwealth Association for Corporate Governance

The 10 Duties of a professional Director The 10 duties ask a board and each director, to behave within the legal

and ethical bounds of

1. The duty of legitimacy – stay within national and international law, the memorandum and articles of association (ignorance is no defence at law) – Avoid Corruption

2. The duty of upholding the 3 values of Corporate Governance –Accountability, Openness, Probity

3. The duty of thrust

The 10 Duties of a professional Director

4. The duty of upholding the primary loyalty of a Director – to the company as a legal entity

5. The duty of Care – preparation, budget time, training, appraisal

6. The duty of Critical review and Independent thought

7. The duty of Delivering the Primary Roles and Tasks of the Board – Directoral Dilemas

see over =>

The duty of Delivering the Primary Roles and Tasks of the Board (Duty 7)

The 4 Directoral Dilemas are (I.O.D. )

1. Driving the enterprise forward, while keeping it under prudent control.

2. Being required to be sufficiently aware of the workings of the business to be responsible for its actions, while having time to develop a long-term, more objective view of developments outside the business

3. Being sensitive to short term, local demands, while balancing these against broader regional, national and international trends

4. Being focused on the commercial needs of the business while acting responsibly to other stakeholders in your society.

The duty of Delivering the Primary Roles and Tasks of the Board

8. The Duty of protecting Minority Owners’ Interests – With 1 member 1 vote this is not a current issue in coops

9. The Duty of Corporate Social Responsibility – Social Audit – See Charles Handy

10. The Duty of Learning, Developing and Communicating. – A board must learn from its decisions, actions by appraising regularly and rigorously. It must maintain Two-way communication with the rest of their business, its cuatomers, suppliers and stakeholders. – The Learning Board =>

The Learning Board

1. Formulating Policy2. Thinking Strategically3. Supervising Management 4. Ensuring Accountability

I.O.D. (2001) The Company Director’s Guidelines: Your Duties, Responsibilities and Liabilities, Kogan Page, London

CPD

Structure of a typical credit union

MEMBERS

BOARD OF DIRECTORS

SUPERVISORY COMMITTEE

AUDITOR

Manager/CEO

Office staff

Credit Committee

Credit officer or

Loan officer

Credit Control

Committee

Credit Control Officer (RoI)

Membership Committeeor officer

Education Committee

Planning & Development Committee

Nominating Committee

Investment Committee or

officer(NI)

Complaints Committee and Officer

Central Bank Definition Corporate Governance: Procedures, processes and attitudes according to which

an organisation is directed and controlled. The corporate governance structure specifies the

distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.

www.centralbank.ie/regulation/pages/codes.aspx (Feb 2012)

Governance

‘the term used to describe the system by which organisations are directed and controlled’

Other References Phillips, S., and S. Rathgeb Smith (2010) Governance and Regulation in

the Third Sector, International Perspectives: Ireland: Dr. Gemma Donelly-Cox, Lecturer in Business Studies, Academic Director, Centre for Nonprofit Management. Trinity (TCD)

 Hogg review of Corporate Governance Code (March 2010) Walker Review of Corporate Governance in the Banking industry.

(consultative text July 2009) Keith Skeoch – Code of Responsibility for investors (Dec 2009!) OECD Principles of Corporate Governance (2004) Credit Union Governance – An Introduction (2004) ILCU

Questions ?

Bibliography Cadbury, A., (1992) The Financial Aspects of Corporate

Governance. London. Gee & Co. Carver, J., & Carver, M., (1996) CarverGuide, Basic Principles of

Policy Governance. San Francisco. Jossey-Bass. Carver, J., (1997) Boards that Make a Difference: A New Design

for Leadership in Nonprofit and Public Organizations. San Francisco. Jossey-Bass.

Cropp, B., (1996) Evaluating Board Performance. Madison. www.uwcc.wisc.edu/staff/cropp/board.html

Financial Reporting Council (UK) (2008) Combined Codes (online) Garratt, B., (2003) Thin on Top, London, Nicholas Brealey. ________ (2003) The Fish Rots from the Head. London. Profile Harvey (1994) Report of the Corporate Governance Working

Group. Co-operative Union Ltd.

Bibliography Higgs, D., (2003) Review of the Role and Effectiveness of Non-Executive

Directors. London. Dept. of Trade and Industry. I.O.D., (2001) The Company Director’s Guidelines: Your Duties,

Responsibilities and Liabilities, Kogan Page, London ILCU, (2004) Credit Union Governance, An Introduction. Dublin. ILCU. Parnell, E. (1999) Reinventing Co-operation. Oxford. Plunkett

Foundation Riley, C. (2004) The Juridification of corporate governance and its

implications for Third Sector organisations: lessons from the UK. http://atlas-conferences.com/c/a/m/l/31.htm

Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. London. Methuen (Ed. 1904).

Nova Scotia Co-op Zone: http://www.coopzone.coop/en/categories Phillips, S., and S. Rathgeb Smith (2011) Governance and Regulation in the

Third Sector, International Perspectives: Ireland: Dr. Gemma Donelly-Cox

Other References Harvard Business Review on Corporate Governance (2000)  Hogg review of Corporate Governance Code (March 2010) Walker Review of Corporate Governance in the Banking industry.

(consultative text July 2009) Keith Skeoch – Code of Responsibility for investors (Dec 2009!) OECD Principles of Corporate Governance (2004) Credit Union Governance – An Introduction (2004) ILCU