Evolution of Corporate

Governance
BY
Advocate
Resham Raj Regmi
 Overview of Presentation
• Before Cadbury
– With the evolution of Company Law
– With the evolution of Democracy
• After Cadbury
– Cadbury Committee Report 1992 and other reports
– UK Code on CG 2018
– The Sarbanes-Oxley Act 2002
– OECD Principles
– Basel Committee Principles
• Models of CG
 Evolution of CG
• Evolution of CG can be divided before and after
Cadbury Report.
• Before Cadbury the elements of CG were being
developed with company law and democracy.
• After Cadbury different commission, reports
and principles developed by different national
and international agencies contributed for this.
Major Scandals which contributed for CG

• BCCI
• WorldCom,
• Enron
• Barings Bank
• Lehman Brothers
• YesBank
 Cadbury Committee
Following serious financial scandals and collapses (e.g.
BCCI and Mirror Group), and a perceived general lack of
confidence in the financial reporting of many UK
companies, the Financial Reporting Council, the London
Stock Exchange and the Accountancy Profession
established the Committee on the Financial Aspects of
Corporate Governance, in May 1991. It was chaired by Sir
Adrian Cadbury and came out with its landmark report in
Dec. 1992, recommending a Code of Best Practice with
which the boards of all listed companies should comply.
 Cadbury Committee report includes
• It defined corporate governance as the system
by which companies are directed and
controlled.
• Board of directors are responsible for the
governance of their companies.
• The shareholders’ role in governance is to
appoint the directors and the auditors and to
satisfy themselves that an appropriate
governance structure is in place.
 It also includes
• The board of all listed companies should comply with the
code of best practice set out by the committee.
• The listed companies reporting in respect of years ending
should make a statement about their compliance with the
code in the report and accounts and give reasons for any
areas of non-compliance.
• Companies should publish their statement of compliance
only after they have been the subject of review by the
auditors.
• The Auditing Practices Board should consider the extent
and form that an endorsement by the auditors could take.
 Different Committees contributed for
further Reform
• The Greenbury Committee report, 1995
• Hample Committee report,1998
• Combined Code, 1998
• Trunbull Report, 1999
• Smith Report, 2003
• UK code on CG, 2012
• UK code on CG, 2018
 UK Corporate Governance Code, 2012

