Corporate Governance Notes 2019 PDF

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GREAT ZIMBABWE UNIVERSITYMUNHUMUTAPA SCHOOL OF COMMERCEDEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMSCORPORATE GOVERNANCELECTURER: R. MANDIZVIDZA (AC410/IA409)Course OverviewCorporate scandals, the world over, have made the world to focus attention on corporate governance, thus putting emphasis on...

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GREAT ZIMBABWE UNIVERSITY MUNHUMUTAPA SCHOOL OF COMMERCE DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

CORPORATE GOVERNANCE LECTURER: R. MANDIZVIDZA (AC410/IA409)

Course Overview Corporate scandals, the world over, have made the world to focus attention on corporate governance, thus putting emphasis on its critical role in business sustainability economic growth and development. Combining real-world examples with theories, it will explore decision-making within a competitive context and will enable students to demonstrate an understanding Using corporate governance related theories, the course will display an appreciation of theoretical underpinnings of business corporate governance. Students will learn how to formulate and respond to different scenarios at different levels and apply presentation and analytical skills to develop argument and evidence to support evaluation. Learning Objectives • To provide an integrative framework that will allow students to synthesize knowledge from other business courses into a comprehensive understanding of Corporate Governance. • To provide a basic understanding of the nature and dynamics of Corporate Governance. • To encourage students to think critically and strategically. • To develop the ability to identify strategic issues and design appropriate courses of action when confronted with different corporate governance contexts. LEARNING OUTCOMES Upon completion of this course, students will be able to complete the following key tasks:  Articulate the concept of corporate governance;  To understand the historical development and the current corporate governance trends.  Develop an understanding and appreciation of the principles of corporate governance.  Identify and discuss the theories and philosophies of corporate governance. Page 1 of 125

 Develop knowledge of the concept in different contexts  Articulate the regulatory framework and the difference models of corporate governance.  Have knowledge of the functions of boards in different scenarios.  Articulate how risks are managed and how corporate social responsibility leads to sustainability.  Analyze the future of corporate governance. Course Content: 1. Introduction to corporate governance and its evolution. 

Origin of corporate governance

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Legislation, regulation and corporate governance codes.

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Corporate regulation in the UK, US, South Africa, Zimbabwe and other countries.

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King III is also discussed in detail as well as the relevant corporate governance provisions. Board meetings, shareholders’ meetings and the role of directors are focused on.

2. Corporate governance and management  Definition of corporate governance 

The scope of corporate governance

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The difference between governance and management

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The performance and conformance aspects of governance.

3. The Regulatory Framework  Legislation, regulation and corporate governance codes. 4. The Principles and theories of Corporate Governance  The principles 

The theories and philosophies of corporate governance o The Agency Theory o Transactions Costs Economics o Stewardship Theory o Resource Dependency Theory Page 2 of 125

o Managerial and Class Hegemony o Psychological and organizational perspectives o The societal perspectives: Stakeholder philosophy o Enlightened Shareholder Theory o Differing Boundaries & Levels: Systems Theory 5. Models of corporate governance  How contexts and culture affect corporate governance 

The American Rules-Based Model

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The UK/Commonwealth Principles-Based Model

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The Continental European Two-Tier Model

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The Japanese Business Network Model

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The Asian Family-Based Model

6. Functions of the Boards  What boards do 

Balancing performance and conformance roles

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Board committees: functions and authority

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Delegating board functions to management

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Corporate transparency

7. The Governance of Corporate risk  Types of risks 

Risk analysis

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Risk recognition, assessment and evaluation

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Risk and management information system

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Risk transfer

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The US COSO Integrated Framework for Enterprise Risk management(ERM)

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The Global Financial Crisis and corporate risk

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Levels of risk: The concept of the ERM. Page 3 of 125

8. Business Ethics, Corporate Social Responsibility (CSR) and Sustainability  Definition of Ethics 

Application of morale philosophies to ethical decision making

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Whistle blowing

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Concept of CSR

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Enlightened Shareholder Value(ESV)

