Corporate Governance 1 - Introduction PDF

Audio file ========== [CCP VidLec1.mp4Transcript00:00:01Welcome to the corporate governance series of lectures under the topic, corporate and commercial practice. This is the very first of four lectures.00:00:13Today, we\'ll cover these topics. What is corporate governance?00:00:17Principles of goo...

Audio file ========== [CCP VidLec1.mp4Transcript00:00:01Welcome to the corporate governance series of lectures under the topic, corporate and commercial practice. This is the very first of four lectures.00:00:13Today, we\'ll cover these topics. What is corporate governance?00:00:17Principles of good corporate governance. Who is responsible for corporate governance?00:00:24Why corporate governance and we\'ll talk a little bit about the disclosure based regime.00:00:31To begin, let\'s ask ourselves the question what is corporate governance?00:00:37The Cadbury Committee report on Corporate Governance, which was issued.00:00:41In the United Kingdom in 1992 defined corporate governance as a system by which companies are directed and controlled.00:00:49Boards of directors are responsible for the governance of their companies.00:00:54The Cadbury report in the UK was a landmark report that eventually evolved into the very first corporate governance code in the UK, known then as the combined code in Singapore. This definition, which you see before you, is taken from the 2018 code of Corporate Governance.00:01:15Now what you need to know in this definition is that corporate governance is a framework involving people, processes and structures that drive behavior.00:01:25Aligned interests and impose checks and balances.00:01:30The focus is on the long term and on the interest of all stakeholders, although there is recognition of the importance of shareholder value.00:01:41Moving on to the general principles of good copper governance, well, these are some basic principles of good governance for all companies, regardless of company size.00:01:511st, we talk about transparency, which involves following the law and making sure that decisions are made openly and with Full disclosure. Then we have accountability, which involves being accountable to shareholders and stakeholders.00:02:05Integrity, which recognizes that reputation or intangible assets are increasingly valued in today\'s companies. Fairness means being fair and balanced in the treatment of all shareholders.00:02:17Sustainability, which involves taking the long term view and considering the business\'s impact on the environment, workers and society.00:02:27Diversity involves making sure that there are different viewpoints, ideas and groups represented.00:02:34And group think is avoided.00:02:37Capability, which concerns competency, getting the right people to work in the right positions in the company.00:02:45And lastly, leadership, which involves setting the tone at the top for everyone in the company to follow.00:02:54Moving on to the corporate governance ecosystem, there are a large number of people and parties involved and interested in corporate governance. These include the regulators at the top who want to see a thriving business environment and who set the rules.00:03:10Also within the companies themselves, you have the board management supported by the company secretary and the auditors. Then you have the shareholders and stakeholders who play a role by making the boards accountable, making sure that the board performs.00:03:24You have capacity builders, which are organizations that do seek, foster, better functioning corporate governance system.00:03:35Another body that has been set up in the ecosystem is the corporate Governance Advisory Committee. This is an industry LED body involved in advising and making recommendations to the regulators.00:03:47While leaving enforcement still with the SGX.00:03:51The key function of the copper Governance Advisory Committee is to monitor the quality of copper governance amongst listed companies in Singapore.00:03:59And identify areas for improvement.00:04:02This committee will make recommendations to the regulators on the practice guidance issued by the MAS.00:04:08Monitor international governance trends and recommend updates to the code.00:04:14It is supposed to act as a resource to regulators and advise on corporate governance issues that are referred to it.00:04:24Ultimately, however, it is the board of directors that plays the primary role in the governance of companies.00:04:33This is recognized in Section 157A of the Companies Act very explicitly.00:04:44From the perspective of the board.00:04:46The scope of governance responsibilities covers too many areas, performance and conformance.00:04:53Performance is to ensure that the company\'s resources are used efficiently and productively and in the best interest of its investors and other stakeholders.00:05:02A primary component of the board\'s role is to ensure that the good performance of the company is sustained.00:05:08This role can sometimes be overshadowed by the constant concern to ensure that the company conforms to the myriad rules and regulations applicable to it and the pressing demand on regulators and other stakeholders.00:05:23Nevertheless, the board should not forget that companies basically exist to create value.00:05:29The Bond\'s role must include the all important objective of growing the company for the benefit of its shareholders and stakeholders.00:05:37In fact, the very first principle of the Court states that the board is collectively responsible and works with management for the long term success of the company.00:05:47Meaning that the board needs to ensure the company\'s performance is sustained.00:05:52Good governance is therefore an enabler not only of long term value protection, but also of value creation and enhancement. Indeed, many academic studies conclude that there is a strong correlation between good corporate governance and good company performance.00:06:12Moving on to conformance to safeguard shareholders and other stakeholders interests, effective corporate governance requires a sound legal and regulatory framework that market participants can rely on.00:06:26In