Corporate Governance: Notes, Assignments, Projects

Corporate governance refers to the collection of rules, practices, and processes to manage a company.

What is Corporate Governance?

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored & assessed, & how performance is optimized.

• The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company
• Corporate governance is therefore about what the board of a company does and how it sets the values of the company
• The Financial Reporting Council’s code is a guide to a number of key components of effective board practice
• It highlights issues such as decisions being affected by “groupthink”; the need for a sufficiently diverse board; clear culture, values and ethics; the need for Directors to lead by example
• However it is important to remember that governance is much wider than just finance. It is about transparency, accountability, and commitment.

Corporate governance involves principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form. Corporate governance often includes both social and institutional aspects.

The Board of Directors generally plays a vital role in the development of corporate governance policies. It needs to engage with the management of the business to provide clarity of strategic purpose. Good management is in fact critical for the operation of a company but managers also need direction in order to prioritise operations and to allocate funds.

• It is the board of directors that is the principal agent for corporate governance: The board is given a mission by shareholders, translates that mission into specific elements of strategy, and then provides direction for management, which makes it all happen.
• The board also ensures that good strategy is backed by proper compliance, to make sure it plays by the rules; and the board also evaluates the risks involved in strategy implementation, and uses appropriate tools of corporate governance, like the audit committee and internal controls, to ensure no dangerous risks are left unmanaged.

Developing and setting a clear strategy and then implementing it effectively are vital to any organisation’s success. Shareholders also play an important role in governance as they need to ensure the right directors are appointed to their Board.

Academic Questions on Corporate Governance

Question: Evaluate your company on their corporate governance.

• How many directors
• How many of them are independent
• How many BoD meetings took place?
• How many meetings did each attend? Break-up of independent and insiders
• Can you find out how independent the directors really are? Their linked-in profiles may give an idea. How many other boards they sit on?
• Who is the Chairman? Any relationship with the CEO?
• No information is also information
• Any news items about confrontations/unanimous decisions?
• Are there takeover defences?

Points related to Potential conflicts of interest

• Look at top shareholders (managers/govt./other insiders)
• Size of block-holders’ holding
• Do the current block-holders have a history of being active investors or passive?
• Does government hold too much power?
• Do labour unions hold too much power?
• How many classes of shares are there?
• Is it a group company?
• Control structures (cross-holdings/self-holdings/shell companies) – Are the cross-holdings by group companies?
• Length of manager tenure
• Does auditor provide services other than auditing?
• Is the auditor report qualified?
• How frequently is auditor rotated?
• How many committees on board? Are the composed of independent directors?
• Are the members/chairman of following committees independent? Audit, Nomination and Remuneration
• Are there any influential individuals on board? (e.g. Buffet/Jobs) — Do founders still hang on? (They may make emotional decisions)

There is no word limit. There are excellent 3 page reports as well as very average 10 page reports too in the past. The idea is whether you have covered relevant information, done detailed analysis (rather than simply data dump) and presented the report well. You can do it in 2 pages if you can do justice. There is no prescribed structure for the report. Just cover all the relevant aspects.

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