4. Corporate governanceCorporate governance is "the system by whichis "the system by which
companies are directed and controlled". It involvescompanies are directed and controlled". It involves
regulatory and market mechanisms, and the roles andregulatory and market mechanisms, and the roles and
relationships between a company’s management, its board,relationships between a company’s management, its board,
its shareholders and otherits shareholders and other stakeholdersstakeholders, and the goals for, and the goals for
which the corporation is governed. In contemporarywhich the corporation is governed. In contemporary
business corporations, the main external stakeholder groupsbusiness corporations, the main external stakeholder groups
are shareholders, debtholders, tradeare shareholders, debtholders, trade creditorscreditors, suppliers,, suppliers,
customers and communities affected by the corporation'scustomers and communities affected by the corporation's
activities. Internal stakeholders are theactivities. Internal stakeholders are the board of directorsboard of directors,,
executivesexecutives, and other employees., and other employees.
INTRODUCTIONINTRODUCTION
5. There has been renewed interest in theThere has been renewed interest in the
corporate governance practices of moderncorporate governance practices of modern
corporations, particularly in relation to accountability,corporations, particularly in relation to accountability,
since the high-profile collapses of a number of largesince the high-profile collapses of a number of large
corporations during 2001-2002, most of whichcorporations during 2001-2002, most of which
involved accounting fraud.involved accounting fraud.[4][4] Corporate scandalsCorporate scandals ofof
various forms have maintained public and politicalvarious forms have maintained public and political
interest in the regulation of corporate governance. Ininterest in the regulation of corporate governance. In
the U.S., these includethe U.S., these include Enron CorporationEnron Corporation andand
MCI Inc.MCI Inc. (formerly WorldCom). Their demise is(formerly WorldCom). Their demise is
associated with theassociated with the U.S. federal governmentU.S. federal government passingpassing
thethe Sarbanes-Oxley ActSarbanes-Oxley Act in 2002, intending to restorein 2002, intending to restore
public confidence in corporate governance.public confidence in corporate governance.
Comparable failures in Australia (Comparable failures in Australia (HIHHIH,, One.TelOne.Tel) are) are
associated with the eventual passage of theassociated with the eventual passage of the CLERP 9CLERP 9
reforms. Similar corporate failures in other countriesreforms. Similar corporate failures in other countries
stimulated increased regulatory interest (e.g.,stimulated increased regulatory interest (e.g.,
ParmalatParmalat in Italy).in Italy).
6. Rights and equitable treatment of shareholders:
Organizations should respect the rights of shareholders and
help shareholders to exercise those rights. They can help
shareholders exercise their rights by openly and effectively
communicating information and by encouraging shareholders
to participate in general meetings.
Interests of other stake holders: Organizations should
recognize that they have legal, contractual, social, and market
driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities,
customers, and policy makers.
Role and responsibilities of the board: The board needs
sufficient relevant skills and understanding to review and
challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment
PRINCIPLES OF CORPORATE GOVERNANCE
7. Integrity and ethical behaviorIntegrity and ethical behavior:Integrity should be a:Integrity should be a
fundamental requirement in choosing corporate officers and boardfundamental requirement in choosing corporate officers and board
members. Organizations should develop a code of conduct for theirmembers. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsibledirectors and executives that promotes ethical and responsible
decision making.decision making.
Disclosure and transparencyDisclosure and transparency: Organizations should clarify and: Organizations should clarify and
make publicly known the roles and responsibilities of board andmake publicly known the roles and responsibilities of board and
management to provide stakeholders with a level of accountability.management to provide stakeholders with a level of accountability.
They should also implement procedures to independently verify andThey should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting.safeguard the integrity of the company's financial reporting.
Disclosure of material matters concerning the organization shouldDisclosure of material matters concerning the organization should
be timely and balanced to ensure that all investors have access tobe timely and balanced to ensure that all investors have access to
clear, factual information.clear, factual information.