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CSR strategies and policies

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The CSR competency framework

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Balancing corporate responsibilities

9. The governance of private companies and other entities  Private entities, family-owned entities, Joint Ventures 

NGOs and NPOs

10. Board membership: Directors’ appointments, roles and remuneration  Board effectiveness 

Board assessment

11. The future of Corporate Governance.  The frontiers of CG 

Beyond the frontiers of CG

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New CG policies and practices

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Society’s changing expectations

COURSE EXPECTATIONS This course is very intensive and requires hard work, critical thinking and maturity since it covers a wide range of business issues in a short space of time. There are three key success factors for achieving the learning objectives of this course:  Diligent preparation: You are expected arrive at the class venue on time and well prepared. There is no option for reading.  Excellent in problem-solving: The objective of the sessions is to develop the participants’ ability to think and apply concepts, not merely understand and memorize facts. Participants should also develop a skill of looking for their study materials. Participants should pay particular attention to critical debates in the literature and other Page 4 of 125

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business reports and apply them in a contingent fashion. Holistic- practical thinking and creativity will be rewarded. New ideas with strong practical impact need to be developed, which might be used to challenge conventional wisdom. Active and empathetic communication: Excellence in thinking develops through active learning and skillful interaction with peers and the facilitator. Participants are encouraged to actively participate in class discussions and this will be rewarded. The learning environment will be conducive to intellectual debate and experimentation. Constructive academic exchange is importantly encouraged.

ASSESSMENT Assessment consists of the following components:  Class participation 2%  Group presentation: 5%  Assignment (Individual & Group): 18%  Final examination 75% Ground Rules  Non-attendance: Non-attendance leads to a class participation score of zero.  Late submissions: Late work will not be entertained.  Plagiarism: This is academic sin and will lead to penalization.  Cellphones: Put all cellphones on silent mode or keep them switched off during class. REQUIRED COURSE MATERIALS AND READINGS 1.

Christine Mallin. (2013) Corporate Governance. Oxford University Press.UK

2. Bob Tricker, Robert Ian Tricker (2012) Corporate Governance: Principles, Policies and Practices. Oxford University Press Amazon.com. Available Online: books.google.co.zw/books? isbn=0199607966 3.

Donald Nordberg (2011) Corporate Governance: Principles and Issues. SAGE Publications. London. 4. David Crowther and Shahla Seifi. (2011) Corporate Governance and International Business. Bookboon.com

OPTIONAL COURSE MATERIALS AND READINGS: These are texts covering general business issues. Some cover specific areas of the interdisciplinary study. 1. Chryssides, G.D., and Kaler, J.H. (2002) An Introduction to Business Ethics, Thompson Learning: London. 2. Crane, A., and Matten, D. (2004) Business Ethics, Oxford University Press. Oxford. 3. Search for Corporate Social Responsibility Texts. NB: Because of the changing nature of information exchange, websites have become important sources of current materials. You can download current and specific journal articles by using Page 5 of 125

online resources such as GZU Library EBooks (Check with the Library), the ‘Google scholar’ search engine, High wire Express, EBSCO Host and many others. ‘Google Books’ is another invaluable internet source. Visit your librarian for help.