• Leadership
• Effectiveness
• Accountability
• Remuneration
• Relations with shareholders
 UK code on CG, 2018
• Board Leadership and company purpose
• Division of Responsibilities
• Composition, succession and evaluation
• Audit, risk and internal control
• Remuneration
 Under above five topics following principles
are incorporated
• A successful company is led by an effective and entrepreneurial board, whose role is to
promote the long-term sustainable success of the company, generating value for
shareholders and contributing to wider society.
• The board should establish the company’s purpose, values and strategy, and satisfy
itself that these and its culture are aligned. All directors must act with integrity, lead by
example and promote the desired culture.
• The board should ensure that the necessary resources are in place for the company to
meet its objectives and measure performance against them. The board should also
establish a framework of prudent and effective controls, which enable risk to be
assessed and managed.
• In order for the company to meet its responsibilities to shareholders and stakeholders,
the board should ensure effective engagement with, and encourage participation from,
these parties.
• The board should ensure that workforce policies and practices are consistent with the
company’s values and support its long-term sustainable success. The workforce should
be able to raise any matters of concern.
 .... continue
• The chair leads the board and is responsible for its overall effectiveness in directing the
company. They should demonstrate objective judgement throughout their tenure and
promote a culture of openness and debate. In addition, the chair facilitates constructive
board relations and the effective contribution of all non-executive directors, and
ensures that directors receive accurate, timely and clear information.
• The board should include an appropriate combination of executive and non-executive
(and, in particular, independent non-executive) directors, such that no one individual or
small group of individuals dominates the board’s decision-making. There should be a
clear division of responsibilities between the leadership of the board and the executive
leadership of the company’s business.
• Non-executive directors should have sufficient time to meet their board responsibilities.
They should provide constructive challenge, strategic guidance, offer specialist advice
and hold management to account.
• The board, supported by the company secretary, should ensure that it has the policies,
processes, information, time and resources it needs in order to function effectively and
efficiently
 ..... continue
• Appointments to the board should be subject to a formal, rigorous and transparent
procedure, and an effective succession plan should be maintained for board and senior
management. Both appointments and succession plans should be based on merit and
objective criteria and, within this context, should promote diversity of gender, social
and ethnic backgrounds, cognitive and personal strengths.
• The board and its committees should have a combination of skills, experience and
knowledge. Consideration should be given to the length of service of the board as a
whole and membership regularly refreshed.
• Annual evaluation of the board should consider its composition, diversity and how
effectively members work together to achieve objectives. Individual evaluation should
demonstrate whether each director continues to contribute effectively.
• The board should establish formal and transparent policies and procedures to ensure
the independence and effectiveness of internal and external audit functions and satisfy
itself on the integrity of financial and narrative statements.
• The board should present a fair, balanced and understandable assessment of the
company’s position and prospects.
 ....continue
• The board should establish procedures to manage risk, oversee the internal
control framework, and determine the nature and extent of the principal risks the
company is willing to take in order to achieve its long-term strategic objectives.
• Remuneration policies and practices should be designed to support strategy and
promote long-term sustainable success. Executive remuneration should be
aligned to company purpose and values, and be clearly linked to the successful
delivery of the company’s long-term strategy.
• A formal and transparent procedure for developing policy on executive
remuneration and determining director and senior management remuneration
should be established. No director should be involved in deciding their own
remuneration outcome.
• Directors should exercise independent judgement and discretion when
authorising remuneration outcomes, taking account of company and individual
performance, and wider circumstances.
 Sarbanes-Oxley Act 2002
The scandals like Enron and WorldCom strengthened the
perception that the close relationship between the
directors and external auditors is largely the cause of
corporate ills going unnoticed to the extent that it
becomes too late to save the company. These scandals
led to the US Congress passing the Sarbanes-Oxley Act in
2002 which introduced reforms in the various areas of
corporate management as well as listing requirements
for NYSE. Many countries have incorporated segments
of this law into their own relevant regulations or codes.
 ...... continue
1. It placed considerable responsibility on CEO and CFO in
relation to accuracy and completeness of the company’s
annual report.
2. It strengthened the independence of external auditor.
3. The audit committees were required to have at least one
financial expert, who should be clearly named as such.
4. It set up a new regulatory body, called Public Company
Accounting Oversight Board, for auditors of US listed firms.
5. It has criminalized fraudulent certification and reporting.
 OECD Principles
• OECD principles 1999
• Revised OECD Principles, 2004
• G20/OECD Principles, 2015
 What is OECD
• The Organisation for Economic Co-operation and Development is a
unique forum where the governments of 30 market democracies
work together to address the economic, social and governance
challenges of globalisation as well as to exploit its opportunities
• Created as an economic counterpart to NATO, the OECD took over
from the OEEC in 1961 and, since then, its mission has been to help
governments achieve sustainable economic growth and employment
and rising standards of living in member countries while maintaining
financial stability, so contributing to the development of the world
economy. Its founding Convention also calls on the OECD to assist
sound economic expansion in member countries and other countries
in the process of economic development, and to contribute to growth
in world trade on a multilateral, non-discriminatory basis
 Objective of the principles
The Principles are intended to assist OECD and non-
OECD governments in their efforts to evaluate and
improve the legal, institutional and regulatory
framework for corporate governance in their
countries, and to provide guidance and suggestions
for stock exchanges, investors, corporations, and
other parties that have a role in the process of
developing good corporate governance. The
Principles focus on publicly traded companies, both
financial and non-financial.
 OECD Principles 1999
• Rights of the Shareholders and Key Ownership
functions
• Equitable Treatment of Shareholders
• Role of the Stakeholders in Corporate
Governance
• Disclosures and Transparency
• Responsibilities of the Board of Directors
 OECD Principles 2004
• Ensuring the Basis for an Effective Corporate
Governance Framework
• The Rights of Shareholders and Key Ownership
Functions
• The Equitable Treatment of Shareholders
• The Role of Stakeholders in Corporate
Governance
• Disclosure and Transparency
• The Responsibilities of the Board
 G20/OECD Principles 2015
• Ensuring the basis for an effective corporate
governance framework
• The rights and equitable treatment of shareholders
and key ownership functions.
• Institutional investors, stock markets, and other
intermediaries.
• The role of stakeholders in corporate governance.
• Disclosure and transparency.
• The responsibilities of the board.
Ensuring the Basis for an Effective Corporate
Governance Framework
The corporate governance framework should
promote transparent and fair markets, and the
efficient allocation of resources.
It should be consistent with the rule of law
and support effective supervision and
enforcement.
 Content under this principle
• The corporate governance framework should be developed with a view
to its impact on overall economic performance, market integrity and
the incentives it creates for market participants and the promotion of
transparent and well-functioning markets.
• The legal and regulatory requirements that affect corporate governance
practices should be consistent with the rule of law, transparent and
enforceable.
• The division of responsibilities among different authorities should be
clearly articulated and designed to serve the public interest.
• Stock market regulation should support effective corporate governance.
• Supervisory, regulatory and enforcement authorities should have the
authority, integrity and resources to fulfil their duties in a professional
and objective manner. Moreover, their rulings should be timely,
transparent and fully explained.
• Cross-border co-operation should be enhanced, including through
bilateral and multilateral arrangements for exchange of information.
 The Rights and equitable treatment of
Shareholders and Key Ownership Functions

