Principles of Corporate Governance

welcome back to the mooc course on corporate social responsibility my name is aradhna malik and i am helping you with this course and ah we were discussing the board of directors so what we will do now is in this class we are going to talk about the principles of corporate governance you know how is corporate governance done we were talking about implementation so we are going to talk about the principle the codes of corporate governance that have been outlined by various agencies the two agencies that we will be looking at are one is the asx agency so i will just tell you it is the asx corporate governance council australia and these these principles were recommended in two thousand and ten and the other principles are by the oecd organization for economic cooperation and development here um so we will go into the details of these principles and as far as the oecd principles are concerned i will read directly from the document and i will give you a summary on the slides when you get the reading material and ah you know so you what you can do as far as the oecd principles are concerned you can just google the you know the word oecd principles two zero one five and you will get access to the same document so that is how we do this ok so lets see what we have here for you principles of corporate governance here ok what are the principles the principles of corporate governance broadly are transparency accountability disclosure discipline responsibility fairness and incentives incentives why because after all we are talking about profit making organizations and people who do the work need to be suitably compensated what are the incentives for putting and following putting a structure in place and following it so and of course ensuring that whatever you do is done in an ethical manner in a fair and square manner all right principles of corporate governance recommended by the asx corporate governance governance council australia in two thousand and ten the first principle is to lay solid foundations for management and oversight a listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated so solid foundations need to be laid down and they should be able to establish and disclose the roles and responsibilities of the board and management and they should be able to disclose how the performance of the management and the board is going to be monitored is going to be supervised is going to be viewed and evaluate the second principle according to this is the structure structuring the board to add value a listed entity should have a board of an appropriate size composition skills and commitment to enable it to discharge its duties effectively so the the the constitution of the board should be such so that they are able to be involved in the work that they have taken on they need the third principle is act ethically and responsibly so act ethically means that they should they should be they should have a value system they should have certain ethical standards and they should act in a responsible manner safeguard integrity in corporate reporting one is doing things properly um so doing things properly is one the second is reporting that you have done things properly many times what people do is or the tendency is to do things in a haphazard manner but make sure that the right things are written in the report that is not the way to do it when we talk about ethical reporting we report what we have done as truly and as factually correctly as possible which means we must do things in a correct manner in the right manner so safeguard integrity in corporate reporting a listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting then make timely and and balanced disclosure a listed entity should make timely and balanced disclosure of all matters concerning it so that a reasonable person would expect to have a material effect on the price or value of its securities respect the rights of security

holders a listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively recognize and manage risk a listed entity should establish a sound risk management framework and periodically review the effectiveness of the framework remunerate fairly and responsibly a listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract retain and motivate high quality senior executives and to sign their interests with the creation of value for [security/security] ah for security ah holders ok so ah this these are the principles of corporate governance recommended by the asx corporate governance council so there is disclosure there is respecting the rights of security holders there is recognition and management of risk there is remuneration of the people of the board of directors and the management ok the next thing the next set of principles of corporate governance that i would like to share with you and that is being followed by the rest of the world is the principles suggested by the organization for economic cooperation and development these principles were first suggested in nineteen ninety nine then they were revised in two thousand and four and further revision was conducted in two thousand and fifteen now what i am going to do is i am going to read directly from the document and i will give you a summary of the document on the slides you will not have them in the video but you will have them as reading material after the end of this class but i am i am telling you what you need to do you need to google the words oecd corporate governance principles two zero one five these are the keywords and you should be taken to this report and i have also provided the link here so you can freeze your screens and copy the link and it should take you to this document right here g twenty oecd principles of corporate governance ok so i will just scroll down and i will read from here you will see that in this course many times i have taken you to websites and read directly from the websites now if you were in class i would have probably give you a handout and discussed it but then you know the format of this course is such that i dont have the liberty to do that so this is what i am doing here ok the first principle here is 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 so ah you first form the basis for you know there is transparency and fair markets and the efficient allocation of resources it should be consistent with the rule of law follow the law and support effective supervision and enforcement of the law ah um enforce ah effective supervision of processes and enforcement of the law ok the next under this 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 let me see if i can increase the size even more here ok this might be easier for you to read ok and the incentives it creates for market participants and the promotion of transparent and well functioning markets the legal and regulatory environments 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 fulfill their duties in a professional and objective manner moreover their ruling should be timely transparent and fully explained and cross border cooperation should be enhanced including thorough ah [in/including] ah ah including through bilateral and multilateral arrangements for exchange of information so this is principle one principle two is the rights and duties ah the sorry the rights

and equitable treatment of shareholders and key ownership functions this is the broad category under this category the principle is that 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 so this is for the protection of shareholders under this the various ah suggestions are basic shareholder rights should include the right to 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 excuse me elect and remove members of the board and share in the profits of the corporation shareholders should be sufficiently informed about and have the right to approve or participate in decisions concerning fundamental corporate changes such as amendments to the statutes articles of incorporation or similar governing documents of the company the authorization of additional shares and extraordinary transactions including the transfer all of all or substantially all assets that in effect result in the sale of the company then shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules including voting procedures that govern general shareholder meetings 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 processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders company procedures should not make it unduly difficult or expensive to cast votes ah 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 and 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 including ah through votes at shareholder meetings on the remuneration of board members and or key executives as applicable the equity component of compensation schemes for board members and employees should be subject to shareholder approval ok shareholders should be able to vote in person or in absentia and equal effect should be given to vote whether cast in person or in ah absentia impediments to cross border voting should be eliminated 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 capital structures and arrangements that enables certain shareholders to obtain a degree of influence or control disproportionate to their equity ownership should be disclosed within any series of a class all shares should carry the same rights all investors should be able to obtain information about the rights attached to all all series and classes of shares before they purchase any changes in economic or voting rights should be subject to approval by those classes of shares which are negatively affected the disclosure of capital structures and control arrangements should be required ok related party transactions should be approved and conducted in a manner that ensures proper management of conflict of interest and protects the interests of the company and its shareholders under this you have conflicts of interest inherent in related party transactions should be addressed members of the board and key executives should be required to disclose to the board whether they directly or indirectly or on behalf of third parties have a material interest in any transaction or matter directly affecting the corporation then minority shareholders should be protected from abusive actions by or in the interest of controlling shareholders

