International Corporate Governance: Principles

Introduction

Corporate governance has become an international phenomenon. The recent financial scandals and bankruptcies of big multinational companies have really impacted almost every nation. Realising the significant, the nations around the globe are either establishing corporate governance guidelines or codes or refurbishing their guidelines already in force. International governance principle like OECD governance principles were issued as early as in 1999 and have been updated by taking into account with the recent developments and new updated guidelines were issued in 2004. (Mallin, 2006,p1).

Corporate governance concerns with rules, systems and processes by which a company’s activity is conducted. It can be explained as the relationship between a company’s shareholders, its board of directors and its managers. It is a set of relationship of a company to society and all of its stakeholders and will include the sets of regulations, laws, listing guidelines, voluntary private-sector practices that facilitate corporations to invite capital, manage the affairs of the business efficiently, and generate revenues and to cater both general societal expectations and legal obligations.

Some critics argue that it should cover broader areas like the role of institutional investors, the remuneration of directors, the relationship between the auditors and company

Corporate Governance

Corporate governance is the process by which the corporate can implement proficient decision making, appropriate resource allocation, and involve in strategic planning. It concentrates on how objects are laid down and attained, how risk is watched and evaluated and how performance are maximised.

Corporate governance helps corporations to construct value through innovation, provide accountability and to implement proper control system to quantify the risk involved.

Corporate governance has become more relevance to determine the cost of capital in a global capital market. Corporate governance must be evolutionary and receptive to the information requirements of local and international investors.

Most definitions on corporate governance refer mainly the following:

• The devise by which companies are controlled and directed and
• The devise by which those who control and direct a company are supervised.

Fundamentals of Corporate Governance:

• To explain the functions of the management and the board clearly.
• The Board is vested with a balance of skills and independence.
• More emphasis on the honesty on decision makers on corporate’s plan and financial performance.
• To inform periodically the investors the important happenings in corporate financial activity and enhances the integrity of the corporate reporting.
• To report all material factors in time and with a matured outlook.
• The shareholder’s rights shall be clearly acknowledged and to be honoured.
• Business decisions with inherent risk and uncertainty is to be handled with proper internal control.
• To cope with the modern risks of business, introduction of formal mechanisms to enhance the board’s and managerial effectiveness.
• Proper rewarding system should be designed to attract skills required to achieve the result anticipated by shareholders.
• Good governance takes care of the interest of all stakeholders.

The main general salient features of corporate governance codes are:

1. It is the way of guaranteeing that the implementation of economic power by the corporate sector.
2. Board of Directors of a corporation has inherent managerial and supervisory function.
3. It ensures that there is a demarcation between managerial and supervisory roles. It includes the separation of the office of the Chairman and CEO, the installation of independent directors, formation of committees of Board like remuneration, audit, share transfer etc.
4. Major codes of the corporate governance deals with disclosures to shareholders more particularly director’s remuneration, top executive remuneration, independence of directors and shareholding pattern etc.

Thus corporate governance is aimed at the maximisation of shareholders wealth and to protect their interests. While the corporate governance is helpful to instil confidence on investors and at the same time if there are grave governance deficiencies, the investors may shun the shares of individual companies, a section of markets or even national capital markets.

OECD Principles

Organisation for Economic Co-operation and Development (OECD) has developed corporate governance principles mainly to enhance the institutional, regulatory and legal framework for corporate governance for their nations to offer suggestions and guidance for investors, stock exchanges, companies and other stakeholders, to have a participating role in the establishment of good corporate governance. These principles mainly focus on publically traded companies both for non-financial and financial matters.

This corporate governance is non-binding in nature. About 30 nations have ratified the above principles in 1999. It is to be noted that four main pillars of OECD principles of Corporate Governance are

Accountability

To make sure that the tactical guidance of the company is supervising the management by the Board and the board’s answerability to the shareholders and company.

Responsibility

To accredit the privileges of stakeholders as proven by concerned legislation and to support the active cooperation between stakeholders and companies and stakeholders in establishing jobs, wealth and the sustainability of financially vibrant companies.

• Equitable Treatment
• Transparency

On all material issues, to make accurate and timely disclosure.

