Introduction
to Corporate Governance
Corporate Governance
are the process and structure used to run and
manage corporate business and affairs in order
to enhance the company's value vis-à-vis
its shareholders.
The process and structure determine
the division of power and establish mechanisms
to fulfil all duties towards the shareholders,
Board of Directors (BoD) and management team.
The direction and management
of the business should take into account the
impact on other stakeholders such as employees,
customers, suppliers and communities.
Click here ! Why Corporate Governance Rules are needed ?
Governance problems
during the 1970's and 1980's
Corporate managers were criticized
for their lack of accountability (1970's) and
for being concerned about their own personal
interests.
Why? It stems from an agency problem
that is the separation between, on the one hand,
ownership and control (dispersed shareholders
and managers who were shareholders as well)
and, on the other hand, self-interest. The conflicts
were mainly due to the distribution of free
cash-flow.
During the 1980's, the CEOs' incomes
increased by 212%, while during the same period
of time the increase in S&P was only 78%.
The consequences were a
drop in market shares, a drop in profitability
and poor mergers.
Changes since the 1980's
The most important changes were
due to the growing importance of institutional
investors (mutual funds with seats on the BoD
- 55% in the USA - creation of shareholder pools,
dialogue between owners and managers, relationship
investing).
The BoD moved towards a greater
involvement. The BoD is responsible for protecting
the shareholders' interests.
A good corporate
governance
- It is supposed to make sure
that the shareholder's interests be protected
- It requires an accountability
system: management - BoD - shareholders
- It requires vigilance: BoD
- CEO / shareholders - BoD
- The BoD must consist of qualified
members who do not belong to the company's
staff (external)
- The company should provide
guidance and training for the new BoD members
- The positions of CEO and Chairman
should be separate (external member)
- The voting procedure should
be that of a secret ballot
- The BoD should consist at
the most of 9-11 members, who will not serve
on the Board for more than two terms of office
Links
© Bernard Jaquier,
Professor of Economics & Finance, Ecole
Hôtelière de Lausanne, 2010