1.0 INTRODUCTION TO CORPORATE GOVERNANCE AND ITS EVOLUTION 1.1 ORIGIN OF CORPORATE GOVERNANCE The world experienced a lot of corporate failures which were due to corporate governance challenges. Corporate Governance is a young discipline that has grown out of deep seated concerns raised by spectacular and well publicized corporate failures. A selected country specific approach is taken in analyzing how corporate governance developed in response to corporate failures. Such corporate failures worldwide were caused by insider loans, compensation scandals, cosmetic accounting, inefficient and unethical conduct of external auditors for companies leading to corruption and wastages. (Dube, 2008). 1.1.1 In the UK A number of companies collapsed unexpectedly in the 1980s and 1990s which included the famous Bank of Credit and Commerce International and Enron to mention but a few. Corporate scandals provoked a response through voluntary codes as opposed to the USA’s legislated approach. After these collapses the UK government set up a commission of enquiry to investigate these scandals. 1.1.1.1 Cadbury Report The first report on corporate governance was the Cadbury Report which was published in 1992 and included a code of best practices and some aspects of corporate governance. It was produced by a committee chaired by Sir Andrian Cadbury (1992). Its major task was to look into financial aspects of corporate governance. The attention of the committee further broadened to look at the effective functions and efficiency of Board of Directors.  It came as a result of scandals involving the London Stock Exchange listed companies.  The report brought about a Code of Best Practice and as such many UK listed companies came under pressure to comply with the code.  The major highlights of the report were about financial reporting  Remuneration of the executive directors was to be performance based  Maximum disclosure of company accounts,  Functional audit committees consisting of at least three non-executive directors  The issue of Risk Management came out in that report and that directors were supposed to report on issues pertaining to risk management and internal control  Separate CEO and Chairman  Service contracts to be limited to 3 years  The financial statements had to be at least understandable by shareholders 1.1.1.2 Paul Myners Report (1995) The report was produced by a Committee chaired by Paul Myners in 1995. It concentrated on the relationships between companies and institutional investors. Page 6 of 125

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Recommended that when a company is performing badly, institutional investors should do something to put things right instead of selling their shares and turning their backs on the company. Argued for a legislated approach in dealing with corporate scandals as opposed to the voluntary codes. Miners went on to argue that unless shareholders who are the institutional investors voluntarily became more active in the governance of companies and exercise their rights more forcibly, they should then be compelled to do so by legislation.

1.1.1.3 Greenbury Report (1995) This committee came as a recommendation by the Cadbury committee to review progress on corporate governance in the UK’s listed companies. It was prepared by the Greenbury Committee which was chaired by Sir Richard Greenbury.  Focused mainly on directors’ remuneration as a direct response to the UK media onslaught on the fat cat directors who over remunerated themselves at the expense of shareholders especially in newly privatized companies.  Directors’ salary did not link to companies’ performance. Directors paid enormous salaries when companies were performing badly.  Recommended the establishment of remuneration committees and the disclosure of director remuneration. All the information on benefits to directors should be known to the public (shareholders), so that shareholders decide if they are not excessive or not.  Also recommended the crafting of sound remuneration policies and performance based director service contracts  Directors were generally supposed to be incentivized to look at long term interests. Shares given to directors must be staggered over a period of time not at once i.e. in the case of where there are share options. 1.1.1.4 Hampel Report (1998) The Hampel Report was drafted in 1995 by Sir Ronald Hampel. Its sole task was to review the recommendations of the Cardbury and Greenbury Committee Reports. The report was finally published in 1998 and covered the following corporate governance issues:  The ideal composition of the Board and roles of directors.  Directors’ remuneration.  The role of shareholders, particularly the institutional investors.  Communication between the company and its shareholders with regard to financial reporting, auditing and internal controls.  He also touched on the separation of CEO and Chairman  This report was a turning point in corporate governance since most of the issues Hampel touched had already been dealt with in previous reports hence he recommended that these reports be combined into one code. This led to the publication of the combined code.