The corporate governance framework should

protect and facilitate the exercise of
shareholders’ rights and ensure the equitable
treatment of all shareholders, including
minority and foreign shareholders.
All shareholders should have the opportunity
to obtain effective redress for violation of their
rights.
 Basic shareholder rights should include

• Secure methods of ownership registration

• Convey or transfer shares
• Obtain relevant and material information on
the corporation on a timely and regular basis
• Participate and vote in general shareholder
meetings
• Elect and remove members of the board
• Share in the profits of the corporation.
 Continued.

Shareholders should have the right to participate in, and

to be sufficiently informed on, decisions concerning
fundamental corporate changes such as:
1) amendments to the statutes, or articles of incorporation or
similar governing documents of the company;
2) the authorization of additional shares; and
3) extraordinary transactions, including the transfer of all or
substantially all assets, that in effect result in the sale of the
company.
 Shareholders should have the opportunity to
participate and vote in AGM

• Shareholders should be furnished with sufficient and timely information

concerning the date, location and agenda of general meetings, as well as
full and timely information regarding the issues to be decided at the
meeting.
• Shareholders should have the opportunity to ask questions to the board,
including questions relating to the annual external audit, to place items on
the agenda of general meetings, and to propose resolutions, subject to
reasonable limitations.
• Effective shareholder participation in key corporate governance decisions,
such as the nomination and election of board members, should be
facilitated. Shareholders should be able to make their views known on the
remuneration policy for board members and key executives. The equity
component of compensation schemes for board members and employees
should be subject to shareholder approval.
• Shareholders should be able to vote in person or in absentia, and equal
effect should be given to votes whether cast in person or in absentia.
 Other contents of this principle
• Impediments to cross border voting should be eliminated.
• Capital structures and arrangements that enable certain shareholders
to obtain a degree of control disproportionate to their equity
ownership should be disclosed.
• The exercise of ownership rights by all shareholders, including
institutional investors, should be facilitated.
• Shareholders, including institutional shareholders, should be allowed
to consult with each other on issues concerning their basic
shareholder rights as defined in the Principles, subject to exceptions
to prevent abuse.
• All shareholders of the same series of a class should be treated
equally.
• Markets for corporate control should be allowed to function in an
efficient and transparent manner.
 Institutional investors, stock markets, and
other intermediaries

