ACC3170

Corporate Accountability

Dr Sepideh Parsa
E-mail: [email protected]

My office hours will be held on:

Mondays: Online 09:00-10:00
Tuesdays: On campus 09:30-10:30
Personal Zoom meeting room:
https://mdx-ac-uk.zoom.us/j/5958634544?pwd=Z0pxSlN1TDlCTENEcVc0N2tJTFRHZz09
Meeting ID: 595 863 4544
Passcode: 7namaH

Term 1
 Introduction
• Lecture outline
 Brief introduction to corporate governance and accountability
 What is corporate governance
 What to cover - Module handbook
 Why/how to study this module?
 Set up the ground rules for the module:

2
 Lecture outcomes

At the end of this lecture, you should be able to:

answer: who/where/when/how - module leader
describe the overall scope of this module
understand the coursework requirements
explain what corporate governance means
discuss the importance of corporate governance
know how to achieve the learning outcomes of this module

3
| 4
 What is corporate governance?
• There is no single, accepted definition of corporate
governance
• Today's corporate governance structures have been
shaped by centuries of legal, financial and social
developments e.g. the historical developments in the
UK.

5
Why do we study
corporate governance?
The importance of corporate governance
 Weaknesses in corporate governance can lead to
corporate failure
 Corporate governance can affect corporate financial
performance
 Corporate governance can affect social welfare

Benefits for you:

 Understand a bigger picture
 Career development – Business awareness
 http://www.whyaccountancy.com/#/home/
 http://www.accaglobal.com/students/acca/exams/p1/
6
 Investor surveys: McKinsey
 Corporate governance at the heart of investment decisions
 75% ready to pay premium for high governance standards
 Premium range:
 12–14% North America, Western Europe
 20-25% Asia, Latin America
 30%+ Eastern Europe, Africa
 Companies: better disclosure, more independent boards
 Policies: shareholder rights, accounting standards, better
disclosure

7
 What is a corporation

© Middlesex University Presentation title | 8

 The concept of corporation
• A corporation is a mechanism established to allow different
parties to contribute capital, expertise and labour, for the
maximum benefit of them all. (Monks and Minow, 2000)
• The business corporation is an instrument through which
capital is assembled for the activities of producing and
distributing goods and services and making investments.
Accordingly, a basic premise of corporation law is that a
business corporation should have as its objective the
conduct of such activities with a view to enhancing the
corporation’s profit and the gains of the corporation’s
owners, that is the shareholders (Eisenberg, 1993).
• Key feature: the ability to draw resources from a variety of
groups and to establish and maintain its own personality
separate from them all

© Middlesex University
 Characteristics of corporations
1. Limited Liability
2. Transferability
3. Legal personality
4. Centralised Management

© Middlesex University
 The purpose of a Corporation

1. Human Satisfaction
2. Social structure
3. Efficiency and efficacy
4. Ubiquity and flexibility
5. Identity
 Evolution of Corporation in the UK
 In 1877, public limited and private companies were
distinguished

 Modern accounting was formed in the 1890s

 Owners were no longer running day to day operations of

their companies

 Technical experts were needed to assist them with running

the company - managers were needed
 This resulted in the formation of a new class called ‘managerial
capitalism’

© Middlesex University
 What is corporate governance

© Middlesex University Presentation title | 13

 Different definitions
• “The way in which companies are directed and controlled" (The Cadbury
Report 1992)

• "Corporate governance is the system by which business corporations are

directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the
corporation, such as the board, managers, shareholders and other stakeholders,
and spells out the rules and procedures for making decisions on corporate
affairs. By doing this, it also provides the structure through which the company
objectives are set, and the means of attaining those objectives and monitoring
performance.“ (OECD)
• http://www.youtube.com/watch?v=KXd70r75V2w

© Middlesex University 14
 What is corporate governance
• There is no single, accepted definition of corporate
governance

• Frameworks for analysing corporation-government-

community interactions and to co-ordinate these
interactions and to achieve social and
environmental sustainability

