Governance

Saved Recents Uploads My Answers Account Products Home Essays Drive Answers Texty About Company Legal Site Map Contact Us Advertise ©2016 StudyMode. com Home > Essays > Evaluate Dutech’s Corporate… Evaluate Dutech’s Corporate Governance Audit, Auditing, Board of directors By allank Oct 6, 2011 1462Words 381Views Page 6 of 6 Dutech Holdings Ltd is a company that has been making large amounts of profits over the years since its incorporation in 2006. At 2009, its net profits amounted to RMB 58. 4 million. This would mean that it would have the necessary resources to ensure proper corporate governance.

The objective behind corporate governance through the reporting and practices is to enhance the long-term shareholder value and interests of other stakeholders by enhancing corporate performance and accountability. General overview of the Annual Report on Corporate Governance Dutech adopts a highly prescriptive approach towards tackling the issue of corporate governance. Dutech follows closely to the requirements set out by the Singapore Code of Corporate Governance so that they would not deviate too much from the intended purpose of adopting Corporate Governance.

It must be conceded that Singapore companies would tend to adopt the Singapore Code of Corporate Governance with a presriptive mindset because the idea of corporate governance has been fairly new to companies in Singapore. This method eases the employment of corporate governance in the company, especially when the Code provides specific guideline, such that they need not devote too much resource or effort to the initial setup of corporate governance. Approach The Singapore Code of Corporate Governance consists of four main principles: 1. Board Matters 2. Remuneration Matters

3. Accountability and Audit 4. Communication with Shareholders One must contend that, as much as “adequacy” comes into play, there is no fixed benchmark. By definition, “adequate” would mean “satisfactory or acceptable in quality or quantity”- Oxford Dictionaries. This would imply that the adequacy of practices is controversial because different classes of stakeholders would have different standards of quality or quantity that they deem acceptable. Board Matters Firstly, Mr Johnny Liu Jiayan is the company’s Chairman, CEO and Controlling Shareholder of the company.

In this case, Mr Liu wields unfettered powers of decision, which he may abuse and work it to his personal gain. Its leadership structure may be better having a Chairman separate from its CEO so that the Chairman can keep the CEO’s management abilities in check and the CEO’s actions can be regulated to be made accountable to the Board of Directors. ? However, advantages can accrue to Dutech by not hindering the decision-making process. This can be evident from the pace the company managed to recover from the drop in profits from 2008.

The company’s ability to quickly innovate and hedge in raw materials is a good example of doing without the separation of functions between the CEO and the Chairman. Secondly, it must be noted that Mr Liu Bin, Dutech’s Vice Chairman is Mr Johnny Liu’s brother. It may be a worrying issue if the brothers decide to collude for the wrong reasons as they have very strong controlling power over the company. Furthermore, it is not specially noted in the Annual Report that there can be potential conflicts of interest.

This presents an issue of adequacy and weakness, diluting the strength and independent element of the Board. In light of this issue, weakness can also be seen in the composition of the Board. There is still a high degree of non-independence in the top positions of the Board, since the Lius are substantial shareholders (holding 57. 51% shares indirectly), holds executive position in the company, and are highly paid. It must be commendable that the Nominating Committee is made up of fully independent directors, thus effectively ensuring the proper evaluation of the Board’s performance.

In this sense, it would be difficult to find biased assessment of any director in the company, increasing shareholder’s confidence in the company’s operations. Even so, the company did not disclose the process of assessing its directors individually, making this level of assessment rather flawed and inadequate. Details regarding the method of assessing the individual directors are of high importance in Dutech especially because the Chairman and Vice Chairman are kins. Remuneration Matters It is commendable that the Remuneration Committee is fully made up of independent directors.

This is above the minimum requirements of “a majority of RC members to be independent”. This can give assurance to the various stakeholders of the company because the level of remuneration is believed to be set at a more appropriate rate, such that the non-independent directors are not excessively paid. It is required that performance-related elements form significant proportion of the total remuneration package. Instead, Dutech has low proportion of performance-related elements. The CEO, Mr. Johnny Liu, has 28% of his remuneration tagged to Bonus.

Furthermore, the top 6 key executives in the company are drawing fixed salaries. ? The remuneration practice of the company may be inadequate because no long-term incentive scheme is employed to align the performance of the top executives and the CEO to the interests of the company, such as share option schemes. Inadequacy in remuneration contracts may inhibit improvement. Accountability and Audit Dutech fulfills the criteria of having all members of its Audit Committee independent and non-executive.

Furthermore, two of the directors have taken mangerial positions in other companies, making their audit work more credible to other stakeholders. Some of its measures may be slightly general, which may not achieve its intended effects. One such example is when Dutech is considering the appointment and re-appointment of external auditors. The criteria for the selection of external auditors are not spelt out clearly in the annual report. This may lead to stakeholders questioning the reliability of Dutech’s choice in appointing Horwath First Trust LLP in terms of cost-efficiency, accuracy and depth of external audit.

It may be a weakness of Dutech that the internal audit function is outsourced to Messrs BDO Raffles Consultants Pte Ltd. They may not be at the company to see the operations of the company to properly assess the risk managements, internal control and corporate governance process. On the other hand, outsourcing of internal audit may also be justified because of the simplicity of operations of the company. By outsourcing internal audit, the company can be advised from a more professional perspective.

Much said, it is still laudable that the AC and the Board cmments on the internal controls and gives assurance to to the various stakeholders that the internal controls are in fact adequate to promise reasonable integrity and reliable financial information to them. Communication with Shareholders and Shareholder Participation The company tackles the issues of communication with shareholders and shareholder participation in an adequate manner as it strives to disclose material information in an adequate and timely manner.

The company has employed an acceptable number of medium such as through annual report, announcements through SGX-ST, advertisements of notice of general meetings and at general meetings of the Company. Transparency of disclosure was also promoted through its active shareholder participation method by allowing shareholders to air their views and ask question during general meetings. ? Conclusion In overall, Dutech is believed to have made a good attempt at enforcing corporate governance especially since it has been incorporated only 4 years ago.

This is in light of the prescriptive approach that Dutech has adopted, making it easier to implement corporate governance into the company. Nevertheless, the trend of Singapore companies incorporating corporate governance into its operations would show that Dutech has made a good step forward. One of the more notable issues is the disclosure of the process that the Board’s performance is assessed. This is because “feedback would allow the board to perform to the best of its capabilities. ” However, we must also acknowledge that “appraisal of individual directors is sensitive as directors are reluctant to comment on board matters”.

Much time will be taken before the full disclosure of such confidential information can be evident in most companies in Singapore. Another similar issue is the reluctance of companies to disclose too much sensitive information. Belkaoui & Kahl (1978) and Wallace & Naser (1995) found that firms with higher profitability tend to disclose less in their annual reports. This is understandable because they may want to avoid rigorous scrutiny by external parties. Yet another issue prevalant in Dutech and many other Singapore companies is that the whistle-blowing provision is not well-developed.

There is little measure to protect in-house whistle-blowers, such as being sued for defamation . Corporate governance within companies can be greatly improved if companies have such measures that promote self-regulatory behaviour. In conclusion, the reporting and practices of Dutech in corporate governance have been rather adequate in meeting the requirements set out by Singapore Code of Corporate Governance (2005). However, it would still be lacking if compared to the other companies such as those in the US where there is great emphasis on corporate governance.

SEBI has revised Clause 49 of the Listing Agreement pertaining to corporate governance vide circular dated October 29, 2004, which supersedes all other earlier circulars issued by SEBI on this subject. The article highlights important changes in the corporate governance norms. Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a listed entity should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla committee.

After these recommendations were in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices and to further improve the existing practices set up a committee under the Chairmanship of Mr Narayana Murthy during 2002-03. The Murthy committee, after holding three meetings, had submitted the draft recommendations on corporate governance norms. After deliberations, SEBI accepted the recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the Listing recommendations and the same was put up on SEBI website on 15th December 2003 for public comments.

It was only on 29th October 2004 that SEBI finally announced revised Clause 49, which will have to be implemented by the end of financial year 2004-05. These revised recommendations have also considerably diluted the original Murthy Committee recommendations.

Areas, where major changes were made, include:

• Independence of Directors
• Whistle Blower policy
• Performance evaluation of nonexecutive directors
• Mandatory training of non-executive directors, etc.

The changes in corporate governance norm as prescribed in the revised Clause 49 are as follows:

Composition of Board

The revised clause prescribes six tests, which a non-executive director needs to pass to qualify as an Independent Director. The existing requirement is that to qualify as an Independent Director, the director should not have, apart from receiving director’s remuneration, any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the Board may affect independence of judgment of the director. This requirement finds place in the revised clause also Agreement based on Murthy committee recommendations.