8. Continental EuropeContinental Europe
Some continental European countries, including Germany and theSome continental European countries, including Germany and the
Netherlands, require a two-tiered Board of Directors as a means ofNetherlands, require a two-tiered Board of Directors as a means of
improving corporate governance.improving corporate governance.[20][20] In the two-tiered board, theIn the two-tiered board, the
Executive Board, made up of company executives, generally runs day-Executive Board, made up of company executives, generally runs day-
to-day operations while the supervisory board, made up entirely of non-to-day operations while the supervisory board, made up entirely of non-
executive directors who represent shareholders and employees, hiresexecutive directors who represent shareholders and employees, hires
and fires the members of the executive board, determines theirand fires the members of the executive board, determines their
compensation, and reviews major business decisions.compensation, and reviews major business decisions.[21][21] See alsoSee also
AktiengesellschaftAktiengesellschaft..
IndiaIndia
India'sIndia's SEBISEBI Committee on Corporate Governance defines corporateCommittee on Corporate Governance defines corporate
governance as the "acceptance by management of the inalienable rightsgovernance as the "acceptance by management of the inalienable rights
of shareholders as the true owners of the corporation and of their ownof shareholders as the true owners of the corporation and of their own
role as trustees on behalf of the shareholders. It is about commitment torole as trustees on behalf of the shareholders. It is about commitment to
values, about ethical business conduct and about making a distinctionvalues, about ethical business conduct and about making a distinction
between personal & corporate funds in the management of a company."between personal & corporate funds in the management of a company."
[22][22] It has been suggested that the Indian approach is drawn from theIt has been suggested that the Indian approach is drawn from the
Gandhian principle of trusteeship and the Directive Principles of theGandhian principle of trusteeship and the Directive Principles of the
Indian Constitution, but this conceptualization of corporate objectives isIndian Constitution, but this conceptualization of corporate objectives is
also prevalent inalso prevalent in Anglo-AmericanAnglo-American and most other jurisdictions.and most other jurisdictions.
CORPORATE GOVERNANCE MODELS AROUND THECORPORATE GOVERNANCE MODELS AROUND THE
WORLDWORLD
9. United States, United KingdomUnited States, United Kingdom
The so-called "Anglo-American model" of corporate governanceThe so-called "Anglo-American model" of corporate governance
emphasizes the interests of shareholders. It relies on a single-tieredemphasizes the interests of shareholders. It relies on a single-tiered
Board of Directors that is normally dominated by non-executive directorsBoard of Directors that is normally dominated by non-executive directors
elected by shareholders. Because of this, it is also known as "the unitaryelected by shareholders. Because of this, it is also known as "the unitary
system. Within this system, many boards include some executives fromsystem. Within this system, many boards include some executives from
the company (who are ex officio members of the board). Non-executivethe company (who are ex officio members of the board). Non-executive
directors are expected to outnumber executive directors and hold keydirectors are expected to outnumber executive directors and hold key
posts, including audit and compensation committees. The United Statesposts, including audit and compensation committees. The United States
and the United Kingdom differ in one critical respect with regard toand the United Kingdom differ in one critical respect with regard to
corporate governance: In the United Kingdom, the CEO generally doescorporate governance: In the United Kingdom, the CEO generally does
not also serve as Chairman of the Board, whereas in the US having thenot also serve as Chairman of the Board, whereas in the US having the
dual role is the norm, despite major misgivings regarding the impact ondual role is the norm, despite major misgivings regarding the impact on
corporate governance.corporate governance.
In the United States, corporations are directly governed by stateIn the United States, corporations are directly governed by state
laws, while the exchange (offering and trading) of securities inlaws, while the exchange (offering and trading) of securities in
corporations (including shares) is governed by federal legislation. Manycorporations (including shares) is governed by federal legislation. Many
US states have adopted theUS states have adopted the Model Business Corporation ActModel Business Corporation Act, but the, but the
dominant state law for publicly-traded corporations isdominant state law for publicly-traded corporations is DelawareDelaware, which, which
continues to be the place of incorporation for the majority of publicly-continues to be the place of incorporation for the majority of publicly-
traded corporations.traded corporations.[26][26] Individual rules for corporations are based uponIndividual rules for corporations are based upon
thethe corporate chartercorporate charter and, less authoritatively, the corporateand, less authoritatively, the corporate bylawsbylaws..[26][26]
Shareholders cannot initiate changes in the corporate charter althoughShareholders cannot initiate changes in the corporate charter although
they can initiate changes to the corporate bylaws.they can initiate changes to the corporate bylaws.