• http://www.youtube.com/watch?v=KXd70r75V2w

© Middlesex University
Different definitions:
• … the process of supervision and control intended to ensure
that the company’s management acts in accordance to the
interests of shareholders (parkinson, 1994)
• … the governance role is not concerned with the running of
the business of the company per se, but with giving the
overall direction to the company, with overseeing and
controlling the executive actions of management and with
satisfying legitimate expectations of accountability and
regulations by interests beyond the corporate boundaries
(tricker, 1984)

© Middlesex University
More definitions
• …the structures, process, cultures and systems that
engender the successful operation of te organisation (Keasy
and Wright, 1993)

• … the system by which companies are directed and

controlled (The Cadbury Report, 1992)

© Middlesex University
 More definitions:
• “The purpose of corporate governance is to minimise the total cost in aligning
managers and shareholders’ incentives, and is to control unavoidable self-interested
managerial behaviour.” (Jensen and Meckling, 1976)
• “Corporate governance is the system or process by which companies are directed and
controlled.” (Cadbury, 1993)
• “Corporate governance provides an architecture of accountability - the structures and
processes to ensure companies are managed in the interests of their owners.” (Derek
Higgs, 2003)

© Middlesex University
 What is corporate governance
• The process whereby elements in society wield power and
authority, and influence and enact policies and decisions
concerning public life and economic and social
developments.
• Corporate governance is more than the
legitimation of authority or taming of power. It is an
activity and an art which concerns all and touches
each (Starkley, 1995).

© Middlesex University
 More definitions
• The Corporate Governance system is integrated and
complicated. The potential incentives for executives,
auditors, boards, banks, and so on, to misbehave are
intertwined.

© Middlesex University
 The evolution of corporate governance

All corporate entities need a governing body

 Profit-orientated companies, public and private
 Joint ventures
 Co-operatives
 Partnerships
 Not-for-profit organizations:
 voluntary and community organizations
 charities
 academic institutions
 governmental corporate entities
 Quangos.

© Middlesex University
 The evolution of corporate governance
- Corporate governance concerns the way power is exercised over
corporate entities;

- Corporate governance is different from management;

- Executive management is responsible for running the enterprise:

the governing body ensures that it is running in the right
direction and being run well;

- Directors are responsible for setting the organization’s direction,

formulating strategy, and policy-making. The board is also
responsible for supervising management and being accountable.

© Middlesex University
 The evolution of corporate governance

Chaucer (c1343 -1400), the father

of English literature, philosopher,
and courtier, used the word
governance (although he could not decide how
to spell it (gouernance, governaunce)

But the phrase ‘corporate governance’ did not

come into use until the 1980s.

© Middlesex University
 The evolution of corporate governance

• Corporate entities always need governing

• Corporate governance is necessary whenever ownership

or membership is separated from management control

 16th century traders and joint ventures

 17th/18th century trading companies
o East India Company
o Hudson Bay Company

 19th century limited-liability company.

© Middlesex University
 The evolution of corporate governance

Owners
(shareholders)

Board of Directors

Managers
Employees

Limited-liability company

© Middlesex University
 The evolution of corporate governance
 In the early days, limited-liability companies were relatively small
and simple

 Shareholders drawn from wealthier classes and could attend

shareholder meetings

 In those days there were no chains of financial institutions,

pension funds, hedge funds, brokers, or agents between the
investor and the boardroom

 But some companies became large and complex. Their

shareholders are numerous, geographically spread, with
different needs and expectations.

© Middlesex University
 The evolution of corporate governance

The governance agency dilemma arises whenever ownership or

membership is separated from executive management control

‘The directors of companies, being the managers of other people's

money rather than their own, cannot well be expected to watch
over it with the same anxious vigilance with which (they) watch
over their own.’
Adam Smith, The Wealth of Nations, 1776.