The corporate governance framework should provide sound

incentives throughout the investment chain and provide
for stock markets to function in a way that contributes to
good corporate governance.
– Institutional investors acting in a fiduciary capacity should
disclose their corporate governance and voting policies with
respect to their investments, including the procedures that
they have in place for deciding on the use of their voting rights.
– Votes should be cast by custodians or nominees in line with the
directions of the beneficial owner of the shares.
 Other contents of this principle
• Institutional investors acting in a fiduciary capacity should disclose how
they manage material conflicts of interest that may affect the exercise of
key ownership rights regarding their investments.
• The corporate governance framework should require that proxy advisors,
analysts, brokers, rating agencies and others that provide analysis or
advice relevant to decisions by investors, disclose and minimise conflicts of
interest that might compromise the integrity of their analysis or advice.
• Insider trading and market manipulation should be prohibited and the
applicable rules enforced.
• For companies who are listed in a jurisdiction other than their jurisdiction
of incorporation, the applicable corporate governance laws and
regulations should be clearly disclosed. In the case of cross listings, the
criteria and procedure for recognising the listing requirements of the
primary listing should be transparent and documented.
• Stock markets should provide fair and efficient price discovery as a means
to help promote effective corporate governance.
 The Role of Stakeholders in Corporate
Governance

The corporate governance framework should

recognize the rights of stakeholders
established by law or through mutual
agreements and encourage active co-
operation between corporations and
stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
 Other contents of this principle
• The rights of stakeholders that are established by law
or through mutual agreements are to be respected.
• Where stakeholder interests are protected by law,
stakeholders should have the opportunity to obtain
effective redress for violation of their rights.
• Mechanisms for employee participation should be
permitted to develop.
• Where stakeholders participate in the corporate
governance process, they should have access to
relevant, sufficient and reliable information on a
timely and regular basis.
 Continued.
• Stakeholders, including individual employees and their
representative bodies, should be able to freely communicate
their concerns about illegal or unethical practices to the board
and to the competent public authorities and their rights
should not be compromised for doing this.
• The corporate governance framework should be
complemented by an effective, efficient insolvency framework
and by effective enforcement of creditor rights.
 Disclosure and Transparency

The corporate governance framework should

ensure that timely and accurate disclosure is
made on all material matters regarding the
corporation, including the financial situation,
performance, ownership, and governance of
the company.
 Other contents of this principle
Disclosure should include, but not be limited to, material
information on:
• The financial and operating results of the company.
• Company objectives and non financial information.
• Major share ownership and voting rights.
• Remuneration policy for members of the board and key
executives,
• Information about board members, including their
qualifications, the selection process, other company
directorships and whether they are regarded as independent
by the board.
 Continued.
• Related party transactions.
• Foreseeable risk factors.
• Issues regarding employees and other stakeholders.
• Governance structures and policies, in particular, the content of
any corporate governance code or policy and the process by which
it is implemented.
• An annual audit should be conducted by an independent,
competent and qualified, auditor in accordance with high-quality
auditing standards in order to provide an external and objective
assurance to the board and shareholders that the financial
statements fairly represent the financial position and performance
of the company in all material respects.
 Standard and independent
• Information should be prepared and disclosed in accordance with high
quality standards of accounting and financial and non-financial disclosure.
• An annual audit should be conducted by an independent, competent and
qualified, auditor in order to provide an external and objective assurance
to the board and shareholders that the financial statements fairly
represent the financial position and performance of the company in all
material respects.
• External auditors should be accountable to the shareholders and owe a
duty to the company to exercise due professional care in the conduct of
the audit.
• Channels for disseminating information should provide for equal, timely
and cost efficient access to relevant information by users.
• The corporate governance framework should be complemented by an
effective approach that addresses and promotes the provision of analysis
or advice by analysts, brokers, rating agencies and others, that is relevant
to decisions by investors, free from material conflicts of interest that might
compromise the integrity of their analysis or advice.
 The Responsibilities of the Board

