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Corporate Governance, Developments and Current

Status

Presents by Group 02Date : 19th Feb 2012

MBA Weekday Program ,Semester I – Second half (2011/2013)MBA 539 Financial Reporting and Management Control System

(Course Lecturer: Mr. R.M.R.B Rajapakshe, Senior Lecturer)

Introduction and evolution of CG

Code of Best Practices

Learnings from the Corporate Sector

Best Practices and addressing issues

Conclusion

1.

2.

3.

4.

5.

2

Corporate governance (CG)

CG is "the system by which companies are directed

and controlled" (Cadbury Committee, 1992)

What is the importunacy?

It involves a set of relationships between a company’s

management, its board, its shareholders and other

stakeholders; it deals with prevention or mitigation

of the conflict of interests of stakeholders.

Right & Expectations of Stakeholders

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ENTERPRISE

GOVERNANCE

CORPORATE

GOVERNANCE

BUSINESS

GOVERNANCE

The two dimensions need to be in balance !

Dimensions Dimensions

(Conformance) (Performance)

Development of Corporate Governance

The Cadbury Report (UK, 1992)

after the collapse of the Maxwell publishing group the structure

and composition of the main board and board committees and

highlighted the importance of nonexecutive directors.

Importantly, it established the ‘comply or explain’ principle

whereby companies should comply with the Code or give

reasons for any areas of non-compliance.

Development of CG Cont…

• The Greenbury Report,1995 - dealt with directors remuneration

• The Hample Report, (combined code) 1998 – Highlighted the role of corporate governance as contributor to business prosperity

• The Turnbull Committee, 1998 - prepared guidelines for corporate governance

• The Higgs Report, 2003- New code emphasizing internal control, audit committee, the board, chairman and nonexecutive directors etc;

Development of CG Cont…

The Sarbanes-Oxley Act of 2002 (US, 2002)

With the collapse of Enron and Worldcom

• Concept of independence of external auditors

• Reinforced the duties of CEOs and CFOs by imposing strict penalties for mis- interpretation the financial position in Financial reports listed companies

• Majority must consist with independent directors and they must adopt and disclose code of business ethics and if any waivers reasons for the same

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The Principles of Corporate Governance (OECD, 1998 and 2004)

2004 additions

I. Ensuring the basis for an effective corporate

governance framework

II. The rights of shareholders and key ownership

functions

III. The equitable treatment of Shareholders

IV. The role of stakeholders in corporate governance

V. Disclosure and transparency

Main Agents in SL

ICASL SEC CSE CBSL

Development of Corporate Governance

Corporate Governance in SL

1997, 1997, ICASL issued voluntary Code of Best Practices

2002, 2002, ICASL Code of Best Practices on Audit Committee

20032003 Best Practices on CG jointly by ICASL and SEC

2004 SEC set

committees of

2004 SEC set guidelines for Audit and Audit committees of listed companies

*Mandatory Listing Rules on CG

2006 /2008 2006 /2008 Revised on Code of Best Practices on CG by ICASL and SEC

Code of best Practices in Sri Lanka

� The board

� Chairman and CEO

� Chairman’s Role

� Financial Acumen

� Board balance

� Supply of Information

� Appointments to the Board

� Re-Election

� Appraisal of Board performance

� Appraisal of CEO

� Directors’ Remuneration

� Disclosures of Remuneration

� Relations with shareholders

� Accountability and Audit� Financial Reporting

� Internal Control

� Audit Committee

� Adheres to Corporate

� Governance

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Board of Directors

)

Shareholders

(providers of capital)

Managers

Governance

Owners

Elects, reports, delegates

Appoints, reports, delegates

Other

parties

Responsibility keep the organizational sustainability.

CEO

Operations

Executive

management

CO-OPERATIVE GORVERNANCE

Owner

Board of Directors

CEO

Executives

Employees

Responsibility is to keep the organizational

sustainability.

Responsibilities of Directors

� Formulate business

strategies

� Adoption of an effective

strategy for CEO and

management team

� Ensuring compliance with

laws, regulations ethical

standards

Chairman’s role

� Chairman should conduct

board proceedings

� With effective participation

of the board

� All directors are

encouraged to contribute

effectively

� Balance of power among

directors

Board of directors & Remuneration

Committee• Should include at least two non- executive directors or one third

of non-executive directors, which ever is higher in the board.

• Majority of Non executive directors should be independent.

• Board should be required to assess performance of the CEO.

• Details of the directors to be published in the annual report.

• Board of directors should set up a remuneration committee only from non executive directors to review remuneration policy and advice to the board.

• Responsible to structure remuneration packages , to attract, retain, & to motivate high caliber individuals to lead the organization.

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Accountability

Financial reporting• Company’s financial position & prospects

• Business going concerns

Internal Control• System of internal controls• Risk management

Audit• Board should establish formal and transparent arrangements

• The Audit Committee - a minimum of two independent non-executive directors or exclusively by non-executive directors which ever is higher

Audit committee

Responsibilities:

• Ensure objectivity and effectiveness of the audit

• Overlook on preparation and presentation of FS

• Supervise company’s compliance

• Ensure internal controls & risk management procedures

• Involve in appointing and removal of external auditors

• Discuss the Company’s annual audited FS

• Regular meetings with the external and internal auditors;

• Report regularly to the Board of Directors

Relationship with Shareholders

• The Board maintains healthy relationships with its key shareholders – individual & institutional.

