Corporate Governance and Capital Adequacy

1. Corporate Governance and Capital Adequacy Outline Definitions Recent Developments Stakeholders Elements of Corporate Governance Models of Corporate Governance Role and Responsibilities of Directors Distinguishing Factors between Directors and Managers

2. Definitions - Corporate Governance “Corporate Governance is the system by which companies are directed and controlled. Boards of directors are responsible are for the governance of their companies. The shareholders’ role in governance is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The Board’s actions are subject to laws, regulations and the shareholders in general meeting.” The Financial Aspects of Corporate Governance – a report by a committee chaired by Sir Adrian Cadbury (UK-1992)

3. Definitions Cont’d… “Corporate governance is the relationship between corporate managers, directors and providers of equity , and institutions who save and invest their capital to earn a return. It ensures that the Board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations.” International Chamber of Commerce

4. Definitions Cont’d… “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. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.” Preamble to the OECD Principles of Corporate Governance, 2004

5. Definitions Cont’d… “In its most comprehensive sense, ‘corporate governance’ includes every force that bears on the decision-making of the firm. That would encompass not only the control rights of stockholders, but also the contractual covenants and insolvency powers of debt holders, the commitments entered into with employees and customers and suppliers, the regulations issued by governmental agencies, and the statutes enacted by parliamentary bodies. In addition, the firm’s decisions are powerfully affected by competitive conditions in the various markets in which it operates. One could go still further, to bring in the social and cultural norms of the society. All are relevant, but the analysis would become so diffuse that it risks becoming unhelpful as well as unbounded.” Professor Kenneth Scott of Stanford Law School (1999)

6. Recent Developments • Internal Control-Integrated Framework; The Committee of Sponsoring Organizations of the Treadway Commission (COSO) – 1992 • Enterprise Risk Management - Integrated Framework; The Committee of Sponsoring Organizations of the Treadway Commission (COSO) – 2004 • The OECD Principles of Corporate Governance, The Organization for Economic Cooperation and Development (OECD) – 2004 • The Corporate Governance Lessons from the Financial Crisis – OECD – Feb. 2009 • The Turner Review: A regulatory response to the global banking crisis – FSA – March 2009 • The Walker Review – Sir David Walker (June 2009)

7. Stakeholders • Customers / Depositors / Borrowers • Creditors / Suppliers • Employees • Shareholders • Stock Exchanges • Community • Regulators and Government

8. Elements of Corporate Governance • Role, Powers, and skills of the Board • Board appointments and Independence • Strategy setting • Monitoring the Board performance • Role and Responsibilities of Board Committees • Financial and Operational reporting • Management environment (objectives, framework, processes, responsibility and accountability) • Code of Conduct • Legislation

9. Models of Corporate Governance The Outsider Model – Anglo-Saxon (UK, USA) - also characterized as market-based system • Large and dispersed body of investors • ‘Disclosure-based’ system • Equities represent a high share of financial assets • Liquid stock markets and strict trading rules • Fragmentation of ownership • Potential agency problems

10. Models of Corporate Governance The Insider Model – (Continental Europe and Asia) • Ownership and control held by identifiable and cohesive group • Group of insiders include family interests, allied businesses/industrial concerns, banks, and holding Cos • Less institutionalization of wealth (little role of pension funds, mutual funds, and insurance companies) • Selective exchange of information among insiders • To acquire control – corporate structure, shareholders agreements, cross-shareholdings, discriminatory voting rights, reduce participation of minority shareholders

11. Models of Corporate Governance The Family / State Model – ‘founding’ families of entrepreneurs and pervasive role of state (Korean Chaebols hold less than 15%, Sweden was traditionally family-dominated now ‘market-based’ and ‘insider system’) • Families and allies exercise control over an extensive network of listed and non-listed companies • Complex web of cross shareholdings • Separation between shareholders and corporation • Large state sector • Family-based conglomerates acquire political weight by premium for sheer size, employment capacity, and political voice • Outside financing is overwhelmingly bank-based (Italy, Greece, Turkey) • Deficient market exit arrangements, high entry barriers, hidden subsidies, obstacles to FDI • Stability of ownership, high degrees of reinvestment, long-term commitment, and firm-specific investment

12. Fiduciary Duties of Directors Duty of Care The duty of care refers to the obligation of directors to exercise care, caution and attention in their decision making process and in overseeing the operations of the firm. This requires directors to attend and participate in Board and committee meetings and further to satisfy themselves with the adequacy of management information and compliance systems of the firm. Duty of loyalty The duty of loyalty requires Board members to act in the best interest of the firm and all its shareholders and not to the personal advantage of the director or the controlling shareholders of the firm.

13. Role and Responsibilities of Directors • Board members are next to the shareholders on one side, and the managers of the entity on the other • Trustees for all shareholders • Loyalty and commitment to the company • Provide leadership, vision, and strategic direction • Objective, transparent, and independent judgment of the management • Accountable to all shareholders including minority

14. Responsibilities of Directors Direction involves: • Formulate and review of company policies, strategies, plans, and policies • Set objectives and monitor performance • Guide on mergers and acquisitions, divestures, financial and legal compliance Control Involves: • Prescribe code of conduct • Supervise disclosure and communication process • Ensure good control environment Accountability involves: • Create, protect, and enhance company wealth and resources • Report timely and transparently • Show corporate social responsibility without comprising wealth maximization objective

15. Distinguishing Factors between Directors and Managers

16. Distinguishing Factors between Directors and Managers

18. Further Questions and Answers Wrap up