This led to widespread protests and representations from the Industry thereby forcing the Murthy committee to meet again to consider the objections. The committee, thereafter, considerably revised the earlier The author is Vice President, Tata Tea Ltd.

Five new clauses have been added to determine independence of a director. These are:

1. He is not related to promoters or persons occupying management positions at the board level or at one level below the board;
2. He has not been an executive of the company in the preceding three financial years;
3. He is not a partner or an executive or was not partner or an executive during the preceding three years of the statutory audit firm or the internal audit firm that is associated with the company; the legal and consulting firms that have a material association with the company.
4. He is not a material supplier, service provider or customer or a lessor or lessee of the company.
5. He is not a substantial shareholder of the company owning two percent or more of the block of voting shares. The new tests of ‘independence’, the readers would recall, were mostly included in the Companies (Amendment) Bill, 2003. The important and practical change that has now been made is addition of the word ‘material’ in item above. Without use of the word ‘material’, technically even a single supply or purchase by the director to or from the company would have taken away independence status if he/she was otherwise eligible.

However, the word ‘material’ has not been defined. Nominee directors of Institutions are now to be considered as ‘Independent Director’. While on the subject of Independent Director one must remember that no one is invited to join a board to act as a nonexecutive director unless he/she is well known to the Promoters or the Chairman or the Managing Director. All non-executive directors, whether or not independent, need support of Promoter Group for their reelection. If the purpose or objective of having a specified number of independent directors on the boards of listed companies is to ensure that boards are not

Twothird of the members of Audit committee shall be independent directors as against the present requirement of majority being independent. packed with ‘yes-men’ or to ensure constructive criticism one needs to ponder how many independent directors can freely raise questions at board meetings. Is it right that a vast majority of them invariably support every proposal of management? Only a few persons who are eminent in their own fields may ask right questions, even if they look inconvenient, at board meetings but the majority may not muster enough courage to do so.

It may therefore appear that no amount of regulation can ensure how an independent director should behave at board meetings. After all independence is a matter of attitude and a director who is conscious about his responsibilities, will always raise right questions at board meetings, whether or not he holds the independent status. The original recommendation of the Murthy Committee for mandatory training and updating of knowledge of directors has now been shifted to non-mandatory requirement, most probably in the face of strong opposition from industry.

This indeed is sad as a vast majority of directors are in need of training in the business model of the company and for updating of knowledge. I do believe that a beginning in this regard was immediately necessary. It may not be out of place to mention here that under the Listing requirements of UK all directors are mandatory required to regularly update and refresh their skills and knowledge. From the point of view of listed companies, a declaration should be obtained annually from all independent directors confirming compliance with all six conditions of independence.

The CEO/CFO Certification is a new requirement and is based on Sarbanes Oxley Act of USA. Five new items have been added under nonmandatory requirements and the existing item on Postal ballot has been deleted. A code of Conduct for Board members and senior management has to be laid down by the Board which should be posted on the website of the company. All Board members and senior management should affirm compliance with the code on annual basis and the annual report shall contain a declaration to this effect signed by the CEO.

Non-Executive Directors’ compensation & disclosures

A new requirement has been provided for obtaining prior approval of shareholders for payment of fees/compensation to non-executive directors. If there is stock option, the limit for the maximum number that can be granted to non-executive directors in any financial year and in aggregate should be disclosed. According to the Companies Act, 1956 fees paid to directors do not form part of Managerial remuneration and hence no approval of shareholders for payment of fees to directors is required.

Listed companies will now need to obtain prior approval of shareholders for payment of sitting fees to directors. Unless the Government is contemplating to change the law and bring sitting fees within the ambit of Managerial remuneration this contradiction should have been avoided. Role of the Audit committee has been enlarged to include matters required to be included in Directors’ Responsibility statement:

• to review the functioning of Whistle Blower mechanism if the same is existing and review of performance of statutory and internal auditors.

The Audit committee will also mandatorily review

• Management Discussion and Analysis of Financial condition and results of operations;
• statement of significant related party transactions;
• Management letters/letters of internal control weaknesses

Audit Committee

Following are the changes with regard to Audit Committee:

1. Two-third of the members of Audit committee shall be independent directors as against the present requirement of majority being independent;
2. Earlier, only non-executive directors could be members of Audit committee. The revised clause has omitted this requirement.
3. All members of the Audit committee shall be financially literate (as defined in the revised clause) as against the existing requirement of at least one member having financial and accounting knowledge.
4. Minimum number of Audit committee meetings in a year increased to 4 from 3. Other provisions relating to Board Gap between two meetings has been reduced to three months from four months ruling at present. statutory auditors; Internal audit reports relating to internal control weaknesses.
5. To review the appointment, removal and terms of remuneration of the Chief Internal Auditor.

The Audit committee will no longer be required to review the company’s financial and risk management policies. Risk assessment and minimization procedures will now be reviewed by the Board. Listed companies should now ascertain from their respective Audit committees the frequency of reporting related party transactions, frequency of discussing Management letters issued by the statutory auditors etc. drawn to the following: Material non-listed Indian subsidiary has been mentioned only for Board representation.

In respect of review of financial statements of unlisted subsidiary by the audit committee of holding company and placing of minutes and significant transactions entered into by subsidiary, it is significant that the words ‘material’ and ‘Indian’ solidated turnover or net worth respectively of the listed company and its subsidiaries. This definition is likely to exclude most of the unlisted subsidiaries as they are not likely to meet the turnover or net worth test. Significant transaction or arrangement shall mean any individual transaction that exceeds 10% of the total revenues/expenses/assets/liabilities of the subsidiary.

It is difficult to understand the logic of excluding subsidiaries incorporated abroad from the purview of representation on the board by an independent director.

Disclosures Following new disclosure requirements have been specified in the revised clause 49:

1. Statement on transactions with related parties in the ordinary course of business shall be placed before the Audit committee periodically;
2. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the Audit committee;
3. Details of material individual transactions with related parties or others, which are not on arm’s length basis should be placed before Audit committee together with management’s justification for the same.

Here also, the word ‘material’ has not been defined. Listed companies should ascertain dent director on the Board of the holding company shall be a director on the board of a material non-listed Indian subsidiary company; The audit committee of the holding company shall review the financial statements, in particular, the investments made by the unlisted subsidiary company; The minutes of board meetings of the unlisted subsidiary company shall be placed at the board meeting of the holding company.

The management should periodically bring to the attention of the holding company a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. Attention of the readers is have not been used. It can therefore be interpreted that board meeting minutes, financial statements and significant transactions of all unlisted subsidiaries whether incorporated in India or abroad are to be placed before the board of the holding company or to be reviewed by the audit committee of the holding company.

Is this the intention? Material non-listed Indian subsidiary shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth exceeds 20% of the con from their respective audit committees the frequency of reporting such transactions. Financial statements should disclose together with management’s explanation any accounting treatment different from that prescribed in Accounting Standard. The company will lay down procedures to inform board members about the risk assessment and minimization procedures which shall be periodically reviewed by the Board. The company shall disclose to the Audit committee on a quarterly basis the use of funds raised through public/ rights/preferential issues.

Annually a statement showing use of funds for purposes other than those stated in Offer document/prospectus should be placed before the Audit committee. Such statement should be certified by the statutory auditors. Under ‘Remuneration of Directors’ new disclosure requirements have been prescribed, which include criteria of making payments to nonexecutive directors, shares and convertible instruments held by non-executive directors and shareholding (both own and held on beneficial basis) of nonexecutive directors to be disclosed in the notice of general meeting called for approving appointment of such director. The revised Clause only requires CEO and CFO to certify to the Board the annual financial statements in the prescribed format.

While this certification will certainly provide comfort to the non-executive directors and will indeed act as the basis for the Board to make Directors’ Responsibility Statement in terms of section 217 of the Companies Act, 1956, it is not clear why SEBI did not require the listed companies to include such certification in the Annual Report. While the new corporate governance norms are more stringent than the existing requirements it must be appreciated that while regulations in these areas are necessary, regulations per se cannot and will not ensure good corporate governance.

Compliance Report

The format of quarterly report to be submitted to the Stock Exchanges has been revised and the new format follows the revised requirements of Clause 49. The CEO or the Compliance officer can now sign the compliance report. The annual corporate governance report should disclose adoption or non-adoption of non-mandatory requirements. G. CEO/CFO Certification This is a new requirement and is based on the Sarbanes Oxley Act of USA.

Non-mandatory requirements

Five new items have been added under non-mandatory require- ments and the existing item on Postal ballot has been deleted. The first new item states that Independent directors may not have tenure not exceeding in the aggregate a period of nine years on the Board of the company. The next item relates to companies moving towards a regime of unqualified audit report. The third item deals with training of board members in the business model of the company as well as risk profile of the business parameters of the company and responsibilities of directors and how best to discharge it.

