Challenges in Implementing Corporate Governance E-Book

John Zinkin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 404

Veröffentlichungsjahr: 2011

Beschreibung

"John Zinkin's new book on Challenges in Implementing Corporate Governance is a welcome addition for board members and senior management on how to improve corporate governance in the post-crisis period. John correctly identifies that most boards on underperforming companies have three elements of failure: a lack of proper understanding of the business and its strategy; a total lack of appreciation of both the strategic and systemic risks created by new product markets; and a total failure by boards to ensure that the incentive structures for top management reflect long-term needs rather than short-term profits, thereby putting the company's future at risk. John has written a useful and practical handbook that is a must read for all board members on how to improve corporate governance." --Datuk Seri Panglima Andrew Sheng, Chief Adviser, China Banking Regulatory Commission and the Boards of the Qatar Financial Centre Regulatory Authority , Sime Darby Berhad and Khazanah Nasional "This timely book will interest those wanting to improve corporate governance and risk management. It should also appeal to anyone curious about what caused banks to fail in a number of markets in recent times, and the values which led to this failure. In considering principles which are essential to good governance, ACCA recognizes that corporate governance evolves and improves over time. We accept that organizations in different sectors and across the world operate in diverse environments in terms of culture, regulation, legislation and enforcement. What is appropriate, in terms of governance, for one type of organization will not be appropriate to all organizations. John Zinkin's book seeks to address this challenge, analyzing the essential cultural and behavioral issues which sit at the heart of the challenges." --Paul Moxey, Head of Risk Management and Corporate Governance, Association of Chartered Certified Accountants "A scholarly combination of practical guidelines and strategic vision." --Lady Sylvia Jay CBE, Vice-Chairman, L'Oreal UK; Independent Director, Alcatel-Lucent, Compagnie de Saint Gobain, Lazard Limited and Carrefour "This is a highly topical and timely publication. Globally, the crisis that has gripped the financial services sector following the failure of well known global banks in recent years has focused attention on corporate governance. To restore confidence in the financial services sector is a long-term goal and effective corporate governance, together with the closely associated topic of risk management, has gripped not only governments and banks, but the public too. In this book, John Zinkin clearly asserts that financial institutions need to exert their responsibilities beyond their shareholders and far more into the wider group of stakeholders, including employees and wider society. In considering issues globally, John provides a book that is not only thought-provoking but pragmatic and useful at a time when stakeholders in our banks need to see real change in transparent, practical ways from those charged with governing our banks." --Ruth Martin, Managing Director, The Chartered Institute of Securities and Investment

Leseprobe

CONTENTS

Foreword

Acknowledgments

Introduction

Chapter 1: Do Western Codes of Corporate Governance Apply in Asia?

Why CG Matters

Portfolio Turnover Affects the Value Placed on CG . . .

. . . as does the Asset-Management Philosophy

Anglo-Saxon CG may not Apply Everywhere

The Need to Localize CG to Meet Asian Conditions

Conclusion

Chapter 2: What is the Business of Business?

Creating and Maintaining Satisfied Customers

Work is Worship

The Rights of the Community and the License to Operate

Are Shareholders the Most Important Stakeholders?

Is Business Ethics an Oxymoron

The Importance of Reconciling Different Agendas

Chapter 3: The Role of the Board

Agreeing the Organization’s Purpose

Agreeing the Organization’s Vision and Values

The Six Principal Responsibilities of the Board

How Should Boards Behave?

How Involved Should Boards Get?

When is it Difficult for Boards to Get Involved?

When is it Easy for Boards to Get Involved?

Hands-off, Hands-on or Hands-in?

Conclusion

Chapter 4: The Role of Board Members

Board Composition

Why Separate the Roles of Chair and CEO?

