Corporate governance and social responsibility

Meaning of corporate governance

The system by which organisations are directed and controlled by senior officers.

Elements in corporate governance Good management and reduce risk to the organisation.

Maintain good performance by good supervision and management using best practice guidelines.

Operate within a framework (system) that is ethical and effective to all stakeholders avoiding abuses to the organisation.

Not only following the framework but must follow law and the spirit of morality.

Accountability be responsible to the stakeholders. Balance in transparency of information to stakeholders.

View about ownership and management of the organisation

1. Stewardship theory

Executive managers or the management as the stewards who takes care and run the business.

Other interest parties do not take part in running the business.

Shareholders/owners can vote in annual general meeting to terminate management.

2. Agency theory

Management runs the company for their own interest and organisation goals align with theirs.

3. Stakeholder theory (organic view).

Management has responsibility to not only the owners but also interest of stakeholders.

Governance principles Minimise risk such as financial risk (bad investment), legal risk

(labour suits) reputation risk (bad name for the company)

To achieve company strategic objectives and not to side track

Responsible to stakeholders and avoid conflicts of interest.

Clear line of accountability (responsibilities of each manager)

Maintain independence of certain parties such as NED, internal and external auditors.

Provide accurate reports and submit on time eg financial statement, tax report.

Involve owners/BOD and NED in the management.

Integrity transparency in dealings, meaning clear and straight forward to avoid malpractices.

What drives governance? Internationalisation and globalisation-investors from

all over the world. Investors require governance.

Local and foreign investors are treated differently eg dividents and excess to information.

Inadequate financial reporting to investors causes lack of confidence.

Individual countries have different standard in corp governance based on their culture.

Increased in high profile corp scandals eg CBT (corp breach of trust) cases.

What is poor corp governance? Controlled by a single individual eg Financial Controller, CEO. Others are just

followers.

Board does not involved regularly, therefore lack of info and does not know what happened in the organisation.

Lack internal audit such as stock check, financial audit etc..

Lack of supervision on employees to ensure greater performance and efficiency.

Lack of independent scrutiny no external auditors to check.

Lack of contact with shareholders-shareholders become not important as long as they get good returns.

Emphasis on short-term profitability- do creative accounting to create profit.

Misleading accounts and information in order to look good (concern with the reputation of the company)

Role of the board Make decision on major policy and strategic decisions:

Mergers and take over.

Buy or sell assets

Investment

Bank borrowing

Money market decision

Monitor performance of CEO

Oversee strategy

Risk management and control systems

Human resource

Communication

Non-executive directors (NEDs) Have no executive (managerial) responsibilities.

Not employee

Take part in decision making at board meetings

Does not take part in day to day operation

At least half the board (excluding the chairman) should comprise independent NEDs. A smaller company should have at least two independent NEDs.

One of the independent NEDs should be appointed to be the senior independent director. They are available to be contacted by shareholders who wish to raise matters outside the normal executive channels of communication.

Role of non-exec directors Strategy-challenge direction of business.

Performance-check performance of management at corporate level.

Risk-ensure the risk management and control system is satisfactory

Directors and managers-determine appropriate reward, appointment or termination of sr managers and involve in succession planning.

Remuneration committee Formulate remuneration arrangement for executive

directors.

Should be independent (nothing to do with company other than shareholders).

A small listed company should have 2 independent NEDs in the remuneration committee and minimum 3 of bigger listed company.

Nomination committee Select board members and make recommendation to

board.

Majority should be non-exec directors.

Audit committee Independent non-exec directors

Liaise with external audit, supervise internal audit, review annual accounts and internal controls.

A small listed company should have 2 independent NEDs in the audit committee and minimum 3 of bigger listed company.

Audit committee meetings are closed to public.

BOD responsible for internal controls.

Audit committee, int and ext auditors concern about the quality of internal controls.

Internal Auditors

External Auditors

Audit Committee

Full Board of Directors

Risk committee Takes care of risk management of the organisation in

terms of financial risk (eg investment, disruption of operations cause by flood, liquidation of customers or suppliers, market downturn etc).

Corporate Social Responsibility (CSR) The idea that a company should be sensitive to the

needs and wants of all of the stakeholders in its business operations, not just the shareholders.

Sustainable development

Corp Responsibility (Sustainable

development)

Corporate Financial

Responsibility

Corporate Environmental Responsibility

Corporate Social Responsibility

Key issues in CSR Employee rights eg overtime must be less than 104 hrs

a month, enough proper and clean toilet, prayers room, proper hostel for foreign workers.

Environmental protection eg reduce factory emissions of poisons and pollutants.

Supplier relations eg payment on time, reasonable requirement (delivery time, quality of raw material)

Community involvement eg charity, scholarship, donation, book prize.

Strategies for social responsibility Proactive strategy-Take full responsibility. Initiate

before anything happens. Preventive in nature. Eg Toyota recalled defective cars.

Reactive strategy-No action until something happens. Eg releasing toxic water into drain until government officer compounds the offence.

Defence strategy-minimise or avoid additional obligation. Act ignorance (make dont know).

Accomodation strategy-Act whenever is pressured to do so eg activist or government pressure.

Against CSR Milton Friedman

Against CSR

Its the resp of mgrs, not business

If concentrate on CSR, it

means spending the

money of owners.

If manager has CSR, it means it

goes against the employer. Higher CSR, lower profits.

Main aim of business is to make money.

CSR is just part of the rules.

Is CSR important to orgn or wasting owners money?BAA owns and operates seven airports in the UK. BAA recognises that

they are responsible, both directly and indirectly, for a variety of environment, social and economic imparts from their operations.

Positive imparts: employing 12,000 people; allowing business people to travel to meetings, thus supporting the global economy; allowing tourist to enrich their cultural experience; allowing dispersed families to visit each other.

Negative impacts: large consumption of fossil fuels; emission of greenhouse gases; noise affecting people living close to airports.