10. REGULATIONREGULATION
Legal environment - GeneralLegal environment - General
Corporations are created asCorporations are created as legal personslegal persons by the laws and regulationsby the laws and regulations
of a particular jurisdiction. These may vary in many respects betweenof a particular jurisdiction. These may vary in many respects between
countries, but a corporation's legal person status is fundamental to allcountries, but a corporation's legal person status is fundamental to all
jurisdictions and is conferred by statute. This allows the entity to holdjurisdictions and is conferred by statute. This allows the entity to hold
property in its own right without reference to any particular real person. Itproperty in its own right without reference to any particular real person. It
also results in the perpetual existence that characterizes the modernalso results in the perpetual existence that characterizes the modern
corporation. The statutory granting of corporate existence may arisecorporation. The statutory granting of corporate existence may arise
from general purpose legislation (which is the general case) or from afrom general purpose legislation (which is the general case) or from a
statute to create a specific corporation, which was the only method priorstatute to create a specific corporation, which was the only method prior
to the 19th century.[to the 19th century.[citationcitation neededneeded]]
In addition to the statutory laws of the relevant jurisdiction,In addition to the statutory laws of the relevant jurisdiction,
corporations are subject tocorporations are subject to common lawcommon law in some countries, and variousin some countries, and various
laws and regulations affecting business practices. In most jurisdictions,laws and regulations affecting business practices. In most jurisdictions,
corporations also have a constitution that provides individual rules thatcorporations also have a constitution that provides individual rules that
govern the corporation and authorize or constrain its decision-makers.govern the corporation and authorize or constrain its decision-makers.
This constitution is identified by a variety of terms; in English-speakingThis constitution is identified by a variety of terms; in English-speaking
jurisdictions, it is usually known as the Corporate Charter or thejurisdictions, it is usually known as the Corporate Charter or the
[Memorandum and] Articles of Association. The capacity of[Memorandum and] Articles of Association. The capacity of
shareholders to modify the constitution of their corporation can varyshareholders to modify the constitution of their corporation can vary
substantially.substantially.
11. CODES AND GUIDELINESCODES AND GUIDELINES
One of the most influential guidelines has been theOne of the most influential guidelines has been the
OECDOECD Principles of Corporate Governance—published inPrinciples of Corporate Governance—published in
1999 and revised in 2004. The OECD guidelines are often1999 and revised in 2004. The OECD guidelines are often
referenced by countries developing local codes or guidelines.referenced by countries developing local codes or guidelines.
Building on the work of the OECD, other internationalBuilding on the work of the OECD, other international
organizations, private sector associations and more than 20organizations, private sector associations and more than 20
national corporate governance codes formed thenational corporate governance codes formed the
United NationsUnited Nations
Intergovernmental Working Group of Experts on International StaIntergovernmental Working Group of Experts on International Sta
(ISAR) to produce their Guidance on Good Practices in(ISAR) to produce their Guidance on Good Practices in
Corporate Governance Disclosure. This internationally agreedCorporate Governance Disclosure. This internationally agreed
benchmark consists of more than fifty distinct disclosure itemsbenchmark consists of more than fifty distinct disclosure items
across five broad categories:across five broad categories:
12. AuditingAuditing
Board and management structure and processBoard and management structure and process
Corporate responsibility and complianceCorporate responsibility and compliance
Financial transparency and information disclosureFinancial transparency and information disclosure
Ownership structure and exercise of control rightsOwnership structure and exercise of control rights
The investor-led organization International Corporate GovernanceThe investor-led organization International Corporate Governance
Network (ICGN) was set up by individuals centered around the tenNetwork (ICGN) was set up by individuals centered around the ten
largest pension funds in the world 1995. The aim is to promotelargest pension funds in the world 1995. The aim is to promote
global corporate governance standards. The network is led byglobal corporate governance standards. The network is led by
investors that manage 18 trillion dollars and members are locatedinvestors that manage 18 trillion dollars and members are located
in fifty different countries. ICGN has developed a suite of globalin fifty different countries. ICGN has developed a suite of global
guidelines ranging from shareholder rights to business ethics.guidelines ranging from shareholder rights to business ethics.
TheThe World Business Council for Sustainable DevelopmentWorld Business Council for Sustainable Development
(WBCSD) has done work on corporate governance, particularly on(WBCSD) has done work on corporate governance, particularly on
accountability and reportingaccountability and reporting, and in 2004 released, and in 2004 released
Issue Management Tool: Strategic challenges for business in the useIssue Management Tool: Strategic challenges for business in the use
. This document offers general information and a perspective from. This document offers general information and a perspective from
a business association/think-tank on a few key codes, standardsa business association/think-tank on a few key codes, standards
and frameworks relevant to the sustainability agenda.and frameworks relevant to the sustainability agenda.
