Methods of resolution designed to improve corporate governance

List of Contents

List of Figures

List of abbreviations

1 Introduction
1.1 Executive Summary
1.2 Scope of Work

2 Problem and Research
2.1 Problem Definition
2.2 Relevance and Motivation
2.3 Methodology

3 Basics and Theories on Corporate Governance
3.1 Definition
3.2 Relevant Theory
3.2.1 Principal Agent Theory
3.2.2 Transaction Cost Theory
3.2.3 Property Rights Theory
3.3 Selected elements

4 Managing Corporate Governance at Heineken
4.1 Definition of the case
4.2 Application
4.3 Interpretation and findings of research methods
4.4 Case solution

5 Conclusion, critical comments and outlook

Bibliography
Literature
Internet
Other

Appendix
ITM Checklist

List of Figures

Figure 1 - Definition approach of corporate governance

Figure 2 - Heineken's corporate governance approach

Figure 3 - Heineken’s view of corporate governance

Figure 4 - Consequences of advanced corporate governance

Figure 5 - Ownership structure of Heineken

List of abbreviations

illustration not visible in this excerpt

1 Introduction

1.1 Executive Summary

Recent high profile scandals, financial crisis and institutional failures like Enron, Tyco or WorldCom have brought corporate governance issues to the fore in the global economy.

But what does the term Corporate Governance exactly mean? Corporate Governance comprises general rules and principals of organizations, behaviour and transparency by which a company is managed and controlled. On the one hand, the relationship between the management and the company environment – especially to the shareholders (relations to the outside world) and on the other hand the management and control of the company (relations to the inside world) are being considered.

The main question that arises was already posed in 1932 “But have we any justification for assuming that those in control of a modern corporation will also choose to operate it in the interests of the owners?”^[1]

Therefore, investors and financial stakeholders need assurances that their investment will be protected from misappropriation and used as intended for the agreed objective.

Within this context, the management therefore needs to focus on the optimisation of operational processes by improving monitoring and controls. An internal control contributes considerably to timely and reliable financial reporting or statements. Thus, sustainable corporate value is achieved through good corporate governance. The implementation, documentation and persistent quality covering of reliable internal controls are therefore mandatory.

1.2 Scope of Work

The assignment “Corporate governance” starts with the introduction which includes the executive summary and the scope of work that is realized in here.

The second chapter deals with a detailed definition of the problem that causes the relevance of this assignment, the determination of the objectives as well as the methodology that describes the assignment’s structured procedure.

Chapter three is focused on the basics and relevant theory of corporate governance. At this juncture in particular the principal agent, the transaction cost and the property rights theory according to corporate governance are being analyzed.

Chapter four is about modern methods and concepts for managing corporate governance issues. A practical case about the Dutch company Heineken that has realized a management concept for corporate governance successfully is examined in chapter four.

Finally, the results of this assignment are summarized; especially whether the set objectives are reached as well as critical comments about the assignment are given in the last chapter. Furthermore, an outlook about possible future effects of applied corporate governance systems is provided.

The purpose of this assignment is to provide further research insight on a topic, which still has not yet reached saturation in terms of analysis and understanding even though there is a voluminous literature on corporate governance issues.

2 Problem and Research

2.1 Problem Definition

Corporate governance is surely not a new phenomenon^[2]and nowadays many companies are aware of its strategic importance. But the most crucial problem these companies face is the problematic nature of the process of integration and management of corporate governance requirements.

The completion of any legal obligations is vital whereas the generation of corporate add value is a voluntary exercise.

The difficulty is obvious. How and to what extent measures that are initiated and implemented with regard to corporate governance could go along with the currently existing control and management philosophy and the resultant processes and systems? Which adjustments concerning the established control and management system have to be made? And what contribution can thus be made to the corporate management?

Nevertheless, only those companies reach a sustained success that recognizes the importance of implementation of initiatives and activities in the subject area of corporate governance. Therefore, they have to define corporate governance and implement individual methods or at the best they have an integrated concept to manage it.