1.1.1.5 The Combined Code (1998) Page 7 of 125

The combined code was born out of the need to combine all efforts on corporate governance in the UK. It is a voluntary code rather than a regulatory requirement. However, the UK Stock Exchanges listing rules require listed companies to disclose in their annual report the extent of their compliance or non-compliance with the combined code. This code was later revised in 2003 and in June 2006  It provided for periodic reviews of its terms to take account of changes in corporate governance in the UK.  The company should be headed by an effective board.  There should be a CEO and chairman and their responsibilities should be separated.  There should be a balance between the ED and NED. Some NED should be independent.  No individual/group should dominate the board.  Appointment to board should be transparent and done through a nominations committee.  There should be a remuneration committee to set remuneration of EDs and no ED should set his own remuneration.  Remuneration should be structured to link individual performance to pay.  Remuneration statement should be included in the financial statement.  More dialogue/ Communication between the company and shareholders with regard to financial reporting, auditing and financial control. The combined code covers most areas of corporate governance, and is made up of: - Main principles - Supporting principles: these are principles that supplement and support the main principles. - Provisions: these are specific measures that companies are expected to take. The accepted view in the UK was that corporate governance should be principles-based, rather than rules-based. Some rules (provisions) are necessary, but should not be excessive provided that companies apply the principles. Listed companies are required by the UK listing rules to comply or explain their non-compliance with the Code’s provisions. It was considered that, given the fact that corporate governance should be mainly principles-based; increasing the number of provisions might create unnecessary reporting requirements. 1.1.1.6 Turnbull Report (1999) This report gave companies guidance on the directors should carry out their responsibilities for the internal control system, as required by the Combined Code.  Directors were made responsible for risk management and internal controls generally.  It however did not necessarily seek to eliminate risk, because taking some risks is necessary to earn returns on investment. There is always risk in undertaking some new business opportunities, but the prospective returns should justify the foreseeable risks. 1.1.1.7 Higgs Report (2003) This report focused on the roles and responsibilities of non-executive directors (NEDs) in promoting the interests of shareholders especially the minority ones. He was more interested in the balance of power (equity) between shareholders and the company. Page 8 of 125

1.1.1.8 Smith Report (2003) It issued guidelines on the roles and responsibilities of audit committees. The responsibility for the Combined Code was transferred to The Financial Reporting Council and in 2003 a revised Combined Code was issued, which incorporated many of the Higgs and Smith’s recommendations. 1.1.1.9 Sir John Walker (2009) In 2009 Sir John Walker prepared the latest code on corporate governance for the UK. It is a review of all developments on corporate governance to date. 1.1.1.10 Company Law From time to time, the UK Government took steps to legislate on corporate Governance. In 1998 changes to the Company Law were made which led to the promulgation of new regulations which called for greater disclosures on director remuneration in listed companies.  So, in the UK, corporate failures and scandals provoked the crafting of voluntary codes as well as some attempts at the legislated approach on corporate governance. 1.1.2 USA  In the USA, no discernible interest existed in corporate governance before the 1990s except for some occasional activist institutional shareholders.  The collapse of Enron, World Com, Tyco International, Peregrine Systems and others from the late 2001 to date, generated interest in corporate governance and a series of regulations and statutory provisions were enacted in 2002 through the famous SarbanesOxley Act.  The USA approached the problem of corporate scandals by legislating corporate governance as opposed to opting for a voluntary code.

1.1.3 Germany In Germany the Cromme Code was developed as best practice for German companies to attract foreign investments. 1.1.4 South Africa  In 1994 South Africa opened its economy to the outside world through the liberalization of capital markets that created a conducive market (environment) for capital markets to flourish.  After attaining democracy the South African country’s corporate governance was underpinned by democracy.  In 1994-1996 South Africa had a new constitution which embodied issues on how a nation is best governed. State power was distributed evenly among the three pillars of state i.e. the executive, judiciary and the legislature. South Africa then became an open and democratic society which is based on values such as equality, human dignity and freedom according to its constitution.  Given that background a committee headed by judge Mervin King was formed to look into corporate governance issues. A code affectionately known as the King Report was produced. Page 9 of 125

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In South Africa, there has been the King I (1994), II (2002) & III (2009) Reports on Corporate governance. Most of the principles included in the UK and USA are common inclusion as well in the King report, e.g. composition of the board. The King III Report anticipates a new Companies Act of South Africa. King III is a revolutionary code on corporate governance. It was published in September 2009. It addresses new concepts such as governance of risk, information technology risk and inte...