The fourth item deals with performance evaluation of non-executive directors by a peer group comprising the entire Board. The fifth item relates to setting up of a whistle blower policy in the company. While the new corporate governance norms are more stringent than the existing requirements it must be appreciated that while regulations in these areas are necessary, regulations per se cannot and will not ensure good corporate governance. Attention of readers is drawn towards the Report on Observance of Standards and Codes carried out under a joint programmed of World Bank and IMF.

This report benchmarks the observance of corporate governance in India against the benchmark Principles of Corporate. Governance laid down by the Organization for Economic Cooperation and Development (OECD). The assessment team had extensively interviewed issuers, institutional investors, financial institutions, market analysts, lawyers, accountants and auditors. The report was also discussed by Government of India and cleared by the DEA for publication in June 2004. Following are the areas identified for reform in the World Bank report:

1. Sanctions and enforcements: Sanctions and enforcements should be credible deterrents to help align business practices with the legal and regulatory framework, in particular with regard to related party transactions and insider trading.
2. The current framework places the oversight of listed companies partly with DCA, partly with SEBI and partly with Stock exchanges. This fragmented structure gives rise to regulatory arbitrage and weakens enforcement.
3. If boards are to move away from simply ‘rubber stamping’ the decisions of management or promoters they must have a clear understanding of what is expected from them. They should know their duties of care and loyalty to the company and all shareholders. They should know their responsibilities and should be familiar with the changes in this regard arising from changes in laws and regulations. A key missing ingredient is a strong focus on professionalism of directors. Director training institutes can play a key capacity building role and expand the pool of competent candidates.
4. Institutional investors acting in a fiduciary capacity should be encouraged to form a comprehensive corporate governance policy including voting and board representation.

It will be observed that the World Bank report has stressed the need of training and updating of knowledge of directors. Unfortunately the recommendation of Murthy Committee in this regard has now been shifted as nonmandatory requirement. The rationale of industry’s objection to mandatory training, etc. of directors is not readily understandable. Hopefully, when the governance norms are reviewed next the training and knowledge updating would be made mandatory requirement. A new requirement has been provided for obtaining prior approval of shareholders for payment of fees/compensation to nonexecutive directors.

If there is stock option, the limit for the maximum number that can be granted to nonexecutive directors in any financial year and in aggregate should be disclosed. Leading light of CA world, SN Desai passes away ne of the highly revered Chartered Accountants and a leading light of the profession, ICAI’s former-president Shri Shantanu Nanubhai Desai passed away on 10th November 2004 in Mumbai. Born on 26th January 1925, he became a member of our Institute in 1949 and rose to become one of the pillars of the profession.

Having become President of ICAI in 1961-62 at a young age of 35, he had served as a Central Council member for decades. He was actively associated with Indian Merchants Chamber as its Managing Committee member for a long period of 32 years. He became its President in 1976. He had held several distinguished positions in his illustrious professional life, including as Member of the High Powered Sachar Committee on Company Law & MRTP Reforms, as Chairman/ Director of several reputed public companies besides as a member of ASSOCHAM. Mr. Desai was also the founder member of the Bombay Chartered Accountants Society. A Rotarian of repute and a veteran of several Committees, Mr. Desai was a free, frank and modest personality— a thorough gentleman who endeared one and all with his qualities of both head and heart. Mr. Desai’s services to the cause of our profession and his long career of more than 50 years as one of our profession’s most distinguished ambassadors will long be remembered and will continue to inspire new generation of Chartered Accountants.

FORMAT OF THE EXAM PAPER

The syllabus is assessed by a three hour paper-based examination. The examination consists of:

• one 50 mark compulsory case study two from three 25 marks scenarios

Try and be seated by the start of the lecture. This will ensure we have the maximum lecture time. Your course notes will be divided into chapters, please make sure you bring the relevant chapters with you to class. Manage your time effectively. If you have a busy work schedule use your study planner to catch up. Do not allow yourself to fall behind.

Should you have any difficulties or questions please do not hesitate to contact me either before the lecture or during the break as most students are in a desperate hurry to leave at the end of the lecture. Alternatively, you can always email me or phone me through our helpline. In the event of an emergency you can come for the same lecture on a corresponding part-time course as all the courses run parallel to each other. It is crucially important that you attend the full course of lectures. Try to read the business section of a decent newspaper at least once a week to get an idea of what is going on in he business world and the difficulties faced by organisations.

EXAM STYLE QUESTIONS

Explain the problems companies have suffered, that have resulted in the need for corporate governance regulations. Explain the agency problem and agency cost. Who sets corporate governance regulations? What are the key concepts that underpin corporate governance? For a given situation, identify the key concepts that are / are not being followed. What are the main areas that corporate governance covers?

A BRIEF HISTORY OF UK COMPANIES

The South Sea Bubble: In 1711, the South Sea Company was granted exclusive trading rights in the South Seas (South American colonies) in return for helping to finance Government borrowing. To help grow their operations, they looked for investors and issued shares. Things seemed to be going well – more and more investors put money in. There were expensive London offices – it all looked very successful.

Management lied about how good it was – with no information available other than what management told them, investors did not know the truth. In 1718, Britain and Spain went to war and the ability to trade in the South Seas was now zero. A shame, as the company had only sent its first trading ship in 1717. But investors did not know this and kept buying shares, largely because management (and some politicians who owned shares) kept making positive comments about the company whilst management secretly sold their own shares.

Once the truth got out, there was a crash – the “South Sea Bubble” had burst. Many had bought shares with loans and could not repay them, leading to personal bankruptcies (and some banks also went bust as they could not collect the loans). Investors need to be able to trust managers / directors. Directors have all the information. Investors need to be provided with complete, accurate information. But if the directors provide this information, they might lie! Directors may act to make themselves wealthy, not the investors.

If management are selling shares, investors should be told – and be able to ask why! If one company collapses, it often leads to others collapsing as well At the time, the UK Government reaction to this was the first “corporate governance”. Eventually, this situation had to change. In the 19th Century, the growth of railways that needed investment, and the existence of limited companies in the USA, meant that the UK had little choice but to follow, and allow limited companies to exist again. The 20th century In 1932, two economists Bearle and Means made some observations about American companies.

Shareholders were more likely to sell their shares than speak out if they thought directors were not running the company very well. This could result in poor quality management never losing their jobs. Some American companies were getting very large, and with so many shareholders there was a growing gap between those who owned the companies, and those who controlled them. By the 1950s, companies were growing ever larger – what we now know as “globalisation”  the existence of large multinational companies with influence around the world was well under way. The 1970s – 1990s saw problems starting to become common. By the late 1980s, there were some famous corporate collapses – some due to poor management, but many due to fraud: Rapid growth in the 1980s took this East End company to the FTSE 100. Run by Asil Nadir (who escaped to Northern Cyprus, but returned to UK in 2010 and will stand trial).

Donated money to the Conservative Party (who were in power). In 1990, 700m found to be missing. Company placed into administration. Then he started making illegal trades, partly to hide his own mistakes, and then in an attempt to make massive profits – the 88888 account became his hiding place for everything. Eventually he opened positions that left Barings heavily exposed if the Nikkei fell … and the Kobe Earthquake caused it to crash.

With losses growing daily on positions he could not close … he ran away. Only then did Barings find out how bad the situation was, and it was too late to save the Bank. 1. Common features of these examples – Too much control in the hands of 1 person. Nobody asking questions of this person. This person was the only one to know all the real information. Personal greed. Directors who failed in their duty to look after the company. Poor quality auditors who should have seen what was happening much earlier.

As we shall see shortly, these corporate failures caused the UK Government to act – and throughout the 1990s corporate governance grew in importance. Successful US energy company, based in Houston, Texas. One of the top 10 companies in the US. Were using accounting techniques that were either illegal, or at least questionable, to hide the massive debts the company had. Enron were borrowing through “Special Purpose Entities” that they controlled, but that were NOT consolidated into Enron’s figures.

With much of the borrowing guaranteed against the value of Enron shares, all it needed was rumours of problems and the share price would start to fall  leading to some of the borrowing needing to be repaid causing the share price to fall even more and the company collapsed in late 2001. Incredibly, this situation had many similarities to the previous UK examples: Poor quality auditing – Andersens, one of the top accountancy firms in the world, lost their reputation and collapsed as a result of Enron. Poor quality directors – those not involved in the fraud failed to understand what was going on, and failed to ask questions.