13. In 2009, the International Finance Corporation and the UNIn 2009, the International Finance Corporation and the UN
Global Compact released a report,Global Compact released a report,
Corporate Governance - the Foundation for Corporate CitizenshCorporate Governance - the Foundation for Corporate Citizensh
, linking the environmental, social and governance, linking the environmental, social and governance
responsibilities of a company to its financial performanceresponsibilities of a company to its financial performance
and long-term sustainability.and long-term sustainability.
Most codes are largely voluntary. An issue raised in the U.S.Most codes are largely voluntary. An issue raised in the U.S.
since the 2005 Disney decision is the degree to whichsince the 2005 Disney decision is the degree to which
companies manage their governance responsibilities; incompanies manage their governance responsibilities; in
other words, do they merely try to supersede the legalother words, do they merely try to supersede the legal
threshold, or should they create governance guidelines thatthreshold, or should they create governance guidelines that
ascend to the level of best practice. For example, theascend to the level of best practice. For example, the
guidelines issued by associations of directors, corporateguidelines issued by associations of directors, corporate
managers and individual companies tend to be whollymanagers and individual companies tend to be wholly
voluntary but such documents may have a wider effect byvoluntary but such documents may have a wider effect by
prompting other companies to adopt similar practices.prompting other companies to adopt similar practices.
14. PARTIES TO CORPORATE GOVERNANCEPARTIES TO CORPORATE GOVERNANCE
The most influential parties involved in corporate governance includeThe most influential parties involved in corporate governance include
government agencies and authorities, stock exchanges, managementgovernment agencies and authorities, stock exchanges, management
(including the board of directors and its chair, the(including the board of directors and its chair, the
Chief Executive OfficerChief Executive Officer or the equivalent, other executives and lineor the equivalent, other executives and line
management, shareholders and auditors). Other influentialmanagement, shareholders and auditors). Other influential
stakeholders may include lenders, suppliers, employees, creditors,stakeholders may include lenders, suppliers, employees, creditors,
customers and the community at large.customers and the community at large.
All parties to corporate governance have an interest, whether direct orAll parties to corporate governance have an interest, whether direct or
indirect, in theindirect, in the financial performancefinancial performance of the corporation. Directors,of the corporation. Directors,
workers and management receive salaries, benefits and reputation,workers and management receive salaries, benefits and reputation,
while investors expect to receive financial returns. For lenders, it iswhile investors expect to receive financial returns. For lenders, it is
specified interest payments, while returns to equity investors arisespecified interest payments, while returns to equity investors arise
from dividend distributions or capital gains on their stock. Customersfrom dividend distributions or capital gains on their stock. Customers
are concerned with the certainty of the provision of goods andare concerned with the certainty of the provision of goods and
services of an appropriate quality; suppliers are concerned withservices of an appropriate quality; suppliers are concerned with
compensation for their goods or services, and possible continuedcompensation for their goods or services, and possible continued
trading relationships. These parties provide value to the corporation intrading relationships. These parties provide value to the corporation in
the form of financial, physical, human and other forms of capital. Manythe form of financial, physical, human and other forms of capital. Many
parties may also be concerned withparties may also be concerned with corporate social performancecorporate social performance..
15. MECHANISMS AND CONTROLSMECHANISMS AND CONTROLS
Corporate governance mechanisms andCorporate governance mechanisms and
controls are designed to reduce the inefficienciescontrols are designed to reduce the inefficiencies
that arise fromthat arise from moral hazardmoral hazard andand adverse selectionadverse selection
. For example, to monitor managers' behavior, an. For example, to monitor managers' behavior, an
independent third party (theindependent third party (the external auditorexternal auditor))
attests the accuracy of information provided byattests the accuracy of information provided by
management to investors. An ideal control systemmanagement to investors. An ideal control system
should regulate both motivation and ability.should regulate both motivation and ability.