Singapore, the challenge for our regulators is to ensure the right mix and balance between hard and soft prescriptive and post scriptive elements so that all companies will engage in ethical, responsible and transparent corporate governance practices without being unduly burdened by them.00:06:50Return to the principal agent problem. This problem has often been used to explain modern corporate governance. The problem began towards the end of the 19th century and the beginning of the 20th century with the creation of joint stock companies and with the control of companies shifting into the hands of managers effectively separating.00:07:11Ownership and control in agency theory, the agent represents the principle in a particular business transaction. The agent is expected to represent the principal\'s best interest without regard for his own self.00:07:25Yes.00:07:26Problems naturally occur when the interests of a principal and the agent are in conflict.00:07:33These conflicts can present usually ethical individuals with rather challenging moral dilemmas.00:07:41Therefore, incentives and disincentives are deployed to redirect and realign behaviour and interests of both the principal and the agent.00:07:52In the context of a company, the board is the agent of shareholders, while management is the agent of the board.00:08:00Corporate governance, then, is about the systems, rules and processes that ensure the interests of the various parties are aligned in an open and transparent way.00:08:13Actually, why do we bother with corporate governance to begin with?00:08:18In today\'s context, good corporate governance means that companies have to have sustainable practices that do not destroy their environment, contravene health and safety requirements.00:08:29And are concerned with other stakeholders beyond the shareholders.00:08:38Good corporate governance also should lead to greater lender, investor and stakeholder confidence that extends to employees and customers. It should result in increased valuations, increased liquidity and increased share price and volume. This is important because ultimately the market needs to be convinced.00:08:58There has to be a tangible benefit for good corporate governance beyond a mere theoretical set of concepts.00:09:05There are many studies that have found that firms with stronger shareholder rights actually lead to higher firm value, higher profits and higher sales.00:09:15Studies have shown that investors would pay a premium for emerging market companies with strong boards, and that there\'s a clear link between board effectiveness and market value, especially in emerging markets.00:09:28There should be cheaper access to capital. Opaque systems create information barriers between lenders and borrowers, creating risk and complexity, and discounting returns. Good corporate good. Corporate governance means you therefore have better access to fund.00:09:44Ones it encourages more entrepreneurial activity because transparency enhances the predictability of business conditions and promotes enterprise. In fact, the World Bank ease of doing business database says that regulatory and legal transparency are important indicators of business, investment and growth.00:10:06And foreign direct investment as well. Finally, well governed companies should not only have lower risk premiums for their debt and equity, but also lower director and officer liability insurance premiums.00:10:22Let\'s go on to the disclosure based regime. Previously, we had a merit based regime where the regulator acted as the gatekeeper.00:10:32After the Asian financial crisis in 1997, we decided to move to a market driven disclosure based regime that was between 98 and 2000.00:10:44After that, changes were made to the Companies Act, the Securities and Futures Act.00:10:50The extracts listing manual.00:10:53And the first board of Corporate Governance was born.00:10:59We turn to TSF A the Securities and Futures Act, which sets out the regulatory framework for the equity and debt capital markets in Singapore.00:11:08We start, we start off with Section 203 of the SFA, which is the key piece of legislation that gives the disclosure rules of the SGX, the force of law.00:11:20If you look at the SJX listing rules by themselves, they are principally a contract between the SGX as a listed company in itself and the companies which it lists on its exchange.00:11:32But what actually elevates the disclosure rules in the listing manual to give them force of law is section 2:03.00:11:40Which says essentially if something is supposed to be disclosed, it is not disclosed under the listing rules whether intentionally, recklessly, or negligently. Then it is a possible criminal offence.00:11:56This applies to all listed companies on the subjects, whether incorporated in Singapore elsewhere. In addition, Section 199 of the SFA deals with false or misleading statements made in the announcement.00:12:12And again, it also applies if the person making announcement doesn\'t care whether the statement is true or false or or reasonably, to have known that the statement was false or misleading in a material particular and on the screen.00:12:25You will see that section.00:12:283.00:12:29Three one of the SFA deals with issues like personal liability of directors for breaches of disclosure rules. This section says that any offence committed by a company that\'s committed with the consent.00:12:43Or the connivance of or is attributable to any neglect on the part of any officer. Then not only will the company be guilty of the offence, but that officer will be punished accordingly. We will go a little bit more into the disclosure requirements of the listing manual in Part 2 of these video lectures.](https://1drv.ms/i/s!AGaPTZsZg5MLibob) Corporate Governance - Introduction - Disclosure-based Regime - **[s203 SFA]** SGX\'s authority - Failure to disclose in accordnace with the listing rules whether intentionally, recklessly, or negligently. Then it is a possible **[criminal offence]**. - **[s199 SFA]** false or misleading statements made in annoucements **[s331 SFA]** **[Personal accountability]** of Directors for duty to disclose