• Maintain a dialogue with potential shareholders.

• The Annual General Meetings to communicate (corporate website, the annual report, quarterly financial statements and press releases) with the shareholders and encourage their participation.

Benefits of CG

• Corporate success and economic growth

• A system of internal control

• Brand formation and development

• Business for a longer period

• Trust of its stakeholders

• Effective monitoring

• Equity investors

• Higher market valuation

• Security on Shareholders’ investment

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Learnings from Corporate Sector Major Corporate Collapses� UK : The Maxwell publishing group

BCCI (Bank)

Marconi (Telco)

� USA : Enron (Energy Company)

World Com (Telco)

Tyco

� Germany : Berliner Bank

Babcok

� Australia : HIH Insurance OneTel

Ansett Airlines , Harris Scarfe

� Italy: Parmalat

SL Context

•Golden Key

•Premuka Savings & Dev. Bank

The Maxwell publishing group (1991)

CG deficiencies

– Heavy borrowing to led to unsustainable levels of debt.• Debts of GBP (Sterling Pound) 4 billion

– Robert Maxwell held the positions of both chairman and chief executive.

– The effectiveness of the non executive directors was also questioned

• Consequence

– Suicide of Robert Maxwell, leading to greatest fraud in 20th Century

– Arise CG issues in public ,business and political arena.

– Implemented Cadbury Report (1992)

Enron - Energy Company (2001)

• America’s most innovative company ranked in the US’

Fortune Top 10 companies based on turnover

• 30000 employees

• $111 billion revenue in 2000

• World leading company

• CG deficiencies

• Board has allowed to Off-the book transaction

• 50% of assets ($27b)were moved off the balance sheet

• Increased risk and liabilities without proper disclosure

• Excessive compensation plans

– Paid $750 bonuses , though net income was $975 in 2001.

• Questionable of the role of the Auditor

• Consequences:

– One of the largest bankruptcies in US history

– US quickly implanted CG reforms (NYSE listing requirements)

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WorldCom

• WorldCom was the darling of Wall Street and the Telecom

Industry of the 90’s

� Grew rapidly through acquisitions and from increased demand for telecom

services

• 1996: Acquired MFS (including internet backbone)

• 1998: Acquired MCI (more than twice it’s size)

• Accounting Fraud

� $11 Billion Accounting Fraud over 3 year period (1999 – 2002)� Understatement of operating expenses of $7B � Overstatement of revenues of $1B.

• Impact� $180B of shareholder value lost (based on peak stock price)

� $180B of shareholder value lost (based on peak stock price)

� 57,000 employees lost jobs

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Impact of the Fraud

Executives and Accounting Staff

6 individuals convicted of fraud / conspiracy / false filings

Ebbers – CEO 25 years in prison

Sullivan – CFO 5 years in prison

Myers – Controller 1 year in prison

Yates – Dir of Acctg 1 year in prison

Vinson – Acctg Dept 5 months in prison

Manager 5 months house arrest

Normand –Acctg Dept 3 years probation

Manager

Above 6 individuals agreed to pay a total of $24-34M to settle securities class action case

Golden Key

• Many depositors lost their savings,

• Directors arrested and CEO remand

• FCs related to the Ceylinco conglomerate (Shriram,

F&G, etc.) also affected..

• Credibility issue on Ceylinco group of company

– Over 300 subsidiary more than 350 offices

– Over 20,000 employees

• Property market was affected, construction sector

suffered, etc.

• All this contributed to the financial instability

Reasons for collapse

• High rate of interest

• Interest paid not from Interest

• Decline in new deposit

• Unable to return deposit

• Asset over valuation

• Dubious Investment

• Not invest in profitable ventures

• Not issued properly audited account

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Pramuka Savings & Development Bank

First banking failure in Sri Lanka in Oct 2002

– Total No. Of Accounts - 15, 886

– Total Deposit Liabilities - Rs. 2,2 bn

Reasons for collapse

• Irregularities of financial reporting

– External Auditors

• Inadequate internal controls and risk

• Non or under performing loan

• Disclosure & Transparency

• Mismanagement of the chairman & the MD

– Money withdrawal

Business Today To 20, 2010/11

Five companies do not comply with

separation of Chairman and CEO

How to practice CG

• “ Public Policy ” rather than narrow interest of

shareholders

• Sound legal framework

• The difference between “ Managing ” and

“Governing”

• Non Executive Directors say “ Yes people”

• Rotation of External Auditors

• Bottom line profit analysis

• Build a reputation in business world

How to practice CG

• Balancing of conflicting stakeholder expectations

• Provide additional financial information even not

mandatory

• Avoid weaker environments by adopting voluntary

CG measures

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Set the Trend by

doing it right

Public enterprises should have a mission statement summarizing objectives rather

than activities

A legal entity must seriously take action to implement the current CG to attract

the hearts of potential investors to the country

Responsibility of CSE / ICASL Financial Regulatory body to encourage the

companies to implement CG and make it compulsory.

For diversified business future all Boards of Directors to put their thoughts to

practice good CG

Set the Trend by doing it right cont..

Senior Management should have operational independence without

influences

Audit Committees empowered by the Management.

True independence and effectiveness of an independent Director can only

be measured by the Director’s action in the board room

Implementation voluntarily is most needed

Q & A Thank you

Pls note thatIf any one needs ppt file, let me know, can’t upload as it’s a heavy.

ckodituwakku@hotmail.com