16. Monitoring by the board of directorsMonitoring by the board of directors : The board of directors, with its: The board of directors, with its
legal authority to hire, fire and compensate top management, safeguardslegal authority to hire, fire and compensate top management, safeguards
invested capital. Regular board meetings allow potential problems to beinvested capital. Regular board meetings allow potential problems to be
identified, discussed and avoided. Whilst non-executive directors areidentified, discussed and avoided. Whilst non-executive directors are
thought to be more independent, they may not always result in morethought to be more independent, they may not always result in more
effective corporate governance and may not increase performance. Differenteffective corporate governance and may not increase performance. Different
board structures are optimal for different firms. Moreover, the ability of theboard structures are optimal for different firms. Moreover, the ability of the
board to monitor the firm's executives is a function of its access toboard to monitor the firm's executives is a function of its access to
information. Executive directors possess superior knowledge of theinformation. Executive directors possess superior knowledge of the
decision-making process and therefore evaluate top management on thedecision-making process and therefore evaluate top management on the
basis of the quality of its decisions that lead to financial performancebasis of the quality of its decisions that lead to financial performance
outcomes,outcomes, ex anteex ante. It could be argued, therefore, that executive directors. It could be argued, therefore, that executive directors
look beyond the financial criteria.look beyond the financial criteria.
Internal control procedures and internal auditorsInternal control procedures and internal auditors : Internal control: Internal control
procedures are policies implemented by an entity's board of directors, auditprocedures are policies implemented by an entity's board of directors, audit
committee, management, and other personnel to provide reasonablecommittee, management, and other personnel to provide reasonable
assurance of the entity achieving its objectives related to reliable financialassurance of the entity achieving its objectives related to reliable financial
reporting, operating efficiency, and compliance with laws and regulations.reporting, operating efficiency, and compliance with laws and regulations.
Internal auditors are personnel within an organization who test the designInternal auditors are personnel within an organization who test the design
and implementation of the entity's internal control procedures and theand implementation of the entity's internal control procedures and the
reliability of its financial reporting.reliability of its financial reporting.
INTERNAL CORPORATE GOVERNANCE CONTROLSINTERNAL CORPORATE GOVERNANCE CONTROLS
17. Balance of powerBalance of power : The simplest balance of power is very: The simplest balance of power is very
common; require that the President be a different person fromcommon; require that the President be a different person from
the Treasurer. This application of separation of power is furtherthe Treasurer. This application of separation of power is further
developed in companies where separate divisions check anddeveloped in companies where separate divisions check and
balance each other's actions. One group may propose company-balance each other's actions. One group may propose company-
wide administrative changes, another group review and can vetowide administrative changes, another group review and can veto
the changes, and a third group check that the interests of peoplethe changes, and a third group check that the interests of people
(customers, shareholders, employees) outside the three groups(customers, shareholders, employees) outside the three groups
are being met.are being met.
RemunerationRemuneration : Performance-based remuneration is designed: Performance-based remuneration is designed
to relate some proportion of salary to individual performance. Itto relate some proportion of salary to individual performance. It
may be in the form of cash or non-cash payments such asmay be in the form of cash or non-cash payments such as
sharesshares andand share optionsshare options,, superannuationsuperannuation or other benefits.or other benefits.
Such incentive schemes, however, are reactive in the sense thatSuch incentive schemes, however, are reactive in the sense that
they provide no mechanism for preventing mistakes orthey provide no mechanism for preventing mistakes or
opportunistic behavior, and can elicit myopic behavior.opportunistic behavior, and can elicit myopic behavior.
Monitoring by large shareholdersMonitoring by large shareholders and/orand/or monitoring bymonitoring by
banks and other large creditorsbanks and other large creditors : Given their large: Given their large
investment in the firm, these stakeholders have the incentives,investment in the firm, these stakeholders have the incentives,
combined with the right degree of control and power, to monitorcombined with the right degree of control and power, to monitor
the management.the management.
18. External corporate governance controlsExternal corporate governance controls
External corporate governance controls encompassExternal corporate governance controls encompass
the controls external stakeholders exercise over thethe controls external stakeholders exercise over the
organization. Examples include:organization. Examples include:
CompetitionCompetition
Debt covenantsDebt covenants
Demand for and assessment of performanceDemand for and assessment of performance
information (especiallyinformation (especially financial statementsfinancial statements))
Government regulationsGovernment regulations
Managerial labour marketManagerial labour market
Media pressureMedia pressure
TakeoversTakeovers
INTERNAL CORPORATE GOVERNANCE CONTROLSINTERNAL CORPORATE GOVERNANCE CONTROLS
19. SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCESYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE
Demand for information: In order to influence the directors,Demand for information: In order to influence the directors,
the shareholders must combine with others to form a votingthe shareholders must combine with others to form a voting
group which can pose a real threat of carrying resolutions orgroup which can pose a real threat of carrying resolutions or
appointing directors at a general meeting.appointing directors at a general meeting.
