The Future of Corporate Governance

1. The Future of CorporateGovernance CCL 2012 Henrik Norinder

2. in which we consider • the frontiers of corporate governance • beyond the frontiers of corporate governance • new corporate governance policies and practices • society’s changing expectations

3. The paradox of the unitary board Corporate governance involves two countervailing responsibilities: • performance: strategy formulation and policy making • conformance: executive supervision and accountability These two responsibilities potentially conflict • “marking their own examination” The two tier board resolves the dilemma with two boards: • the executive board responsible for performance • the supervisory board responsible for conformance

4. The paradox of the unitary board The dilemma met in unitary boards by having independent directors: • with independence strictly defined to exclude any interests • able to take an objective, independent view • providing a counterweight to the executive directors • independent directors also form the audit committee

5. A paradox • The greater a director's independence the less he is likely to know about the company • The more an INED knows about the company, the greater his potential contribution, the less his perceived independence

6. 10 core governance principles • The board’s fundamental objective is to build long-term sustainable growth in shareholder value • corporate management - critical role in corporate governance • good corporate governance should be integrated with the company’s business strategy • Shareholders have a responsibility to vote their shares • over-reliance on legislation and rules may not be in the best interests of shareholders, companies or society

7. 6. a critical component of good governance is transparency 7. independence is an important attribute for board members but non-independent outside directors can add expertise, diversity and knowledge 8. proxy advisory firms should be transparent and accountable 9. the SEC should work with exchanges to ease the burden of proxy voting 10. SEC and/or the NYSE should periodically assess the impact of major governance reforms

8. Can outside independent directors be genuinely independent? In unitary board countries: - CG codes call for independent non-executive directors - The codes define 'independence' in detail But can any director be genuinely independent when INEDs: - nomination came from existing members of that board - had the approval of CEO and chairman - feel commitment and loyalty to them - have to form an effective team with the CEO and the other directors - work closely with executive directors on strategic and other issues - determine the issues they are supposed to be monitoring - become enmeshed in the board culture

9. Can outside directors be genuinely independent? In two-tier board countries: • supervisory board consists entirely of outside directors • but members of supervisory boards represent the interests of stakeholder groups So how can a supervisory board member apply independent judgement if: • their allegiance is to the groups they represent • their interests may be in conflict • the relationships within the board can be adversarial

10. Should CG be based on principles or rules? In the United States: - listed companies must obey SOX Act rules and SEC and stock exchange regulations - US accounting standards also rule-based In the United Kingdom, the Commonwealth and 'OECD-code' countries: - listed companies follow country's corporate governance principles (comply with code or explain why not) and international accounting standards The rules versus principles debate has a long way to go

11. Should chief executive officer ever be board chairman? In the United States - - chairman and CEO of listed companies frequently a single individual - independent directors provide constraints In the United Kingdom, the Commonwealth and 'OECD-code' countries: - codes require roles of chairman and CEO to be separated - avoids domination and risk-taking by a powerful individual Which is preferable: - a leader providing single-minded leadership - shared responsibility with reduced risk The duality question remains unanswered

12. How should directors’ remuneration be determined? • Top management of large listed corporations wield enormous power. • Some claim directors pursue their own agendas and extract huge rewards. • Major investors and investigative media have challenged director rewards. • Concern that some rewards are excessive • particularly when not related to performance. • Some even apparently rewarded for failure.

13. Should a retiring CEO ever become chairman of the board? FOR allowing a retiring CEO to become chairman: - Accumulated experience - CEO known by fellow directors and senior managers - CEO known and trusted by investors, customers, employees etc. - Personal qualities - integrity, leadership, other skills - known - Risks with a new chairman reduced AGAINST allowing a retiring CEO to become chairman: - Chairing the board different from being CEO - Success as CEO does not guarantee success as chairman - Past experience quickly decays in rapidly changing world - Problems establishing good relations with the new CEO The answer remains ambiguous

14. Should shareholders be able to nominate directors? In 19th century, shareholders nominated directors. Now in listed companies shareholders' interests vary. • Directors choose new directors • Shareholders' approve but do not nominate • Recent proposals in US and UK for shareholders to propose candidates • Suggestion not welcomed in many board rooms • Determining who joins the board is a power base

15. Should institutional investors exert power over listed companies? Calls for institutions to vote shares and “exercise power” • Some fund managers prefer to 'vote with their feet’ by selling shares • Institutions first responsibility is to their investors • Voting must be in the interests of beneficial owners • Some regulators now require institutions to say if and how they voted • Institutions’ involvement in governance could increase their risk • They might be accused of receiving insider information • Could they be held accountable if a company fails

16. Can external auditors really be independent? Independent external auditor's role in corporate governance is fundamental But can the auditor be seen to be truly independent of the company when: • the company appoints the auditor • the company pays the auditor • the company is a client of the auditor • the auditor may be economically dependent on the client

17. Auditors serve two masters - the shareholders and the directors Potential conflict of interest satisfying the interests of: - shareholders (an external check on the directors) - the directors (working closely with them) Audit of large companies world-wide dominated by just four firms, which raises a number of concerns

18. Drivers of Change • US influences • - SOX, SEC, NYSE, other organizations • - institutional investors, CalPers etc • international drivers • - OECD, World Bank, IMF, other nations • - global economic crises • recognition of cultural aspects • - differentiation accepted • influence of China, India and Russia

19. recognition of complexity of ownership chains • development of new organisational forms • right of owners to nominate directors • disincentive to go public • governance of private equity, sovereign and hedge funds • societal expectations and government actions • drive for gender diversity on boards • demand for genuine independence of external auditors • new theories of corporate governance • need for a new paradigm of corporate governance • corporate collapse and CG responses • - fraud, company domination, economic problems

20. Boundaries of agency theory recognised • New research possibilities • - inter-personal relations and board behaviour • - board as team, board style and culture • - director interpersonal networks • - CG as an information process • - psychology of boards • - politics of boards - power as measurable force • - board leadership - traits and competencies • New models, frameworks, concepts • - new insights, new thinking, better understanding

21. The implications • New governance demands on organisations • New ways of working for boards • New challenges for directors and boards

22. If the 19th century was • the century of the entrepreneur • and the 20th century was • the century of management • then the 21st century is • the century of corporate governance