The Role of the CEO

The Role of the Chair

The Role of the Chair: An Important Caveat

The Role of the Lead Director

The Role of Independent Non-Executive Directors (INEDs)

Chapter 5: Why Boards Fail and How to Avoid Failure

Five Reasons for Board Failure

Avoiding Failure

Getting the Best from Board Committees

Conclusion

Chapter 6: From Good Governance to Good Results

Getting Strategy Right

Making Informed Decisions

Ten Steps from Strategy to Action

The Role of the Board in Succession Planning and Talent Management

Chapter 7: Managing Risk

Managing External Risks

Managing Internal Risks

Matching Risk Profiles to Shareholder Risk Appetites

Conclusion

Chapter 8: What We Measure and Reward

Inadequate Emphasis on Right Behaviors

Externalities and Systemic Risk

Excessive Importance Placed on Financial Information

Profits are an Accounting Fiction—Only Cash is a Fact

Comparing Return on Capital with the Cost of Capital is not Comparing Like with Like

Discounted Cash Flow (DCF) Sacrifices the Future for the Present

Chapter 9: Saving Capitalism from the Capitalists

Neutralizing the Amorality of Financial Services

Rediscovering Moral Purpose in Business

Stop Alienating Key Stakeholders

Conclusion

Appendices

Appendix A: The Hynix Case

Appendix B: The SK Case

Appendix C: Director’s Checklist

Appendix D: Risk Management Accountabilities

Appendix E: Making Risk Management Work

Appendix F: Red Flags

Appendix G: Thymos and “Thymotic Man”

Appendix H: Customer Value Measurements

Appendix I: Honda’s Fundamental Beliefs

Index

Advance Praise for Challenges in Implementing Corporate Governance Whose Business is it Anyway?

A must-read for directors of companies in Asia who want to make sure their companies are following best practice corporate governance standards. The book provides guidance of where directors should start when beginning their directorships and also is a helpful tool for the review process of how effective the Board is (or how the Board can improve).

Angelina Kwan

Director and Chief Operating Officer, Asia Pacific Region Cantor Fitzgerald LP

I think I have learned a lot more about corporate governance and its fundamental issues reading this book. It is a good, comprehensive, and readable guide for directors to understand the issues relating to corporate governance.

Dato Krishnan Tan

CEO

IJM Corporation Berhad

Challenges in Implementing Corporate Governance is the most definitive book on corporate governance to date. John Zinkin challenges the norms on what defines the Board of Directors. He not only redefines their responsibilities but also stresses that board performance makes a difference to long-term business sustainability. The author illustrates the challenges of implementing Western-style corporate governance and why and how there is a need to go local in getting strategy and risk management right, to managing change and talent. The book looks at how defective governance implementation can destroy capital. This is a must-read for future and existing board members who are serious about their “license to operate.”

Tay Kay Luan

Director, International Assignments Association of Chartered Certified Accountants

In this book, John Zinkin challenges us with questions like “Is business ethics an oxymoron?” and provides answers to how a company can be run both responsibly and successfully. It is the right message in these turbulent times after all the financial excesses of the past years. Challenges in Implementing Corporate Governance delivers valuable advice for board members on their roles and responsibilities in order to carry out their duties effectively, as well as how to avoid the most common pitfalls and manage risk successfully. A must-read book for any board representative.

Peter Vogt

CEO

Nestlé Malaysia

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Published in 2010 by John Wiley & Sons (Asia) Pte. Ltd.

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ISBN 978-0-470-82522-8

FOREWORD

Good corporate governance ensures proper accountability, probity and openness in the conduct of a company’s business, resulting in a business environment that is fair and transparent, and where companies can be held accountable for their actions. Only with good governance can companies create wealth and ensure the management of such wealth in a sustainable manner for its shareholders and other stakeholders. Good corporate governance therefore also holds the balance between economic and social growth.

The global financial crisis of 2007–08 demonstrated yet again the devastating impact of poor governance on financial markets and its participants. Regulatory measures to reduce systemic risk, protect investors and uphold fairness and efficiency of markets will come to naught if they are not accompanied by the practice of strong governance as reflected in the way business is conducted.

This book could not have come at a more appropriate time. Lessons need to be shared and learned. The range of corporate governance issues covered is comprehensive. The critical aspects of corporate governance in terms of the role of the board and its members, the delivery of sustainable good results, the management of risk, and performance measurement and reward among others, underscore the challenges that top management of companies must deal with and invest effort and resources into.