Personal greed – leading Enron directors made millions from the way in which the special purpose entities were set up. Clearly, companies / corporations need to be governed / regulated in some way. Banks had been lending to riskier and riskier people, especially for mortgages. Because banks trade these mortgage assets (they are receivables), the whole banking sector was involved. Many banks had taken big risks to expand, including taking over other banks at very high prices (Royal Bank of

Scotland took over Dutch bank ABN-Amro, Lloyds took over Halifax Bank of Scotland). Northern Rock realised that defaults on loans were a major problem, and the rumours caused a “run” on the bank. The UK government stepped in to save it, and restore market confidence. But other banks were also in trouble, and the hidden truth started to become clear. In late 2008, Lehman Brothers collapsed, with the US government choosing not to rescue them. In the UK, RBS and Lloyds both had to be rescued by the UK government putting in billions of pounds and becoming the major shareholder.

This has raised many questions about risk management, risk culture, remuneration (especially bonuses) and the way performance is measured in relation to risks being taken, the role of auditors and financial reporting etc.

WHAT IS CORPORATE GOVERNANCE?

In many organisations, those controlling it are not the same people who own it. In the largest organisations, owners may have such small individual stakes that:

• They do not care too much what the organisation does.
• They are not prepared to challenge the directors.
• They do not have the power to challenge the directors.
• The biggest owners are often institutional shareholders – for example, pension funds
• They are investing money on behalf of others – it is not theirs.
• They tend to be “inactive” by nature, preferring not to “rock the boat”.
• Globalisation has resulted in the biggest companies / organisations becoming even larger than in the past – which is making the above issues even more important.

The agency problem In simple terms, if you want something done properly, the way you want it done … Do It Yourself! Agents are people employed to do something for you (you are the “principal”). The risk is that they do it for themselves … rather than fulfilling their “fiduciary duties” to you. Agency Costs If you employ someone to do something for you, additional costs will arise:

• The agent will expect to be paid for their work
• The agent may expect additional benefits
• A nice office
• A company car
• To travel first class while doing your business
• You will have to spend some time and effort monitoring the agent to ensure they are doing what you want and the less you trust the agent, the more checking you will want to do!

Corporate Governance is a system of laws or guidance aimed at making (or helping) directors manage companies in the best interests of shareholders, and potentially other stakeholders.

Its objective is to create effective, entrepreneurial and prudent management, to deliver long term success. In other words, it is an attempt to deal with the agency problem (conforming) with a view to maximising long term performance.

CORPORATE GOVERNANCE RULES / GUIDANCE

Global – the OECD have developed a Code (Organisation for Economic Cooperation and Development). The ICGN (International Corporate Governance Network) has used its membership to create its own more detailed guidelines built around the OECD Code, and designed for use by any country.

National – many countries have developed their own systems, sometimes as laws (e. g. Sarbanes-Oxley in the USA) and sometimes as a Code (e. g. UK Corporate Governance Code (formerly called Combined Code)). Companies – many companies have tried to develop their own policies on Corporate Governance, some of which go further than the rules or Code their country expects them to follow. Other – in some countries, a regulatory body will set some rules. For example, something that appears to be “voluntary” can effectively become law (e. g. n UK all listed companies are required to either follow the UK Corporate Governance Code, or explain why they have not followed it – Stock Exchange Rules). ? ? ? Underlying concepts behind corporate governance These are the fundamentals behind how companies (and more importantly those involved with companies, primarily directors) should behave. As we will see at the end of the course when we study business ethics, there remains some debate about the words “should behave”… Fairness All people affected by decisions (stakeholders) should be treated with equal consideration. Openness / transparency

All information should be made available to stakeholders, and in a clear manner. This may suggest companies should not just follow disclosure rules, but also add voluntary disclosures if it adds to transparency. All those in a position of monitoring should be independent of those / what they are monitoring: Non-Executive Directors should be independent of the Executives, and of company operations. External auditors should be independent of the company, especially its accounting department and processes.

Internal auditors should be independent of the company, as they are likely to be involved in monitoring systems throughout the company’s operations. Probity / honesty This is not just telling the truth – it also means finding out / investigating the truth, not ignoring it (not “turning a blind eye”). Responsibility Directors should understand and accept their responsibility to shareholders and other stakeholders, and act in their best interests … and be willing to accept the consequences if they fail in this responsibility.

Directors must be willing to be held to account (i. e. be judged) for their actions – and whilst responsibilities can be delegated down through the management structure, accountability comes with the job and cannot be passed to others. Reputation Directors must protect their own reputation, and that of the company they run, as damage to either is likely to lead to more widespread damage to the company. This raises an interesting debate about whether a director’s private life is in fact private – since a bad personal reputation is likely to affect their business reputation and hence that of the company. Judgement

Directors must ensure they have all the necessary information and understanding in order to be able to make sensible business decisions that improve the prosperity of the company. Integrity This is quite a general term and has a crossover with some of the other terms above. Integrity means honesty, fair-dealing, presenting information without any attempt to bias opinion … and in a more general sense, “doing the right thing”. It also links with words such as consistency, reliability, trust – and therefore integrity applies not just to people such as directors and auditors, but also to systems, financial reporting etc.

THE MAIN AREAS OF CORPORATE GOVERNANCE

Using the UK Corporate Governance Code as an example, the primary areas of Corporate Governance are as follows: Directors An effective board of directors should: Lead company strategy, with prudent controls and risk management, to maximise sustainable long term success of company. Set the company’s values. Include Non-Executive Directors (NEDs) who:

• contribute to strategy, and challenge the Executives.
• assess performance of the Executive Directors.
• Oversee integrity of financial information, control systems, and risk management.
• Decide remuneration of the Executive Directors.
• Appoint, remove, Directors. and consider succession planning of Executive
• Should meet regularly, with a formal agenda. Should detail its membership (including Chairman, CEO, Senior Independent Director, Committee members) and work in the Annual Report.

Should ensure Chairman and NEDs meet without the Executives, to consider their performance. Should ensure NEDs meet (with SID leading) without Chairman annually, to consider the performance of the Chairman.

Should not be the same person. Chairman leads Board, and sets agenda for Board Meetings ensuring there is enough time for important matters and all directors contribute. Chairman, aided by Company Secretary, should ensure adequate information flows between Board members, and in advance of Board meetings. Chairman is key contact for shareholders. Chairman is Independent on appointment. Chairman is not the former CEO of the company. CEO runs the company. No one person, or group, should be able to dominate the Board. For the biggest companies (FTSE 350) at least ? the Board, excluding the Chairman, should be Independent NEDs. Should be an appropriate size, and right balance of skills and experience. This includes diversity, including by gender. Annual Report must detail which NEDs are considered independent. Should appoint a Senior Independent Director – so shareholders (and board members) have an alternative to talking to the Chairman.

Nomination Committee, majority of whom are Independent NEDs. Chaired by Chairman (unless Chairman is being discussed). Have objective merit-based criteria for selection of new Board members. Report its work in the Annual Report. Oversee induction and training for all directors (likely to be organised by Chairman, assisted by Company Secretary). Board, its committees, and individual directors should have performance appraised at least annually. Re-election of board members At 1st AGM after appointment to Board, and at least every 3 years afterwards, by shareholders (note, for FTSE 350 companies, all directors are up for reelection every year). If not annual re-election for all directors, sensible to “retire by rotation” and avoid potentially losing all the Board in one go. Remuneration of directors Enough to attract, retain and motivate. Significant proportion should be performance-related. Should consider industry pay levels. NED remuneration should not be performance-related, but should reflect time involvement of the role.

If a director is removed before the end of contract, provisions should be in place to ensure they are not over-compensated for failure. Notice periods no longer than 1 year. Remuneration committee. At least 3 Independent NEDs as members. Should set remuneration of all executive directors and the chairman, and senior management. Remuneration of NEDs is flexible – could be by Board as a whole, by shareholders, or a separate Board Committee.

Shareholders must approve any long term share options. Board should present a balanced assessment of company’s position and future prospects, its business model, its strategies, and that it is a going concern. Board should ensure a sound system of Controls (more detail on this in Chapter 6). Annual review of effectiveness of Controls, and report this in Annual Report. Audit Committee of at least 3 Independent NEDs (smaller companies = 2). At least 1 member to have recent relevant financial experience.

Main role is liaison with the internal and external auditors on all matters (more detail on this in Chapter 6). Regular dialogue with shareholders. Chairman to ensure shareholder views communicated to Board. Communicate with investors and encourage debate. Separate resolutions on each issue. Allow and monitor the use of proxy votes. Institutional shareholders (UK Stewardship Code). Should themselves ensure dialogue with directors. Should make considered use of their considerable voting power.

The update of The Combined Code in 2010 resulted in numerous changes (all of which are reflected in these course notes). There were 2 major concerns: ? ? That directors were following the “letter” of the Code rather than its “spirit”. Better interaction was needed between directors and shareholders. Regarding the second of these, it was agreed that the largest Institutional Shareholders should have their own code of governance, and that the UK Corporate Governance Code would focus on directors. As a result, the new UK Stewardship Code was created, to work alongside the UK Corporate Governance Code.