Monitoring costs: A barrier to shareholders using goodMonitoring costs: A barrier to shareholders using good
information is the cost of processing it, especially to a smallinformation is the cost of processing it, especially to a small
shareholder. The traditional answer to this problem is theshareholder. The traditional answer to this problem is the
efficient market hypothesisefficient market hypothesis (in finance, the efficient market(in finance, the efficient market
hypothesis (EMH) asserts that financial markets arehypothesis (EMH) asserts that financial markets are
efficient), which suggests that the small shareholder will freeefficient), which suggests that the small shareholder will free
ride on the judgments of larger professional investors.ride on the judgments of larger professional investors.
Supply of accounting information: Financial accounts form aSupply of accounting information: Financial accounts form a
crucial link in enabling providers of finance to monitorcrucial link in enabling providers of finance to monitor
directors. Imperfections in the financial reporting process willdirectors. Imperfections in the financial reporting process will
cause imperfections in the effectiveness of corporatecause imperfections in the effectiveness of corporate
governance. This should, ideally, be corrected by thegovernance. This should, ideally, be corrected by the
working of the external auditing process.working of the external auditing process.
20. EXECUTIVE REMUNERATION/COMPENSATIONEXECUTIVE REMUNERATION/COMPENSATION
Research on the relationship between firm performance andResearch on the relationship between firm performance and
executive compensationexecutive compensation does not identify consistent and significantdoes not identify consistent and significant
relationships between executives' remuneration and firm performance. Notrelationships between executives' remuneration and firm performance. Not
all firms experience the same levels of agency conflict, and external andall firms experience the same levels of agency conflict, and external and
internal monitoring devices may be more effective for some than for others.internal monitoring devices may be more effective for some than for others.
Some researchers have found that the largest CEO performanceSome researchers have found that the largest CEO performance
incentives came from ownership of the firm's shares, while otherincentives came from ownership of the firm's shares, while other
researchers found that the relationship between share ownership and firmresearchers found that the relationship between share ownership and firm
performance was dependent on the level of ownership. The resultsperformance was dependent on the level of ownership. The results
suggest that increases in ownership above 20% cause management tosuggest that increases in ownership above 20% cause management to
become more entrenched, and less interested in the welfare of theirbecome more entrenched, and less interested in the welfare of their
shareholders.shareholders.
Some argue that firm performance is positively associated with shareSome argue that firm performance is positively associated with share
optionoption plans and that these plans direct managers' energies and extendplans and that these plans direct managers' energies and extend
their decision horizons toward the long-term, rather than the short-term,their decision horizons toward the long-term, rather than the short-term,
performance of the company. However, that point of view came underperformance of the company. However, that point of view came under
substantial criticism circa in the wake of various security scandals includingsubstantial criticism circa in the wake of various security scandals including
mutual fund timing episodes and, in particular, the backdating of optionmutual fund timing episodes and, in particular, the backdating of option
grants as documented by University of Iowa academic Erik Lie andgrants as documented by University of Iowa academic Erik Lie and
reported by James Blander and Charles Forelle of thereported by James Blander and Charles Forelle of the Wall Street JournalWall Street Journal..
21. Even before the negative influence on public opinion causedEven before the negative influence on public opinion caused
by the 2006 backdating scandal, use of options faced variousby the 2006 backdating scandal, use of options faced various
criticisms. A particularly forceful and long running argumentcriticisms. A particularly forceful and long running argument
concerned the interaction of executive options with corporateconcerned the interaction of executive options with corporate
stock repurchase programs. Numerous authorities (includingstock repurchase programs. Numerous authorities (including
U.S. Federal Reserve Board economist Weisbenner)U.S. Federal Reserve Board economist Weisbenner)
determined options may be employed in concert with stockdetermined options may be employed in concert with stock
buybacks in a manner contrary to shareholder interests.buybacks in a manner contrary to shareholder interests.
