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corporate governance

corporate governance. Class Announcements. Assignment #7 due March 6 th (today) Research Paper Part #3 due March 10th Monday’s class (March 10 th ) is at 5:00-7:00pm in SCHW 110 (Movie)

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corporate governance

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  1. corporate governance

  2. Class Announcements • Assignment #7 due March 6th (today) • Research Paper Part #3 due March 10th • Monday’s class (March 10th) is at 5:00-7:00pm in SCHW 110 (Movie) • Business Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia

  3. Class Objectives • Contracts as a means to manage the expectations and relationship between principals and agents • Corporate Governance addresses agency issue

  4. Agency Theory • Positive accounting theory envisions firms as a nexus of contracts. • (e.g. compensation agreements, debenture contracts) • Two parties with conflicting interests to a contract 1) agent 2) principal • Party’s actions are motivated by the contract itself • Corporate governance addresses the “contract” between agent and principal via the Board of Directors

  5. Corporations: Corporate Governance • Private and Public Corporations • Separation of Ownership (Shareholders) and Management • Corporate Governance is the relationship between: • Shareholders (owners) • Board of Directors • Corporate Officers

  6. Corporate Governance: Conflict • Separation of ownership and management • Manager and shareholder interests alignment • Information asymmetry • Incentives to conceal bad news (agency theory - adverse selection) • Incentives to shirk (agency theory – moral hazard) • Agency Theory – attempt to modify behavior

  7. Corporate Governance: Defined • Corporate Governance is the relationship between shareholder, the board of directors and other top managers in the corporation • Corporate governance processes attempt to ensure proper functioning of management • Corporate governance is implemented and evaluated through various processes within the organization • Board of Directors – internal and external directors • Audit Committee – meet with auditor and review audited financial statements • Compensation Committee – set corporate officers compensation • Nominating Committee – nomination of qualified members • Securities Exchanges (e.g. OSC, SEC) • Reporting in Annual Report

  8. Corporate Governance: Importance • Why is corporate governance important? • Owners can not easily observe the corporate officers who are managing the owners’ investment • Companies lack oversight by investors • Board of Directors have failed to provide proper checks and balances • Markets have stirred distrust instead of building confidence (e.g. Enron) • Rules for Board of Directors make accountability explicit

  9. Corporate Governance: Need • 94% of investors say corporate governance is important • 83.5% believed new regulations should be put in place to strengthen investor confidence in global markets • Regulatory requirement • US – SOX (2002) • Canada – National Policy 58-201(2005) • Globalization of world capital markets • Internally imposed obligation • Ownership responsibility • Competitive advantage

  10. Corporate Governance: Issues • 1. Better Boards • Independence, skill, accountability • 2. Executive Compensation • Link pay to performance, disclose metrics and links, executive overcompensation (US & Canada) • 3. Financial reporting • Improved disclosure in financial statements • 4. CEO Performance • 5. Cost compliance/time

  11. Corporate Governance: Proposed Solutions • Better Boards • Director independence: How many? Who is independent? • Independent and financially literate audit committee; to whom external auditors would report directly • Independent compensation committee • Only one management representative on board of directors • Continuing education • Truly independent directors

  12. Corporate Governance: Proposed Solutions • Financial Reporting • Management attest to financial statements and to the presence of reasonable internal controls • Codes of conduct/ethics • Transparency

  13. Corporate Governance: Proposed Solutions • Audit Committees • Charter • Qualifications (financial literacy) • Auditors • Participate in public oversight program established by CPAB • Reduce concerns over loss of client • Reduce commodification of audit by reducing cost pressure • Increase oversight with firm review

  14. Corporate Governance: National Instrument 58-101 National Instrument 58-101 - Disclosure of Corporate Governance Practices: • Board of Directors • Board Mandate • Position Descriptions • Orientation and Continuing Education • Ethical Business Conduct • Nomination of Directors • Compensation • Other Board Committees • Assessments

  15. Corporate Governance: Multilateral Instrument 58-110 Multilateral Instrument 58-110 - Disclosure of Corporate Governance Practices: • Audit Committee Charter • Composition of the Audit Committee • Relevant Education and Experience • Reliance on Certain Exemptions • Reliance on Exemption in 3.3(2) or 3.6 • Reliance on Section 3.8 • Audit Committee Oversight • Pre-approval Policies and Procedures • External Auditor Service Fees (by Category)

  16. Corporate Governance: Shoppers Drug Mart • “The Corporation and its Board of Directors recognize the importance of corporate governance to the effective management of the Corporation and to its shareholders and other stakeholders. The Corporation’s approach to significant corporate governance issues has been, and continues to be, designed with a view to ensuring that the business of the Corporation is effectively managed to enhance long-term shareholder value. The Corporation has implemented certain structures and procedures to ensure that effective corporate governance practices are followed and that the Board of Directors functions independently of management. Prior to March 2005, the directors reviewed and considered the Corporation’s corporate governance framework with a view to complying with the guidelines of the TSX and, more recently, with Multilateral Instrument 52-110 (‘‘MI 52-110’’) pertaining to audit committees. On June 30, 2005, National Instrument 58-101, Disclosure of Corporate Governance Practices (‘‘NI 58-101’’) was proclaimed into force, and National Policy 58-201, Corporate Governance Guidelines (‘‘NP 58-201’’) was adopted with the objective of providing greater transparency to Canadian capital markets regarding issuers’ corporate governance practices. Schedule ‘‘B’’ to this Circular sets out the Corporation’s overview of its corporate governance practices, as assessed in the context of NI 58-101 and NP 58-201. This overview has been prepared by the Nominating and Governance Committee of the Board and has been approved by the Board of Directors.” (Shoppers Drug Mart)

  17. Class Objectives - Revisited • Contracts as a means to manage the expectations and relationship between principals and agents • Corporate Governance addresses agency issue

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