THE BUSINESS CASE FOR CORPORATE GOVERNANCE

Corporate Governance differs between countries, but tends to be either law, or “best practice” which companies are generally expected to comply with. But if it can be shown that improved corporate governance leads to increases in company profits and share price, any sensible Board of Directors would surely choose to have good corporate governance voluntarily … meaning there would be no need for regulation.

There are arguments both for and against this link being true: For Good governance includes good risk management which must surely improve the performance of a company. Good governance creates a better impression of the company to investors, who are more likely to want to buy the shares and hence will drive up the share price. Happier investors are likely to require a lower rate of return on their investment, meaning company finance would be cheaper. A more balanced Board should reduce the risk of a single director defrauding the company. Some aspects of governance, e. g. orporate responsibility, may improve the company’s reputation among its customers, and lead to products achieving a premium price, and sales volume increasing. Governance means lots of new systems and monitoring to make sure there is compliance takes time and money. If investors feel companies are doing it purely to comply, they may not feel there are any major business benefits. The governance requirements are likely to need more directors, especially NEDs, to be employed – and senior staff are not cheap! Increased reporting responsibilities, and increased accounting complexity. Conclusion

Real world evidence suggests very strongly that improved governance DOES lead to improved company valuation … and companies with poor governance get bad media reaction, complaints from investors, and their share price tends to suffer as a result.

Explain the importance of the independence of NEDs, and circumstances where their independence could be threatened? Explain the importance of succession planning for a Nomination Committee? Suggest some of the content of an induction programme for a new company director? Explain the importance of annual performance reviews for boards of directors, and how such a review could take place effectively? Discuss the main components of a director remuneration package, and how to ensure it is aligned with company interests? Explain the importance of institutional shareholders, and the circumstances in which they may intervene in a company?

THE ROLE OF DIRECTORS

Directors have a fiduciary duty, meaning a position of trust. Directors could, for example, use their position for personal gain (as any “agent” could). Their fiduciary duty is:

• To disclose all information held.
• To disclose any personal profits made from their position as director.
• To disclose any potential conflicts of interest.
• All directors should ensure they commit enough TIME to the job (e. g. ther directorships should be kept to a sensible minimum).
• A non-executive director, or NED for short, is not involved in day-to-day direction of the company, unlike the Executive Directors.

The roles of the NEDS are:

• to contribute to company strategy (STRATEGY role)
• to monitor the performance of the Executives (SCRUTINY role)
• to monitor risk management and financial reporting (RISK role)
• to appoint, remove, and decide the remuneration of the executives (PEOPLE role).

THE NOMINATION COMMITTEE

Role is to monitor the Board and Committees and ensure appropriate membership. Have to decide type of people needed to ensure balance and skills on the Board. Required role / capabilities should be agreed before searching. May use outside “executive search” agencies (headhunters) to approach potential candidates, especially where they should be independent (Chairman, NEDs). Roles of Committee should be disclosed in the Annual Report. Succession planning ? Cannot just wait for a senior figure like a Chairman or CEO to announce they are leaving – even if they give a year’s notice, any potential replacement may also have to give a year’s notice! Induction of new board members Exercise You are due to join the Board of P-MEK, a company listed on its country’s Stock Exchange, in 2 months’ time. What could the company do to help you as you start your new role?

BOARD OF DIRECTORS – PERFORMANCE REVIEW

At least once a year, the Chairman must organize an appraisal of (and act on the results of) the performance of:

• The Board. Each Board Committee.
• Each individual Director.
• Many companies do this internally – although this creates some problems, as all of the directors end up appraising each other!
• As such, some companies use outside experts in the process, to try to make it more objective.
• FTSE 350 companies must use someone external (and report on how independent they are) at least every 3rd year. The method of evaluation should be disclosed in the Annual Report.

REMUNERATION OF DIRECTORS

As noted in Chapter 1, director remuneration needs to be:

Enough to attract, retain and motivate directors But should not be excessive It must also be fully disclosed, with all detail, on a director by director basis in the Annual Report. There are 5 key elements to a remuneration package for Executive Directors:

• SALARY – which will be based on similar salaries in the Industry, and at similar size companies, and on the skills and experience of the individual director.
• PENSION SCHEME CONTRIBUTIONS – which are typically a % of the base salary.
• BENEFITS – such as company car, travel expense allowances, health care etc. In some companies benefits may increase based on performance, but in many companies they are fixed.
• BONUS – typically based on annual performance measures, to motivate short term performance.
• LONG TERM SHARE OPTIONS – to motivate in the longer term. The more directors can drive up the share price, the more reward they will get.

The balance of this package needs careful thought, as there are plenty of potential problems:

Salaries need to fit in with the salaries of others – including sub-board management. Benefits should ideally be company-related. Directors who travel a lot would be more likely to get a company car, for example. Directors who attend many public events may get a clothing allowance. The annual bonus could lead to manipulation of the Financial Statements, or a deliberate attempt to inflate short term profit (which may harm long term profit). It would be sensible to link the bonus to several challenging measures (and put a cap on it), and not just those that are aimed at financial results

Reduction in staff turnover Reduction in customer complaints Reduction in pollution. Share Options, if very profitable, could result in a director retiring the moment they are exercised! Often directors will not be able to take all of their gains in one go, to try to tie them to the company for at least another year or two! Pay should be aligned with the level of risk taken, and “clawback” provisions should be considered.

INSTITUTIONAL SHAREHOLDERS

Traditionally, institutional “conservative” by nature: shareholders (e. g. pension schemes) have been They would often have such large amounts invested in companies, that they preferred to let the directors make short term mistakes, as long as they still trusted them in the long term. They would often allow directors to grant themselves large pay rises, because compared to their billion pound investment, a few extra million on a salary is immaterial. With their shareholdings being large, and their votes therefore considerable, corporate governance regulations have tried to target institutional shareholders to encourage them to be more active, and to use their votes isely. If a Board is underperforming, one large shareholder could create change, whereas smaller shareholders may not have enough “weight” to achieve anything. In recent years, institutional shareholders have indeed become much more active: Partly because corporate governance has encouraged them Partly because many have seen that improved governance leads to increased share prices Partly because those whose funds they are investing are putting more pressure on! As noted in Chapter 1, there is now a UK Stewardship Code aimed at good governance of institutional investors.

Its main principles are:

• Public disclosure of how its responsibilities will be met
• Robust policy on conflicts of interest Investors should monitor companies they invest in Policies on when to intervene
• Investors should act together where appropriate Investors should have clear policies on voting, and disclosure of how they voted Investors should report periodically on their activities/responsibilities.
• Institutional Shareholders are likely to intervene in a company

AGENCY THEORY AND TRANSACTION COST THEORY

In the 1930s, economist Ronald Coase was investigating the reasons why companies exist, and why they were growing so large. Example You have left your job, and have decided to run accountancy exam training courses on your own.

You have identified 2 different ways of going about the organisation of your venture:

• You will either buy a property, or agree a 5-year lease. You have identified 6 tutors who could teach all of the exam papers between them, so you would offer each of them a full time job with salary, pension scheme, health care benefits. Each tutor would have a contract of employment with a 6-month notice period. You have found a company who publish the text books and other course materials that you need. You would agree a 2-year supply deal with this company. In each classroom, you will have installed computer and projection equipment which you would buy. You would also buy the necessary chairs and tables for students. To help finance this plan, you will take out a 5-year bank loan.
• You will rent hotel conference rooms for courses. For each course, you will book the room 2-3 days before the course once you are sure that the course will run. You will employ tutors on a freelance basis, only giving them a firm commitment for each day of teaching at the same time that you book the rooms. For each course, you will shop around publishing companies for the best deal on course materials. The necessary IT and projection equipment will be hired on a daily basis, although some hotel rooms have this equipment installed already. Discuss the advantages and disadvantages with these options. Answer Option 1 seems to have created an organisation, or company. The organisation owns assets, has employees, and has entered into contracts. seems to involve you running operations from your own home. Everything is organised on a daily basis. Option 2 would not need much of a financial investment. However, it would cause you a lot of stress because: Everything is organised at the last moment possible Tutors and teaching rooms may not be available if they are booked so late IT equipment may not be available at such short notice Getting anything at short notice is likely to involve higher costs

They would know that rooms, tutors, equipment and materials were always available, making it easier to plan ahead. After the initial set-up and agreement of contracts, the time saving would be immense, allowing them to focus on strategy. By having contracts, assets etc. , the directors have internalised transactions. Since they no longer have to go to external markets, they have increased their control. They have also saved the transaction costs of searching for the best supplier / tutor / building and negotiating a price, as all of these have been tied up in long term contracts. The result of all of these benefits?