acting either directly or indirectly and should have effective means of redress abusive self dealing should be prohibited then markets for corporate control should be allowed to function in an efficient and transparent manner the rules and procedures governing the acquisition of corporate control in the capital markets and extraordinary transactions such as mergers and sale of substantial portions of corporate assets should be clearly articulated and disclosed so that investors understand their rights and recourse transactions should occur a transparent prices and under fair conditions that protect the rights of all shareholders according to their class anti take over devices should not be used to shield management and the board from accountability and so this ends the discussion on shareholders the third one is institutional investors stock markets and other intermediaries so you can see that you know this this these the set of principles is really looking after the interests of all associated with the the the you know with the organization and so in the corporate governance structure the interests of everybody connected to the organization are being taken ah ah care of and so we will read this also and now i am going to take the liberty of reading it on the screen here because its easier to do so anyway but you can have the document with you i will see if i can increase the size even more ah ah let me see i think this is better easier to read ok 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 ok 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 so the description of each of these is given under ah you know the specific 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 related to or relevant to decisions by investors disclose and minimize conflicts of interest that might compromise the integrity of their analysis or advice insider training 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 recognizing 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 ok the next is the role of stakeholders in corporate governance so we have talked about shareholders we have talked about we have talked about the ah you know the the other parties here now we are going to talk about these stakeholders in corporate governance corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth jobs and the sustainability of financially sound enterprises under this the rights of stakeholders that are established by law or through mutual agreements 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 ah where stakeholders participate in the corporate governance process they should have access to relevant sufficient and reliable information on a timely and regular basis 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 ah 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 next is disclosure and transparency so we are going back to the prime the main list that we had talked about in the beginning so now we are going to talk about disclosure and transparency 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 disclosure should include but not be limited to material information on one the financial and operating results of the company company objectives and non financial information major share ownership including beneficial owners and voting rights remuneration of members of the board and key executives information about board members including their qualifications the selection processes other company directorships and whether they are regarded as independent by the board related party transactions ok and foreseeable risk factors issues regarding employees and other stakeholders governance structures and policies including the content of any corporate governance code or policy and the process by which it is implemented then information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non financial reporting 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 aspects 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 next is the responsibilities of the board so these are also outlined to the corporate governance framework should ensure the strategic guidance of the company the effective monitoring and management by the board and the boards accountability to the company and the shareholders 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 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 fulfill certain key functions including reviewing and guiding corporate strategy major plans of action risk management policies and procedures annual budgets and business plans setting performance objectives monitoring and implementation and corporate performance monitoring implementation and [compu/corporate] corporate performance ah and overseeing major capital expenditures acquisitions and divestitures monitoring the effectiveness of the companys 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 ah shareholders 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 corporations 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 the board should be able to exercise objective independent judgment on corporate affairs boards should consider assigning a sufficient number of non executive board members capable of exercising independent judgment or tasks where there is a potential for conflict of interest examples of such key responsibilities ensuring the integrity of financial and non financial reporting the review of related party transactions nomination of board members and key executives and board remuneration

board should consider setting up specialized committees to support the full board in performing its functions particularly in respect to audit and depending on the companys size and risk profile also in respect to ah also in ah sorry in respect to risk management and remuneration when committees of the board are established their mandate composition and working procedures should be well defined and disclosed by the board board members should be able to commit themselves effectively to their responsibilities boards should regularly carry out evaluations to appraise their performance and assess whether they possess the right mix of background and competencies in order to fulfill their responsibilities board members should have access to accurate relevant and timely information when employee representation on the board is mandated mechanism should be developed to facilitate access to information and training for employee representatives so that this representation is exercised effectively and best contributes to the enhancement of board skills information and independence and so these are the the different principles of corporate governance that have been ah shared now ah of course the recommendation of the council on principles of corporate ah governance is given here but this is something that you can read on your own so you know so these are the principles and i am going to summarize all of these and i will give them to you but before i do that i would really like you to go to this document and read it on your own i will put the key words here again i told you that you know ah you could do that so let me just put the key words in front of you so that you can find this on you know through ah the internet you can type in oecd principles of corporate governance two zero one five and when you do this the save the document up here will pop up i suggest you go to this document and you read it and then you can discuss about this and i will give you a summary of this document in the slides when you get them at the end of this lecture so ah that is all we have time for in this class and you know the reading could have been a little stressful for you but then i wanted to show you the actual document and as you can see the explanation of each principle is given there so lets have a discussion about this on the forum is well and i hope you enjoyed it and thank you very much for listening in the next class we will talk some more about corporate governance will wind up the discussion on corporate governance and corporate social responsibility thank you