2.2 Relevance and Motivation

According to the new corporate governance the board of directors and supervisory board of listed corporation are held more liable for misrepresenting and omitting relevant financial information or statements.

This change requires a stronger orientation of business enterprises towards optimized corporate governance reporting in order to create a lasting added value for the enterprise.

In order to meet these requirements, the primary objective of this assignment is to reveal and underline the importance of well implemented and managed corporate governance for corporate success and to explain methods for the management critically.

2.3 Methodology

In general, data researches are clustered into two groups:^[3]

- Secondary Research
- Primary Research

On the one hand, the secondary research is based on already existing literature. The primary research or the so-called field research raises data and information on the market originally - starting point for the data collection is the origin respectively source of facts and opinions.^[4]

Due to time restrictions this assignment is only based on secondary research which is particularly about the arising problems that causes the relevance of that assignment.

Today, recent high profile scandals, financial crisis and institutional failures are the main developments which cause the growing importance of well implemented and managed corporate governance for corporate value creation.

In addition, the objectives of this assignment are defined: Primary, these are the explanations about the significance of corporate governance, the critical analysis about the necessity as well as methods to manage and control corporate governance. The next approach is to include the general theoretical analysis of different methods to manage and control corporate governance issues. In addition, an analysis of a method which the Dutch company Heineken introduced successfully is described.

3 Basics and Theories on Corporate Governance

3.1 Definition

In general, corporate governance is qualified as a control and management system of companies. Material to this definition is a recent article out of the Cadbury Report in which it was stated that “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.”^[5]

From a literature research however arises no standard definition of corporate governance. It has come to mean many things. Even according to the OECD principals the term is not accurately defined. “Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”^[6]

However, it is eventually not more than the problem of power and control in complex organizations.^[7]Böckli^[8]has summarized the two key elements of corporate governance to the point.

illustration not visible in this excerpt

Figure 1 - Definition approach of corporate governance^[9]

According to Böckli the main point is the balance within the inner triangle between the management function, the control function of the board of directors and the examination function of the auditors but also and particularly the appropriate composition and structure of the board of directors as committee.

Furthermore, corporate governance deals with the balance of forces within the exterior triangle between companies, the capital market and further target groups which qualify for information.^[10]

3.2 Relevant Theory

The neo-institutional finance theory deals with the explanation of institutions and financial relations, i.e. it concentrates on the question, to what extent and under which institutional conditions an approximation to the neo-classical finance theory of the perfect and complete capital market can be found in reality.

The purpose of the neo-institutional finance theory is the determination of the capital market equilibrium under information asymmetries.

Due to the advanced development of the information and communication technology sub-markets certainly exist which approach ideal market conditions, nevertheless it remains undisputed that the capital market is to be called imperfect.

To add is the existence of financial intermediates as well as different financing and legal forms, which are not explicable on the basis of the assumptions of the capital theory.

However in practice the financial intermediates are of crucial importance. An explanation for this can be found in different levels of information with regard to investors and capital seekers and the often unequally distributed possibilities of contracting parties to make decisions concerning the capital appropriation.

In fact the neo-institutional theory developed three fundamental directions, which also have affected the development of corporate governance (principal agent theory, transaction cost economies and the property rights theory) which will be explained in the following three sections.^[11]

[...]

^[1]Berle and Means (1932), p.121.

^[2]Cf. Menden and Rötzel (2006), p.13.

^[3]Cf. Meffert (2000), p. 145.

^[4]Ibidem.

^[5]The Committee of the Financial Aspects of Corporate Governance (1992), article 2.5.

^[6]OECD (2004), p. 11.

^[7]Böckli (2002), pp. 709.

^[8]Böckli (1991), pp. 149.

^[9]Böckli (1991), pp. 149.

^[10]Ibidem.

^[11]Cf. Achleitner (2002), p. 46; Perridon/Steiner (2003), pp.19, Werner (2000), pp. 42.