Directors are likely to prefer to own things, or at least have long-term contracts in place, because it makes their lives easier through increased control and certainty over the future. As such, they are likely to create larger and larger organisations / companies. This may be good for them, but may not result in the best decisions for shareholders or other stakeholders:  the organisation may grow larger than is efficient by agreeing long term contracts, the ability to take advantage of good deals in the future may be lost because directors will get to know company staff, assets etc. ery well (because they are internal), they may simply renew contracts without looking at outside options. Next time you order a pizza, or buy your lunch, or get your hair cut, ask yourself why you usually go back to the same place, and get the same product as you did last time … it is most likely because you were satisfied last time, so feel certain that you will get something that is acceptable this time. But there may be better options that you have not investigated! This concept is bounded rationality. You are making decisions without all the necessary information about some of the options … so you go for the option you know best.

The main reason that you might change would be if an alternative option presented itself at precisely the right moment – and even then such opportunism is not something that everyone would go for! Not everyone is willing to give something unknown a try!

TRANSACTION COST THEORY LINK

Transaction Cost theory suggests that companies will keep growing because directors want to make their lives easier, through improved control and certainty. This links with Agency Theory in 2 main ways: directors seem to be making decisions that are good for them, rather than for shareholders and other stakeholders … the classic agency problem by making companies larger and larger, the gap between directors and shareholders is likely to widen, making it more likely that directors will not know what shareholders want (and making it harder for individual shareholders to have a “voice” due to their small % shareholdings).

The Code is kept up to date by the UK Financial Reporting Council (FRC), and a detailed summary of the Code’s provisions was seen in Chapters 1 and 2 of these Notes. History of the UK Corporate Governance Code This is not a history exam! However, the Code includes the results of a number of individual Reports, and it would be reasonable for the P1 Examiner to expect you to recognise the names. Following a series of high profile corporate collapses in the late 1980s and early 1990s, some of which were detailed in Chapter 1, Sir Adrian Cadbury was asked to look into UK corporate governance.

In 1992, the Cadbury Code was created. In 1995, following a series of concerns about excessive director pay, the Greenbury Report was issued, giving recommendations on how to better align director rewards with those of shareholders. In 1998, soon after the Cadbury Code had been in use for 5 years, the Hampel Report reviewed how well the Cadbury Code was working, and made recommendations for change. Important issues There was a concern that the Cadbury Code was too close to a box-ticking approach, and was not making companies think enough about the principles involved. As such, Hampel advocated a more principles-based code.

The London Stock Exchange operates a Comply or Explain approach. All listed companies are expected to follow all provisions of the Code … or explain in their Annual Reports which provisions they have not followed, and why. In 1999, the Turnbull Report was issued. Turnbull gives detail on how to create an effective Internal Control System, which is an essential part of good risk management. There is more detail on this in Chapter 6 of the Notes. In late 2001, Enron collapsed. Whilst Enron was primarily a US company, its operations were international … and it was felt that UK corporate governance may be able to learn some lessons as well.

In 2002/2003, two reports were issued as a result of post-Enron analysis, and both of these reports formed part of the Combined Code in the UK. The Higgs Report looked into improving the effectiveness of directors, especially NEDs. The Smith Report focussed on the role of Audit Committees. The Combined Code was updated again in 2006, but a far more important update was in 2010, when the name was changed to the UK Corporate Governance Code. A review had been due anyway, but the Banking Crisis of 2007-2010 had resulted in numerous issues and concerns, and many of these were relevant to all companies, not just banks.

On 30 July 2002, the Sarbanes-Oxley Act was passed (it is named after the 2 US politicians who sponsored it through Congress). It was not long before it became known as Sarbox … or SOX. There are many differences between SOX and the UK Code: ? ? ? SOX is law, with strict penalties for non-compliance. Practice, not law. The UK Code is Best SOX makes audit partner rotation the law, whereas in the UK such matters are covered by the profession’s Codes of Ethics. SOX has a ban on auditors providing a range of “other services” to their audit clients.

In the UK, very few “other services” are banned, but are instead considered within the objectivity area of Ethics. SOX requires the CEO and CFO to personally attest to the accuracy of the Annual Report, Quarterly Reports, and to the effectiveness of Internal Control Systems. In the UK, there are general assurances in the Directors’ Report and Annual Report, but no personal certification is required. Under SOX, the auditors must attest the Internal Controls statement. Auditors do not make any such statement in the UK. Under SOX, if laws have been broken (e. g. accounting standards), the CEO and CFO forfeit some of their remuneration (e. . their bonuses). There are no such rules in the UK. Under SOX, no loans can be made by a public company to its directors or other senior executives. Whilst the same rules apply in UK law, there is a de minimus limit and there are some exemptions. In many ways, SOX and the UK Corporate Governance Code are very similar, but in many other ways SOX is much more strict, and of course is backed up by the US law. The main areas in which SOX is tough are directors, auditors, and internal controls – which is hardly surprising giving many blame Enron’s collapse on a failure in those 3 areas.

GOVERNANCE

In Japan, many major company structures were traditionally based around banks. Large groups of companies from many industries would all be financed, and partowned by a major bank, which would create a strong financial alliance. Crossshareholdings between companies were common, and in many cases the companies in the “group” would all supply each other. In South America, Italy, Spain, and large parts of East Asia (e. g. Indonesia) the focus is more on family ownership, with a large % of the biggest companies owned and controlled by a small number of the most powerful families in the country. Unitary and two-tier boards

In countries where there is greater inclusivity in decision-making, or where there is a strong family dominance, it is possible that a 2-tier board will exist. A Management Board will run the day to day operations of the company, but will be monitored by a higher level Supervisory Board. In UK terms, this is similar to having the NEDs on a top board, with the Executive Directors on a separate lower Board. The 2-tier system may also operate with family dominated companies, with family members having their own top-level private Board which has controlling voting rights (and therefore where the true decision-making power rests).

To an extent, schools in the UK may be seen to have a 2-tier system, with the Head / Principal and a small number of senior teachers on a management board, with the School Governors in a more supervisory role. Of course, schools naturally have a lot of stakeholders (parents, teachers etc. ) so would seem well-suited to this structure.  Where there is a large Board, splitting into 2 may make discussion and decision making easier. The existence of 2 Boards allows for more stakeholders to be involved. By separating NEDs from the Executive Directors, the independence of the NEDs is likely to be improved. If one board is clearly senior to the other, it may lead to conflict. It may be better for NEDs to be present during Executive Director discussions, rather than receiving a report of what was said. It is likely to lead to slower decisions. Senior management are now 2 steps away from a final decision, which may demotivate them. In many countries (e. g. UK) all directors have equal legal status, whether Executive or NED.

They are often much smaller than companies, so are less likely to have the need (or resources) for things like Board Committees. Often the founder of the charity leaves rules in place to ensure future decisions are still made according to his original intentions. It may seem “harsh” to forcibly rotate a volunteer off a charity’s Board. It may be that as volunteers, there are no Board remuneration issues (other than reclaimed expenses). Public sector – e. g. councils Traditionally, councils were seen as full of faceless officials, inefficiently spending the public’s money.

Many would not associate a council with words such as accountability or responsibility, assuming that decisions were often made for political reasons, or because you knew someone on the council and were able to persuade them to get you what you wanted.

Event management is the part of project management, including festivals, event and conference. Event develop be come our central of culture. Nowadays industry of event has including Olympics Game, company annual meeting, festival celebrations, personal and organization celebration. Allen, Tooled, McDonnell and Harris (2008) have point out that ‘governments now support promote event as part of their strategies for economic development, nation building and destination marking.

Event industry is an important part for regional development, impact public and personal behavior which involves several profits. This essay will discuss about how the event industry has impact and benefits regional development, should consider to cultural, social, economic, environmental and political. Present oneself festivals and event are part of culture, the artistic and music activities is key factor of cultural impart. It is cultural sector signals a productive branch which is growing in importance.

Several valuations and more in depth researcher have found that large scale events have a variety of potential impacts (Lange and Garcia 2009). According to the Australia performing arts market has chive from company and private support more than $30 million in 2012. Australia major performing arts group executive director Sorrow has said that, the nongovernmental investment is the key to the operations of the performing arts institutions in Australia.

The Nongovernmental investment enable us to do thing that previously could not afford, for example, held in communities and schools to better cultivate talents, free of low cost performance, with the artists to training programs. ‘ Company and private is a important part of Australia performing art marking porter, but performing art marking development can not without government support. Australia government will invest $2. 6 million for paratactic the native language and culture (People. CNN 2014).

To protective the native language and culture can let the next generation to learn and develop the culture, and has a profound significance to the country. For the festival celebration also is the way to propagate the culture, such as Byron Bay Bluffest, it is a popular festival in Australia, they are play the blues music, every year have over 17500 people to Join this festival. As a DOD festival can encourage people participate and communication, showing people things they may not have seen before, reinforcing pride in the community, improving the community, to learn different culture.