John has been active in the promotion of good corporate governance. He has spoken widely on the subject, published articles in the media and run numerous corporate governance seminars and workshops for directors of PLCs. His many years of experience in this regard have enabled him to gain many unique perspectives and insights into the challenges of putting into practice the principles of good corporate governance. This comes through very clearly, making his book compelling, instructive and practical.

I congratulate John on his outstanding effort.

Tan Sri Zarinah Anwar

Chairman

Securities Commission Malaysia

ACKNOWLEDGMENTS

The views expressed in this book are personal and are based on my experiences in running workshops on corporate governance in Malaysia and presenting arguments to regulatory conferences. They do not represent those of the Securities Commission, Malaysia, or of the Securities Industry Development Corporation. If I have failed to interpret the views of others correctly, or have ascribed to what they have written meanings they did not intend, then the fault is entirely mine, and I apologize to them and to my readers in advance.

I am deeply indebted to the following people who have given me great help, insight, and support in writing this book.

I would like first of all to thank Dr. Gary Dirks, Ian Pollard, Joan Sheridan, and Dato Krishnan Tan, who read the entire manuscript with the mindset of the prospective target audience. I have tried to incorporate their comments wherever possible to make sure that the book is easier to read and understand from a director’s perspective. I would also like to thank Shireen Muhyiddin, who took the time to look at the first six chapters through the eyes of a socially responsible investor and pointed me in the direction of Joe Studwell’s excellent and provocative book.1 I am grateful to Attila Emam, whose discussions on risk management proved invaluable in ensuring that I approached this difficult subject appropriately without leaving anything out in Chapter 7. I would also like to thank Professor Didier Cossin, Angelina Kwan, Goh Ching Ying, Irene Dorner, and Julian Wynter for the unique insights they gave me into the nature of the financial crisis as it unfolded.

I owe a debt to Stephen Young of the Caux Round Table for his penetrating and thoughtful writing on business ethics and corporate governance; to Paul Krugman, Robert Shiller, and Joe Stiglitz for their fearless analysis of what happened in the financial crisis; and to John Bogle for showing how sophisticated financial services have subtracted value from the real economy.2

I originally intended to update Corporate Governance, a book I co-authored with Peter Wallace in 2005. When I raised this with Nick Wallwork of John Wiley, he suggested that perhaps the time had come instead for a new book on the subject as a result of the spectacular failures on Wall Street. I am grateful to him for that suggestion. I must also thank John Owen for his editing: he sharpened my writing and forced me to clarify points which I took for granted but the general reader might not have understood. This book is the better for his input.

Last, and most important, I would like to thank my wife Lisa for her loving understanding and full support while I was writing this book in my spare time. I dedicate it to her in loving gratitude.

Endnotes

1 Studwell, J. 2007, Asian Godfathers: Money and Power in Hong Kong and Southeast Asia, London: Profile Books.

2 Bogle, J. 2009, Enough: True Measures of Money, Business, and Life, Hoboken, NJ: John Wiley & Sons.

INTRODUCTION

I have been involved with the promotion of good corporate governance in Malaysia since 1999, when the Malaysian Code of Corporate Governance was written as a reaction to the 1998 Asian Financial Crisis. At the time it made sense for Malaysia to look at the UK’s Combined Code as a basis for developing its own code for two reasons: first, the UK was the leader in the field; and, second, something needed to be done quickly if confidence in the stock market was to be restored.

In the ensuing years, as a result of countless workshops and seminars I have run for directors of Malaysian public-listed companies, it became clear to me that adopting a Western code of governance built on different assumptions about what matters in life and how capital markets are structured created as many problems as it sought to solve—most particularly for independent non-executive directors.

Given that other stock markets in Asia share many of the same characteristics as Malaysia’s, it should not be a surprise that they too face many of the same problems in implementing good corporate governance (CG).

The problems of implementing good CG come in two distinct parts. The first is caused by the adoption of codes from jurisdictions that are culturally different and built on a different underlying stock-market structure and assumptions about how boards are supposed to work based on different ownership structures and levels of market sophistication. The second is created by the generic difficulties boards have in translating conformance or compliance (which is what regulators look at) into good performance (which is what concerns shareholders).