Fairness

It safeguards shareholder’s rights and make sure that equitable treatment of shareholders.

The above pillars are progressively viewed as universal value for corporate governance. The principles give due weight to the privileges of shareholders and demand for the design of mechanism as the egressing “gold standard” for corporate governance. (Zarsky, 2005, p201).

Section IV of the OECD Corporate Governance Principles distinctly speaks out about transparency and disclosures and educate that disclosures include but not restricted to the following information:

• The operating and financial results of the company
• Corporate’s main goals
• Voting rights of major shareholders
• Top executives and Board of Directors and their pay and remuneration
• Material risk factors that can be foreseeable
• Top issues pertaining to other stakeholders and employees
• Corporate governance policies and structures.

The stakeholder issues and the ‘materiality of risk factors is normally detailed as information ‘whose mis-statement and omission could shape the economic decisions taken by users of such data However , the demarcation of whether particular information is a matter of significance is left to the nation or market actor to explain.

The above mentioned points relating to governance policies, the disclosure of foreseeable risk are of specific interest for taken into consideration of how corporate governance has the potency to hold companies responsible on global social and environmental issues.

Further, describing of these sections could act as a bare minimum structure for statutory social and environmental disclosures needed of OECD –associated companies.

For instance, if a company is bribing a military government in a developing nation to offer security for its project or pipeline, it will loose its insurance coverage if it is indulged in poisoning a community’s drinking water system with that of mine tailings, this could be ‘material’ data that the company is expected to disclose to its stakeholders and international community.

Both International Monetary Fund and World Bank have employed OECD Corporate Governance as a measuring yard and as a benchmark for measuring the adherence of corporate governance by companies.

Further, World Bank has commenced “the Global Corporate Governance Forum” as a way to propagate deep research, best practices and offer technical help among the private sector companies especially in developing countries. (Zarsky, 2005, 203).

International Corporate Governance

U.K has a unitary board of directors system where both non-executive and executive directors offer their advice on every board meeting. European nations have a dual board system which consists of management board and supervisory board. The supervisory board has employee directors.

Corporate governance plays a dominant role in UK and institutional investors are very particular about its implementation. For example, Dutch/Shell group has exaggerated its tested reserves of oil and gas and later engaged in strategies to restore its standing and rebuild faith in it. Standard Life is the UK’s oldest institutional investors. It is upbeat in corporate governance issues and stresses that its investee companies should adhere corporate governance without failure.

Telecom Italia is an Italian telecom company and it has corporate governance reforms which assist to enhance protection of minority shareholder’s interests.

In Spain, Indra is a leading information and defense technology company. It has introduced noteworthy corporate governance transformations which includes new remunerations schemes and board restructuring processes. Due to introduction of corporation, lndra attained noteworthy increase in growth, profitability and efficiency. Singapore Technologies Engineering is having high levels of disclosure and transparency. (Mallin, 2006, p 2).

Corporate Governance in UK

In 1992, the Cadbury Report was published and UK has become a pioneer in Corporate Governance and the Cadbury Code became an exemplar for the self-control of listed company boards in other nations.

Cadbury Code vehemently recommended for the following:

• Non-executive directors assumed an expanded role
• Executive remunerations received a tighter control
• Financial reporting has to give full and transparent disclosure
• Institutional investors took active part in the management of the company
• Auditors and Accountants are regulated independently

The above recommendations were combined together n a new Combined Code which was implemented in July 2003 and was meant to make board more independent and more efficient in controlling the top management team of the companies.. (Mallin, 2006, p 17).

Effective Corporate Governance Structure

The new combined code stresses the following for the implementation of an effective corporate governance structure:

Though, these governances are compulsory for a listed company in UK, there is no bar on the other types of companies to follow the same. I think, those companies functioning on international level should follow these guidelines to have an effective corporate governance structure:

• There should be chairman and CEO to lead the company. It should be seen that no individual has unlimited authority in managing the affairs of the company.
• Board should comprise both executive and non-executive independent directors. It should be seen that no small group of individuals or individuals can dictate the board’s decision taking authority.
• All directors of board should be re-elected once in three years.
• The annual report of the company should contain a report on company’s remuneration policy and short notes on the each director’s remuneration.
• The company should have adequate internal control to protect both the company assets and shareholder’s investment.
• Board should take efforts to consult institutional investors before initiating any major policy changes and on director’s and key employee’s pay packages mainly through extra-ordinary or annual general meeting.
• Remuneration committee should consider and analyse industry standards while fixing remuneration to top executives. Further, there should not be any discount while executive share options are allotted.