The corporate governance framework should

ensure the strategic guidance of the company,
the effective monitoring of management by
the board, and the board’s accountability to
the company and the shareholders.
 Other contents of this principle
• Board members should act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of
the company and the shareholders.
• Where board decisions may affect different shareholder
groups differently, the board should treat all shareholders
fairly.
• The board should apply high ethical standards. It should take
into account the interests of stakeholders.
• The board should be able to exercise objective independent
judgment on corporate affairs.
• In order to fulfill their responsibilities, board members should
have access to accurate, relevant and timely information.
• The board should fulfill certain key functions.
 Key functions of the board.
• Reviewing and guiding corporate strategy, major plans of
action, risk policy, annual budgets and business plans;
• Setting performance objectives; monitoring implementation
and corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures.
• Monitoring the effectiveness of the company’s governance
practices and making changes as needed.
• Selecting, compensating, monitoring and, when necessary,
replacing key executives and overseeing succession planning.
• Aligning key executive and board remuneration with the
longer term interests of the company and its shareholders.
 Continued.
• Ensuring a formal and transparent board nomination and
election process.
• Monitoring and managing potential conflicts of interest of
management, board members and shareholders, including
misuse of corporate assets and abuse in related party
transactions.
• Ensuring the integrity of the corporation’s accounting and
financial reporting systems, including the independent audit,
and that appropriate systems of control are in place, in
particular, systems for risk management, financial and
operational control, and compliance with the law and relevant
standards.
• Overseeing the process of disclosure and communications.
ADB Principles of Corporate Governance

ADB with collaboration with HERMES Pension Fund

has developed a list of CG principles to assist:
(i) enterprises design and implement their own corporate
governance guidelines by benchmarking their practices
against these principles;
(ii) domestic and institutional investors, fund managers, as
well as ADB, in their quest for excellence in corporate
governance in investee enterprises;
(iii) governments in designing corporate governance
regulations.
 ADB Principles of CG Include
• Performance Orientation
• Nomination and Compensation Committee
• Disclosure
• Audit Committee
• Code of Conduct
• Conflict of Interest
• Environmental and Social Commitment
• Conduct of Board of Director
• Responsibility of Investors
• Role of Director in turn around situation
Models of Corporate Governance
Corporate Governance refers to the way companies are
financed and structured in an economy in terms of
entrepreneurial and functional decision-making. Over the
past forty years or so, three main models of corporate
governance have been emerged in the world. Most of
countries in the world have one or other of these models.
These are:
– Shareholders/Anglo-American Model
– Stakeholders Model
• Japanese Model
• German Model
• Government Model
 Anglo American Model
• This model is based on free-economy theory and operates
essentially on the premise that the free inter-play of market
forces sets the price for capital as well as decides who gets to
run a company.
• Companies in this model operate to maximize the wealth of its
shareholders who decide who to assign the responsibility of
running the company.
• The prime measure of the efficiency of the BoD is the rate of
return earned on the investors.
• The AAM works on a triangular (Principle- Watchdogs-agent)
relationship comprising of shareholders, BoD and the managers.
 Japanese Model
• The Japanese companies most follow the keiretsu
system, which by definition means a group of
associated or related companies having inter-locking
directorates and shareholding. Typically, a group has
a number of companies, some operating in the same
industry, other in the different industries.
• The capital for these companies is provided by banks
through equity and debt. Quite often banks are also
part of the group performing the task of gathering
funds for the group through their deposits.
 ..... continue
• The bank providing debt and equity also play a dominant
role on selecting the BoDs for their group companies.
Their hold on the board is quite firm and therefore can
influence the decision-making processes of the group
companies according to the group interest.
• For quality governance, the groups seek and appoint
good professionals as non-executive directors of the
group companies. The high level of interaction between
the funding bank and investee companies keep the
boards on their toes.
 German Model
• Quite like Japanese model, institutional investors, including both public and private sector
banks, play a very important role in the German companies and their corporate
governance model.
• The boards of German companies have a significant number of nominees from financial
institutions who look into the interests of all stakeholders.
• The most apparent difference in the German model lies in composition of board of
directors, comprising of two tiers by law.
• The lower tier called Management Board comprises entirely of executive directors.
• The upper tier is non-executive supervisory board having compulsory representation from
institutional investors. No one can serve at both tiers of the board.
• The supervisory board can summon members of lower tiers for clarifications at its
meetings.
• However, the strict role of institutional investors allows the companies to have a much
higher debt to equity levels.
• The individual ownership of shares in German companies is relatively lower than in USA or
UK companies.
 Any Queries?

Thank You for your attention.