The culture impact may be as simple exchange entertainment experience, as created by a sports or concert (Allen, Tooled, McDonnell and Harris 2008). Relative to social impact, Davie (2009) has say it the social benefit is derived from the fact that many employed in there industries are part time, casuals or tertiary students, with the overwhelming majority of employment being in the 18 to 25 year GE range’. Every event or festival has deeper impact. Firstly, bring more Job opportunities for the host place, show them how event industry works.

Secondly, and some event like charity event, the eventual profit will all give back to social, such as nursing home, organization for the disabled, and develop education level of school, to help those people needs to help. According to the Sydney 2000 Olympic Games is the increase in interest and active participation in sport and physical activity by its residents. An event is the most important impacts of tourism revenue. In addition to aorist are external visitors potentially spending money on travel, accommodation, goods and service in the host region at the event (Allen, Tooled, McDonnell and Harris 2008).

The city, region or country to host a major event is the potential positive impact of the event on the local economy. According to CRAMPON (1994), the economic impact of an event can be defined as the ‘net economic change in the host community that results from spending attributed to the event’. The economic contribution of mega- sporting events is primarily thought of in terms of the possibilities they provide of increasing the awareness of the city or region as a tourism destination and the knowledge concerning the potential for investment and commercial activity in the region.

Therefore, they can attract more investment and visitors, and consequently create new Jobs and contribute to the economic growth of the city or region. Connect to the Sydney 2000 Olympic Games, Australia have invest around $6. 5 billion for Olympic Games, it is long-term benefits for encouraging the whole of Australia and significant in international tourist arrivals. ‘Between 1997 and 2004 an extra 1. 6 lion international visitors are expected to come to Australia as a result of the Games, generating an additional A$6. 1 billion in tourism earnings and creating 150000 new Jobs’, Haynes has point out that (2001).

Event also part of tourism industry, host Olympic Games effective tourism industry, significant result achieved, increase speed of Brand Australia by 10 years, media relation and publicly programs generating SIS$2. 1 billion, Olympic sponsors spending SIS$170 million promoting Australia. The Olympic Games developed the construction of a series of world-class sporting facilities. After the Olympic Games the sporting facilities can be reuse for host other international sporting and major event. Therefore, the economic in Australia has developed and the employment has increased.

The Australia government achieved taxes and benefits from the development of event tourism. The event industry is the most fast growing sector of the whole tourism system. Environment impact is important element of the event industry. An event is an excellent way in which to showcase the unique characteristics of the host environment. According to Professional Convention Management Association (PCMCIA) Annual Meeting 2013, the host city was Orlando, Florida, which is one of the best Leisure City in the world. Environment impact is the first element for event organizer consider about.

It must have enough accommodation, restaurant and convenience transportation system provided. Physical infrastructure provision is often mentioned as a key benefit of major events. This typically encompasses transport infrastructure, stadium construction and other new buildings, landscape improvements and housing development. Environmental impacts have already come to the fore in cent years, especially in relation to major events. For instance, the Sydney Olympic Games were heralded as ‘The Green Games’. Much less is shown on both physical infrastructure and environmental impacts in relation to smaller scale events.

Events are highly resource-intensive, and can have negative environmental consequences for the host city. When host the event or festive, People, equipment and goods must be transported, electricity and water are used in the preparation and execution stages, and the location itself is strained by the influx of visitors, and the waste they leave behind. Event planners and attendees are becoming increasingly aware of their impact on the environment; creating green events has now become both desirable and practical. The key is sustainability, using and enjoying the environment without causing permanent damage. The decision to hold an event, especially a large scale event, is essentially a political decision’, Dickinson has present it (2012). For example, hold the Olympic Games and the Football World Cup decided by central government. The main reason for that is that management of such events produces difficulties in covering the cost for the opportune infrastructure of the event or even of operating costs from tickets sales, sponsorship, and television right. For example, the cost of development infrastructure of the Sydney 2000 Olympic Games was almost covered by the Government of New South Wales.

For instance, which was heavily involved in the organization of the Sydney 2000 Olympics, has adopted more entrepreneurial-driven forms of governance, since a broad range of non-government, often private, organizations were incorporated into the NEWS Government’s decision making and policy formulation process. Therefore, under the new urban politics imperatives, decision to bid for mega-events, such as the Olympics, is not solely made by local or regional governments but often involves business corporations.

But government to hold the major event because other reason, promote international communication, show strength of the country, to built image of tourism industry for encourage traveler to visit. In that sense, mega-sporting events are often credited with embroiling corporate elites and local politicians in profitable alliances that not only can boost local construction and retail and tourist industries but can also generate absentia infrastructure funding from higher levels of government. In conclusion, this essay review the event industry has impact region development.

Culture, social, economic, environment and political is element of event industry for impact region development. Local performing art make has impacts are develop culture, encourage culture communicate and protect culture. For impact of social, provide more Job opportunity, improve education level and bring in new technology. Economic impact is most important part of event industry, attract investment and visitor, help region develop the infrastructure and sporting facility. Sustainable development is an irresistible trend of event industry.

Bajaj Auto Limited is one of India’s premier two and three wheeler automobile manufacturing companies. It was founded in the year 1945. For the financial 2009-10, the company had sales of Rs. 12152. 74 crores and net income of Rs. 1597. 22 crores. It exports its two and three wheeler vehicles to more than 50 countries. The company as of 2010 accounts for 24. 3% of the Indian motorcycle market. Corporate Governance practices of Bajaj Auto Ltd.

Here are the significant points regarding the corporate governance of Bajaj Auto followed by an analysis of their effectiveness and impact. * The company has stated that its corporate governance policy is centered on 4 concepts of transparency, fairness, disclosure and accountability. Any good governance has 8 features that characterize it. They are: participative, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follow the rule of law.

Bajaj Auto as from its statement on corporate governance, we can conclude that it follows and implements at the maximum 5 out of the 8 features necessary for good governance ( the 4 features that it has explicitly stated and the 5th feature being implicitly assumed that it follows the rule of law). Thus there is more room for the company to improve its corporate governance policies. It must strive to incorporate all the 8 features that are essential to implement good governance. * The company has been following corporate governance policies even before SEBI rules and the clause 49 of the listing agreement came into force.

This is a good sign of the commitment shown by the company towards effective corporate governance and indicates that the company believes in the principles of transparency, fairness, disclosure and accountability.

* The company’s chairman Rahul Bajaj is also an executive. Thus according to the rules the company’s board must have at least one half of its members to be non executive, independent directors. The board consists of 16 members of which 4 are executives, 3 are non executive and 9 are non executive and independent thus conforming to the said rule. Read about Corporate Governance at Wipro

The board during the year 2009-10 met 6 times, and one of the independent directors J N Godrej was absent for all the 6 meetings. This undermines the above rule as an independent director must attend the board meetings and ensure that the company is functioning in the proper manner and it is following all the rules and upholding the interests of all the stakeholders. Only 3 out of the 9 independent directors attended all the 6 board meetings

* The company in its board meeting on January 30, 2008 laid down a code of conduct for all directors and senior management of the company.

All directors and senior management personnel have affirmed compliance with the code for 2009-10. A declaration to this effect signed by the managing director / chief executive officer is given in this annual report (2009-10). The code of conduct lays down a set of rules to ensure more honesty and integrity of the directors and senior management of the board. This is a step in the right direction to promote good governance in the company.

* Some of the board of directors such as J N Godrej ( also the chairman of Godrej & Boyce Manufacturing Company Limited ), Shekhar Bajaj (also director of Bajaj Electricals Ltd.

And Hind Musafir Agency Ltd. ) were involved in related party transactions. All the related party transactions are maintained by the register of contracts maintained by the company under section 301 of the Companies Act, 1956.

* The board does not provide stock option plans for any of its directors be it executive or non executive. The directors are also were not paid any performance linked incentive. The company also did not advance any loans to any of the directors for 2009-10. Their remuneration is set independently by the Remuneration & Nomination committee and it is fixed.

Thus remuneration policies of the company are in compliance with policies and rules laid out.

* The company has not adopted the method of using postal ballot to adopt any resolution it seeks to pass during its AGM. This must be looked into and should be made available to the shareholders when passing important resolutions come to the fore.

* The company has set up a shareholders and investors grievance committee consisting of independent directors to specifically look into the shareholders’ and investors’ complaints on matters relating to transfer of shares, non-receipt of annual report, non-receipt of dividend etc.

In addition, the committee also looks into matters that can facilitate better investor services and relations.