Corporate Governance at Jersey Trust Company

Jersey Trust Company (JCT) is offering advisory services on private wealth, administration of corporations and funds. Their head office is located in Jersey financial district of St.Helier and has operations in many other places.

JCT is offering a high efficient, professional and personal service to its customers. The specialty of JCT is that it is offering corporate governance itself as a package to its corporate clients.

Since JCT is managing private wealth administration of corporation and funds, as corporate governance compliance, JCT has to appoint a Money Laundering Compliance Officer (MLCO) and Money Laundering Reporting Officer (MLRO) to prevent and detection of money laundering and financing of terrorism in their client companies. JCT has to establish and maintain policies and procedures of internal control and communications mainly to forestall and prevent money laundering in their client companies.

JCT is to conduct and document a business risk assessment with reference to company’s structure , its customers , the jurisdictions in which it operate , its services and products , and how it delivers its services and products in their client companies ongoing basis.

Since JCT business is a service provider to many corporations, it should safeguard its international reputation and its Jersey island business by offering quality advice on corporate governance on international standard to its clients.

In case, if JCT observes any serious deviation or failures to adhere with the needs of Money Laundering provisions in its client companies, it has to notify to commission in writing immediately.

JCT should make appropriate customer due diligence policies and procedures. JCT should bring to the notice of Joint Financial Crimes Unit when it comes across any deviation or suspicion about involvement of money laundering or financing terrorism by their client companies. JCT should establish relevant employee screening policies in their client companies. (www.jerseytrust.com).

Having known the significance of the corporate governance for various investment and Funds companies that is being administered by the JTC, it offers the following Company Secretarial services to its clients.

• Duly convening the board of director’s meeting
• Convening the meeting of committees
• Drafting and circulating the board or committee meeting agenda, board meeting notices and minutes of the board and committee meetings.
• For shareholder’s meeting, preparing and mailing the notices, proxies and proxy statements.
• To make sure that company’s jurisdictional filings are filed well before its deadline.
• Adherences with rules and codes of practices of concerned stock exchanges.. (www.jerseytrust.com).

For success of any mutual fund company or any investment company, the composition of its board of directors is a vital process and is essential to its success. The success of any fund depends upon the quality of the Board that steers the fund’s management. JCT nominates non-executive directors to the boards of such funds ( both quoted and unquoted funds) and is extending independent advise , knowledge , a breadth of experience and a deep understanding of corporate governance. JCT is also offering non-executive directors to offer their expertise to the following committees:

• Remuneration committee
• Audit committee
• Management engagement committee
• Remuneration committee

For instance, in May 2005, Renewable Energy Generation was included in AIM. The above company was established with prime aim of making investors to participate in the development of global renewable energy market through investing only in wind energy products. JCT personnel are acting as its Audit Committee Chairman, member of its Nomination and Remuneration committee. Further, JTC also offers Company secretarial support in addition to filing announcements to the stock market. (www.jerseytrust.com).

In view of the above, l suggest that board of directors of Gildor Ltd should follow the effective Corporate Governance structure of JCT as enumerated above and such abhorrence will help them to establish international guidance on corporate governance in Gildor Ltd. Hence, Gildor Ltd should initiate various measures that are being followed by JCT which will enhance Gildor Ltd ability to meet its responsibilities in this area.”

References

JerseyTrust. (2006). Web.

Mallin Chiris A.(2006). International Corporate Governance: A Case Study Approach. New York: Edward Elgar Publishing.

Zarsky Lyuba. (2005). International Investment for Sustainable Development. New York: Earth Scan.

Zekany, Kay E., Lucas W. Braun, and Zachary T. Warder. Behind Closed Doors at WorldCom: 2001. Issues in Accounting Education 19.1 (2004): 101+.