© Middlesex University
 The evolution of corporate governance

‘The rise of the modern corporation has brought a

concentration of economic power which can compete on
equal terms with the modern state - economic power versus
political power, each strong in its own field. The state seeks
in some aspects to regulate the corporation, while the
corporation, steadily becoming more powerful, makes every
effort to avoid such regulation . . .’
Berle and Means, 1932, revised 1967

© Middlesex University
 A Recent case
Rio Tinto chief Jean-Sébastien
Jacques to quit over Aboriginal
cave destruction
11 Sept. BBC

Protesters outside the Rio Tinto office in Perth,

Australia after the company’s operations
destroyed sacred sites

Juukan Gorge cave sites, seen before and after the

destruction
© Middlesex University Presentation title | 29
 Axe hangs over Rio Tinto boss Jean-Sébastien Jacques as
board discusses caves explosion
The future of Rio Tinto’s chief executive was hanging in the balance last night as the mining
group’s board met to decide further sanctions over the Juukan Gorge scandal.
Senior City sources believed that Jean-Sébastien Jacques could not remain in his job after
the company blew up two 46,000-year-old sacred rock shelters in the Pilbara region of
Western Australia and was criticised for its handling of the subsequent outcry.
Rio’s board was understood to be meeting overnight, with several directors pushing for
tougher action after investors criticised the inadequacy of its move last month to dock the
bonuses of Mr Jacques, 48, and other executives. One source said that the Frenchman,
who has led the company since 2016, may agree to go.
Rio Tinto, one of the world’s biggest miners, had profits of $10.4 billion last year, when it
shipped 327.4 million tonnes of iron ore from the Pilbara. In May it blew up the two caves
at Juukan Gorge to reach an extra eight million tonnes of iron ore, despite having been told
that the caves were of the “highest archaeological significance in Australia”.
A review found that Mr Jacques and two other executives bore “partial responsibility” for
“systematic failures” that led to the blasts, for which it has apologised.

© Middlesex University | 30
 Axe hangs over Rio Tinto boss Jean-Sébastien Jacques as
board discusses caves explosion
The Local Authority Pension Fund Forum, which represents funds owning almost 2 per cent of Rio,
said that the scandal exposed “a deeper, systemic governance issue”. Doug McMurdo, its chairman
said: “The corporate governance — and lack of it — does point the finger to the leadership of the
business.”
The Local Authority Pension Fund Forum, which represents funds owning almost 2 per cent of Rio,
said that the scandal exposed “a deeper, systemic governance issue”. Doug McMurdo, its chairman
said: “The corporate governance — and lack of it — does point the finger to the leadership of the
business.”
Adam Matthews, director of ethics for the Church of England Pensions Board, said that Rio’s board
must “demonstrate that they have grasped the implications of the review, which has raised questions
about governance, accountability and company culture”.
One leading analyst said there was “nothing more” the board could do to satisfy investor pressure,
beyond asking Mr Jacques to resign. Another City source said: “Investors will go bananas if they keep
JS now.”
Rio Tinto declined to comment.

Emily Gosden, Energy Editor

The Times, 10th Sept. 2020

Rio Tinto chief executive

Jean-Sebastien Jacques has
© Middlesex University already lost about $3.5
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million in bonuses
 Exercises for the seminar

© Middlesex University
 Seminar questions:
1. What, in your view, are the pros and cons of
Corporations? How, in your view, should a corporation
priorities its objectives?
2. How do ‘you’ define corporate governance? Why?
3. What are the main attributes of the limited-liability
company?
4. What is the basis of corporate power?
5. What did the classical Berle and Means (1932) study
emphasize?

© Middlesex University Presentation title | 33

 Case study: Rio Tinto
1. What are the key issues of concern?
2. What are the corporate governance aspects?
3. What does the case suggest about corporate
governance structure of Rio Tinto?
4. Considering the role of the Board of directors,
what changes could have prevented this case?

© Middlesex University Presentation title | 34

 Case study questions: Rio Tinto
5. Which theoretical construct will you use when
evaluating the case of Rio Tinto? Why? (Critical
evaluation)
6. Which CG perspective do you think Rio Tinto
adapted? Why?
7. How could Rio Tinto’s case have been prevented?

Presentation title

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