* Some of the non mandatory requirements of clause 49 that the company has complied with include: Whistleblower policy The company has a whistle blower policy to enable employees to report to the management their concerns about unethical behavior, actual or suspected fraud or violation of company’s code of conduct or ethics policy. This mechanism provides safeguards against victimisation of employees, who avail of the mechanism.

This also provides for direct access to the chairman of the audit committee in exceptional cases. The policy has been appropriately communicated to the employees within the organization.

* Some of the non mandatory requirements that the company has not complied with include:

* The Chairman of the board Rahul Bajaj is also an executive of the company.

* There are no qualifications of the financial statements of the company for the year 2009-10.

* The company has actively implemented policies to conserve energy and other resources.

Various measures have been taken to ensure that electricity, water and fuel (LPG) are conserved. Some of the measures taken include:

* Electricity: introduction of LED lights, compact fluorescent lamps for office lighting, efficient use of compressor and installation of transparent roof sheets to make better use of natural lights.

* Water: use of recycled water, drip/sprinkler system for better usage, more efficient use of water by installing timers, replacing of old pipes with new ones to prevent leakages.

* LPG: installation of heat recovery system and reducing the number of heat up occurrences from two to one for the Continuous Gas Carburising furnance. All these activities cost Rs. 81 lakhs but resulted in savings of Rs. 151 lakhs. Also this is an environmentally friendly measure that shows the company’s concern for other stakeholders as well.

* The company has a well defined Corporate Social Responsibility plan. The core activities of the plan focus on ethical functioning, respect for all stake-holders, protection of human rights and care for the environment.

Some of the activities that form part of it are:

* Code of conduct and affirmative action with regard to hiring and non discrimination of people belonging to the weaker sections of the society.

* Education: promoting and upgrading of ITIs * Health: setting up of an anti retro viral treatment centre The company also carries out further activities through various charitable trusts, NGOs. All these indicate that the company is actively trying to promote the welfare of the stakeholders of society and not just itself.

* The governance practices of the company indicate that it is following the stakeholder theory when it comes to running its business. The company believes that it has a responsibility not only to its shareholders but also to other various stakeholders such as employees, communities, customers, suppliers, environment etc. The company has shown commitment to improving the stakeholder’s welfare and not just focusing on the company profits.

* The company faces a vertical challenge in its corporate governance. The chairman of the board is also an executive.

Also the board consists of several members of the promoter family who own substantial part of the company. The promoter family members all occupy key positions in the company and on the board. This may pose significant challenges for effective corporate governance as the owners and management are the same, it may result in conflict of interest situations where the resulting action would benefit the promoter family more than the company and other company stakeholders.

* The company also faces a horizontal challenge in its corporate governance as the promoter family and group own 49.69% of the company.

Hence the promoters can significantly influence the working of the company to their own benefit.

* The financial statements that the company provides every year to its shareholders conform to all the rules and regulations required. Also the company’s financial statements are comprehensive with an in depth Management discussion and analysis with results that are suitably summarized at various points of the report. The report also contains suitable charts and graphs to summarize the data and present it in a concise manner.

All these measures taken by the company go a long way in making the financial reporting more comprehensible to the investors and help them to better understand the financial position the company is in.

* The company’s disclosure policies conform to the various rules and regulations. The company can take this forward by incorporating procedures to disclose information as soon as something significant (either positive or negative) happens from the current policy of disclosing as and when it is required under the various rules. The company should not hesitate to disclose negative information.

The “Key Business Issues Relating to Best Value Management and Strategic Development in the Housing/Regeneration Industry & New Business and Asset Management” are inclusive of what is termed “Best Value”. In the Housing Industry the 4Cs of best value are applied to every review. The four “Cs” are:

1. Challenging why and how a service is being provided;
2. comparing performance with the performance of others in the industry;
3. embrace of fair competition as a means of securing efficient and effective services;
4. consulting with local taxpayers, customers and the wider business community.

Under the Best Value standard, local authorities have a duty to make arrangements to “secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness.” (What is Best Value?, 2006) Best Value is defined as “providing local people what they want, when they want it, at a price they are willing and able to pay. It’s also about being imaginative in how local needs are met.” (What is Best Value?, 2006) Other principles of Best Value are stated to include:

1. Being accountable to local people. They have to listen to and consult the people they are there to serve. They have to report regularly on what they have achieved and what they are planning.
2. Looking to continuously improve. Sometimes this will come through many small changes, sometimes through larger changes when the existing service is fundamentally challenged.
3. Setting targets and publicly reporting achievement against them.
4. Cutting across departmental boundaries, rather than just looking at services individually. Councils can also work with other local agencies to tackle issues beyond the reach of a single service and need co-operative working with partner bodies.
5. Developing partnerships with the private sector, with communities and agencies, and between authorities. These partnerships will be able to review services jointly, develop local plans, acting together to achieve local outcomes, and provide services in some cases.
6. Being open about service delivery. Councils shouldn’t assume that they should deliver activities if other more efficient and effective means are available. This is not to say however that authorities must contract their services out – what matters is what works best for delivering services to the community, so an open mind is needed. (What is Best Value?, 2006)

PART A

Critical Review of the Existing Key Business Issues Related to Best Value Management and Strategic Development in the Housing Management, Regeneration, New business and Asset Management Industry.

1. In the assessment of DHA the comments provided by the inspecting agency were in the areas of the following which require improvement:
2. Effective Financial and Corporate Governance;
3. Asset management, including repairs and response management;
4. Reinvestment in Current Stock to meet the Decent Home Standards;
5. Poor procurement and project management systems;
6. High levels of social behavior and poor neighborhood communities.

According to the standards of ‘Best Practice’ in this industry accountability to the local people is considered critical. It is necessary that Dante Housing Association ‘listen’ to the residents; it is critical that Dante Housing Association ‘consult’ with the residents; and it is critical that Dante Housing Association ‘report’ on a ‘regular basis’ to the residents and inform them what plans are in process.

All of these actions herein stated fall directly in line with numbers 1, 2, 4, 5, and are associated with number 7 of the problem areas that must be focused on in the six months allotted for Dante Housing Association, hereafter referred to as DHA to make the necessary changes and improvements. In fact, the continuous view toward improvement is necessary to be instituted into the principles and practices of DHA so it is important that this perspective and standard be initiated into all aspects of improvement toward which this report is focused.

The regular reporting and accounting publicly is critical as well in the process of instituting ‘Best Value’ standards for DHA because to meet the goals that are set for DHA is not enough, because without reporting of these goals and their achievement publicly then the public will not be aware of what DHA is doing and may assume that DHA is doing nothing.

DHA must institute a principle of collaboration across boundaries both within and outside of DHA in order to attain the best prices, gain the cooperation and assistance of other agencies position to offer such assistance because so many times the changes that are needed are bigger than DHA has the capacity to provide single-handedly. This leads to the next issue which is the need for DHA to establish partnerships and cooperative efforts with other companies in both the public and private sector and for the reasons as just stated.

Finally, DHA must agree to consider options available in services delivery and if outsourcing some of these delivery of services might mean savings, efficiency and effectiveness then DHA must prepare itself to make the necessary changes to deliver services in the most effective and efficient manner possible.

Appointing a mission-wise Chair: Role separation resolves a potential conflict of interest arising from the fact that the CEO is the primary manager of a company and the chairman is the head of the board, which oversees management (Hodgeson, 2014). Separating the roles strengthens the system of checks and balances and enhances the appearance of board independence.

Splitting the roles is widely considered to be a best practice in corporate governance, though its benefits remain controversial in some circles, notably in parts of the mainstream, corporate America. (Tonello, 2011). The mission relevance of the chair’s role has long been recognized in the non-profit sector where facilitating mission delivery, through managing and organizing the governing board’s mission-related work, has always been central to the chair’s role (Akpeki, 2006).

Appointing a new board chair, then, may come to be seen as a potential milestone for mission preservation in social entrepreneurships. The chair’s role is central to successful corporate governance, and the influence of the person fulfilling this role can be critical to the maintenance of mission within thriving social entrepreneurship.

It stands to reason that, through choosing a chair who understands and backs the social mission, organizations can strengthen mission stewardship in the boardroom and thus help avert mission drift. Commitment to carrying the torch of the mission is only a starting point for a chair. The chair’s skills, personality, and behavior will determine his or her effectiveness.

A capable chair should come with first-hand knowledge of the sector or industry the business is operating in, proven leadership skills and an understanding of board process.

In social entrepreneurships, the chair will also need a firm grasp of mission in the practical sense, experience in delivering mission in a business context and a commitment to ensuring that mission has its place in board discussion and decision-making at every level (Shekshnia ; Rowley, 2014). A mission-capable chair will know how to keep the mission on the agenda, how to generate productive group discussion around mission and how to foster a positive board culture with a shared sense of purpose.