These authors argued that, in part, corporate stock buybacksThese authors argued that, in part, corporate stock buybacks
for U.S. Standard & Poors 500 companies surged to a $500for U.S. Standard & Poors 500 companies surged to a $500
billion annual rate in late 2006 because of the impact ofbillion annual rate in late 2006 because of the impact of
options. A compendium of academic works on theoptions. A compendium of academic works on the
option/buyback issue is included in the studyoption/buyback issue is included in the study ScandalScandal byby
authorauthor M.M. GumportGumport issued in 2006.issued in 2006.
A combination of accounting changes and governance issuesA combination of accounting changes and governance issues
led options to become a less popular means of remunerationled options to become a less popular means of remuneration
as 2006 progressed, and various alternative implementationsas 2006 progressed, and various alternative implementations
of buybacks surfaced to challenge the dominance of "openof buybacks surfaced to challenge the dominance of "open
market" cash buybacks as the preferred means ofmarket" cash buybacks as the preferred means of
implementing aimplementing a share repurchaseshare repurchase plan.plan.
22. CONCLUSIONCONCLUSION
The questionnaire survey shows that diffused ownership is relativelyThe questionnaire survey shows that diffused ownership is relatively
rare in all the countries under study except for Malaysia. Professionalrare in all the countries under study except for Malaysia. Professional
managers in CEO positions are found in less than 60% of themanagers in CEO positions are found in less than 60% of the
Malaysian firms and only in 40-50% of the respondent firms in threeMalaysian firms and only in 40-50% of the respondent firms in three
other countries. This confirms that the major corporate governanceother countries. This confirms that the major corporate governance
concern in listed firms is indeed to prevent controlling owners fromconcern in listed firms is indeed to prevent controlling owners from
expropriating minority shareholders.expropriating minority shareholders.
The surveyed firms are doing relatively well in recognizing the rights ofThe surveyed firms are doing relatively well in recognizing the rights of
shareholders. This may be due to the fairly elaborate laws andshareholders. This may be due to the fairly elaborate laws and
regulations on shareholders’ rights and the operation of shareholders’regulations on shareholders’ rights and the operation of shareholders’
meetings. Nevertheless, there is substantial room for improvement.meetings. Nevertheless, there is substantial room for improvement.
Given the high ownership concentration in most firms, for minorityGiven the high ownership concentration in most firms, for minority
shareholders to address their concerns by calling a specialshareholders to address their concerns by calling a special
shareholders’ meeting or putting issues on a meeting agenda seems toshareholders’ meeting or putting issues on a meeting agenda seems to
be difficult. Shareholders are inadequately protected with such rights asbe difficult. Shareholders are inadequately protected with such rights as
priority capital subscription, approval of major related-partypriority capital subscription, approval of major related-party
transactions, and dissenters’ rights. Moreover, voting by mail is largelytransactions, and dissenters’ rights. Moreover, voting by mail is largely
unavailable, and minority shareholders seem to take little part in theunavailable, and minority shareholders seem to take little part in the
process of selecting board members. Sample firms perform relativelyprocess of selecting board members. Sample firms perform relatively
poorly in relation to information disclosure and transparency,poorly in relation to information disclosure and transparency,
particularly for matters potentially involving selfdealing or other conflictsparticularly for matters potentially involving selfdealing or other conflicts
of interest. In Indonesia and Thailand, web sites are not yet fully utilizedof interest. In Indonesia and Thailand, web sites are not yet fully utilized
as a way to disclose information in a timely manner and enhanceas a way to disclose information in a timely manner and enhance
transparency.transparency.
23. REFERENCESREFERENCES
(Cadbury Committee, 1992) European Corporate(Cadbury Committee, 1992) European Corporate
Governance InstituteGovernance Institute
aa bb "OECD Principles of Corporate Governance,"OECD Principles of Corporate Governance,
2004".2004". OECDOECD..
http://www.oecd.org/dataoecd/32/18/31557724.phttp://www.oecd.org/dataoecd/32/18/31557724.p
df. Retrieved 2011-07-20.df. Retrieved 2011-07-20.
Tricker, Adrian,Tricker, Adrian, Essentials for Board Directors:Essentials for Board Directors:
An A-Z GuideAn A-Z Guide, Bloomberg Press, New York,, Bloomberg Press, New York,
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