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CH 01

This document provides an overview of corporate governance and the free market system. It discusses key topics such as the role of business in society, the importance of transparent financial information for capital markets, definitions of corporate governance, and reforms that aim to improve accountability. The primary goal of governance is described as creating a balance of power among shareholders, boards of directors, and management. Business ethics and compliance culture are also covered.

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53 views16 pages

CH 01

This document provides an overview of corporate governance and the free market system. It discusses key topics such as the role of business in society, the importance of transparent financial information for capital markets, definitions of corporate governance, and reforms that aim to improve accountability. The primary goal of governance is described as creating a balance of power among shareholders, boards of directors, and management. Business ethics and compliance culture are also covered.

Uploaded by

fauziah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Free Market System

and Business
Chapter I
Chapter Objectives:
• Learn the free market system and business.
• Understand the role and responsibility of business in society.
• Understand the primary goal of corporate governance.
• Recognize that effective corporate governance is established through power
sharing among all participants, particularly shareholders, boards of directors,
and management.
• Exemplify the importance of reliable and transparent financial information.
• Be aware of the effect of corporate governance on investor confidence.
• Present various definitions of corporate governance.
• Provide an overview of corporate governance reforms.
• Introduce business ethics.
• Provide an overview of costs and benefits of corporate governance reforms.
• Address the impacts of corporate governance reforms on accountability.
Key Terms
Corporate accountability reporting
Corporate culture
Corporate gatekeeper
Corporate governance
Ethical accountability
Federal sentencing guidelines
Generally Accepted Accounting Principles (GAAP)
Listing standards
Multiple bottom lines (MBL)
Public Company Accounting Oversight Board (PCAOB)
Sarbanes-Oxley Act of 2002 (SOX)
Securities Act of 1933
Securities Exchange Act of 1934
Securities and Exchange Commission (SEC)
Social accountability
The Free Enterprise system
and capital markets
The free enterprise system in the US is a bedrock
principle of the US economy, and capital markets are
the backbone of such systems.
The free enterprise system has transformed from
private ownership of businesses to dispersed public
ownership.

Capital markets are driven by the capital provided to


companies by investors.

Investor protection is essential and should be


provided through appropriate regulations, effective
corporate governance, and optimal market
mechanisms.
The Free Enterprise system
and capital markets (Cont)
Investor confidence eroded at the turn of the 21st
century due to:
• High-profile financial scandals
• Economic downturn
• September 11 terrorist attacks
• Ineffectiveness of market mechanisms
• Investors demand protection through regulation and
transparency.

Congress responded by passing the Sarbanes-Oxley Act


of 2002, also known as SOX, to identify and manage
conflicts of interest by improving corporate governance,
financial reporting and audit activities.
Public Trust and Investors
Confidence
Investor confidence is the key driver of the nation’s
economic growth, prosperity, and financial stability.
More than 110 million Americans invest in capital
markets.

US markets have a good reputation, considered the


most transparent, efficient, and reliable, in turn:

- Facilitating efficient allocation of a scarce resource of


capital
- Enabling public companies to raise capital for
establishing/expanding their businesses
- Providing a safe, lucrative marketplace for investing to
fund retirement or pay for children’s education.
The Role and responsibility
of Business in the Society
The Role and responsibility
Corporate stakeholders are classified into several layers and
are categorized into three general tiers.
Eight layers of shareholders and stakeholders
The Role and responsibility
3 tiers of
corporate
stakeholders:

The First Tier:


Investors

The Third Tier: The Second Tier:


Others Creditors
The Role of the financial
information in the Capital Markets
o The sustainability of public companies is key to
keeping investor confidence high.

o Financial disclosures under SEC regulations are


necessary to provide investors with reliable
information, so they can make informed decisions.

o Public companies in the United States are required to


file their financial reports with the SEC, including
audited annual financial statements on Form 10-K,
reviewed quarterly financial statements on Form 10-Q,
and extraordinary transactions on a current basis on
Form 8-K (e.g., departure of directors, officers,
auditors), in addition to proxy financial
statements submitted to investors.
Layers of financial statement scrutiny
Introduction to the Corporate
Governance

Effective corporate governance can only be


achieved when all participants:
(1) add value to the company’s sustainable long-
term performance;
(2) effectively carry out their fiduciary duty and
professional responsibilities;
(3) are held accountable and personally responsible
for their performance;
(4) develop a practice of not only complying with
applicable regulations, but also committing to
doing the right thing and observing ethical
principles of professional conduct in avoiding
potential conflicts of interest.
Introduction to the Corporate
Governance
Corporate Culture and Integrity
The compliance culture can be promoted through the
establishment of a centralized CCO who is primarily
responsible for ensuring compliance with all applicable laws,
regulations, rules, standards, codes of ethics, policies, and
procedures, and oversees all compliance functions.

Corporate Accountability
The multiple bottom lines (MBL) objectives of economic,
social, ethical, and environmental (ESEE) performance have
been advocated by global business and investment
communities. The perceived benefits of reporting both
financial and nonfinancial key performance indicators (KPIs)
are improved quality of information, enhanced
communications with analysts and investors, and integration
of the organization’s operating, financial, and social
performance.
Introduction to Business Ethics
Ethics “a set of moral principles: a theory or
system of moral values.”

Corporate governance should create an ethical


business environment in which all employees are
encouraged and empowered to “do the right thing.”

An important aspect of the emerging trend toward


increased corporate accountability and
governance is reflected in the role and relevance
of business ethics and codes of professional
conduct.
Conclusion
• The primary goal of corporate governance is to create a right
balance of power sharing among all participants.
• The investment community is requiring companies to earn back
public trust; therefore, the roles of individuals involved in
corporate financial reporting have become a value-added function
under intense scrutiny.
• Reliable and transparent financial information contributes to the
efficient function of the capital markets and economic growth.
• Corporate government reforms require four key corporate
gatekeepers: an independent and competent board, an
independent and competent auditor, objective and competent
legal counsel, and objective and competent financial advisors.
• Corporate governance, for the purpose of this book, is defined as
the process affected by a set of legislative, regulatory, and legal
market mechanisms; listing standards; best practices; and efforts
of all corporate governance participants, which creates a system
of checks and balances
with the goal of creating and enhancing sustainable value for
shareholders while protecting the interests of other stakeholders.
Conclusion
• Market-based mechanisms alone cannot solve corporate
governance problems because they are often initiated and
enforced after the occurrences of management abuse and
after shareholders sell their shares, depressing the price.
• Corporate governance reforms are intended to improve the
vigilance and effectiveness of corporate governance.
• The net benefit of corporate governance reforms is expected
to aid in improving investor confidence and public trust in
corporate America.
• Corporations should set an appropriate “tone at the top” to
effectively integrate a culture of ethics and compliance.
• Global initiatives have extended corporations’
accountability, not only to their investors, but also to all
stakeholders, on a variety of issues from economic measures
to governance, ethical, social, and environmental
performance. Therefore, corporations are focusing on MBL
objectives of ESEE performance.

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