Corporate Governance

Content

1. Executive Summary

2. Definition of Corporate Governance
The OECD Principles of Corporate Governance

3. Importance of Corporate Governance
Why do corporations and nations need corporate governance?

4. The Driving Forces of Corporate Governance
The Growing interest for corporate governance

5. National Differences and recent developments
Corporate governance system in Germany and in the UK:
Anglo-American Influence

6. Corporate governance in developing countries
Where the need comes from
What to do?
General challenges

7. Conclusion

8. Appendix
Case Study: Thailand as an example for successfully adapting corporate governance systems

9. Bibliography

1. Executive Summary

This essay describes the problematic of corporate governance systems, which, if they are weak, distort the efficient allocation of resources, undermine opportunities on a level playing field and, ultimately, hinder investment and economic development. Recent high profile scandals, financial crises and institutional failures in Russia, Asia and the United States have brought corporate governance issues to the fore in modern western, as well as developing countries, transitional economies, and emerging markets.

Firstly, I will give a definition of corporate governance and introduce the OECD Principles, which are the foundation of all corporate governance systems. Secondly, I discuss the driving forces and the importance of corporate governance. I will then concentrate on national differences and recent developments, where I am particularly looking at the UK and Germany. A special chapter about the Anglo-American influence follows and leads to the last chapter, which covers the current situation and possible future effects of applied corporate governance systems in developing and transitional countries.

The purpose of this paper is not to go deep into legal details of corporate governance, but reveal its importance for society (stakeholder), economy (corporations and capital markets) and future development of emerging market economies.

2. Definition of Corporate Governance

During my research I found many definitions of corporate governance. The IMF defines it very succinct: “Corporate governance refers to the framework of rules and regulations that enable the stakeholders to exercise appropriate oversight of a company to maximize its value and to obtain a return on their holdings.”

The corporate governance movement started roughly 15 years ago and was spearheaded by the World Trade Organization (WTO). The main aim was to help companies grow across borders by persuading investors and creditors that they can confidently invest in their country. However, this development got significantly more momentum when the OECD introduced international corporate governance principles nearly 4 years ago now.

The OECD Principles of Corporate Governance ¹

These principles, based on the Milstein Report², where endorsed in may 1999 by 29 OECD member nations. They represent the first inter-governmental accord on the common elements of effective corporate governance. The four core principles are:

- Fairness
- Transparency
- Accountability
- Responsibility

Fairness means the protection of shareholders’ rights (Principle I) and the equitable treatment of them (Principle II). Thereby participatory rights on key corporate decisions are ensured and laws that protect the rights of minority and foreign shareholders are included in the legal framework.

Transparency ensures that investors and shareholders get information about the performance of the company. As financial information may be unreliable, internationally prescribed and accepted accounting standards are necessary to promote uniform disclosure and enable comparability.

Accountability implies a legal duty on the part of directors to the company and its shareholders. As elected representatives, directors are held to be in a fiduciary relationship to shareholders and the company. Their duties of loyalty and care require that they avoid self-interest and act diligently and on a fully informed basis.

Responsibility forces corporations to act responsibly and ethically outside of the law and regulations, with special consideration of the interests of stakeholders (particularly employees).

The core elements of corporate governance can be shown graphically as the four corners of a rhombus:

Abbildung in dieser Leseprobe nicht enthalten

3. Importance of Corporate Governance

No matter what view of the corporate objective is taken, effective governance ensures that boards and managers are accountable for pursuing it. The role of corporate governance is of broad importance to society for a number of reasons:

- Promotion of the efficient use of resources both within the company and the larger economy. Debt and equity capital should flow to those corporations capable of investing it in the most efficient manner and with the highest rate of return.
- Assisting companies (and economies) in attracting lower-cost investment capital by improving both domestic and international investor confidence that assets will be used as agreed.
- Making sure that the company is in compliance with the laws and regulations.
- Providing managers with oversight of their use of corporate assets. Thus making it more likely to respond rapidly to changes in business environment, crisis and periods of decline.
- Reducing corruption in business dealings.

Why do corporations and nations need corporate governance?

When firm ownership is separated from control, the manager’s self interest may lead to the misuse of corporate assets. Corporate financiers (pensions funds, mutual funds, banks or even governments and individuals) need assurances that their investments will be protected from misappropriation and used as intended for the agreed corporate objective. Corporate governance concerns thus the relationships between corporate managers, directors and the providers of equity capital. It also encompasses the relationship of the corporation to stakeholders and society. More broadly defined, corporate governance includes the combination of laws, regulations, listing rules and voluntary private sector practices that enable the corporation to:

- Attract capital,
- Perform efficiently,
- Achieve the corporate objective (raison d ’ê tre),
- Meet both legal obligations and general societal expectations.

Corporate governance is to a large extent a set of mechanisms through which outside investors protect themselves against fraudulent asset diversion by the managers or insiders. In effect investors will avoid investing in countries, where they have to fear losses due to non-existing protection through laws and regulations, i.e. effective corporate governance institutions.

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¹ The principles are available in full text at www.oecd.org/

² Business Sector Advisory Group, Report to the OECD on Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets dated 20th April 1998.