The problems of translating regulation-driven compliance into good performance have been put under the spotlight by the global financial crisis (GFC). Although the GFC has been concentrated in financial institutions mainly in the US and the UK, it has highlighted such serious failures of CG in those institutions and others in Switzerland and Germany that it has brought capitalism into discredit.

The critical aspects of the failure in CG relate to performance rather than conformance or compliance. Companies were destroyed by a combination of three elements that are essential to good performance which were found to be wanting: first, a lack of proper understanding by the board of the business and its strategy; second, a total lack of appreciation of both the strategic risk and, more important, the systemic risk created by new product-markets into which financial institutions entered because others were doing it too; third, a total failure by boards to ensure that reward and remuneration systems for top executives and CEOs reflected the long-term needs of the business, rather than encouraging irresponsible behavior that put the company’s future at risk and, as it turned out, the entire global financial system in jeopardy.

This book discusses the problems posed by the differences in assumptions about how companies are supposed to run once they are listed and who the prime beneficiaries of the firm should be—whether it is shareholders (the regulatory perspective of good CG) or stakeholders, which raises a much wider set of issues, particularly in Asian countries where government-linked entities form a large part of stock market capitalization. The US and the UK governments are just beginning to find themselves in potentially similar positions as a result of their bailouts of financial institutions and, in the case of the US, of GM and Chrysler.

Chapter 1 introduces why CG matters and explains why adopting a Western-based view of CG may not be totally appropriate in markets that are structured differently and based on a different set of values.

Chapter 2 deals with the need for boards to take a wider view of their responsibilities than simply maximizing shareholder value. It discusses the role of the firm’s primary stakeholders—customers, employees, community and shareholders—and their claims on the company. It makes the case that an excessive focus on maximizing shareholder value will ultimately put the company’s “license to operate” at risk. It argues that boards should regard corporate responsibility not as an add-on but as an early-warning mechanism in setting strategy. It also makes the case that it is necessary to reject inappropriate theories taught at business schools which make the task of reconciling competing stakeholder claims harder and less natural than it should be.

The following chapters are about how to make good CG operational. Chapter 3, for example, explores the role of the board in defining the firm’s business purpose, vision and values; and then examines the six primary roles set out by the revised Malaysian Code of Corporate Governance. It then discusses the levels to which boards should get involved with management, arguing that the approach the board takes to its role and the level to which it needs to be engaged in the business will depend on the particular circumstances of the company.

Chapter 4 looks at board composition and argues that the roles of Chair and CEO should not be combined, not only because that would represent an excessive concentration of power in the hands of one person, but because the two roles are quite distinct. This is in contrast to the majority of American boards, where the roles are still united in the person of the “imperial CEO.” It then discusses the roles and responsibilities of executive and non-executive directors and explores some of the very real problems independent non-executive directors face in an Asian context, where dominant shareholders are often the norm, making it difficult for them to be truly independent in the Anglo-Saxon sense.

Chapter 5 argues that many of the major failures of corporate governance have been the result of boards making poorly informed decisions. These may be the result of problems of board culture; dysfunctional board dynamics where the company’s vision and mission are misunderstood, where conflicts of interest exist and there is lack of trust within the board; of dysfunctional processes resulting from a lack of transparency and poor information, poor planning of meetings, and poor decision-making; and an inadequate understanding of risk and its dynamics; or all of them combined. It goes on to suggest ways to resolve these problems using the Carver Policy Governance® model, emphasizing the importance of good information, and making clear what the role of committees is.

Chapter 6 deals with the four factors for getting from good governance to good results: getting strategy right; making informed decisions; managing change; and converting strategy into action. Good governance, as defined by regulators and auditors, does not automatically guarantee good results, nor does bad governance automatically guarantee bad results.

Chapter 7 explores the different types of external risk that companies face: political, economic, financial, socio-cultural, technological, competitive, and systemic. It deals in some detail with the problem of systemic risk and how it arises as a result of what is known as “the tragedy of the commons.” It then looks at the internal risks and explores the four characteristics of an effective risk management system. Finally, it explores the four stages of matching the company’s risk profile to the risk appetite of shareholders by establishing what shareholders value about the company; identifying the risks around the key drivers of shareholder value; determining the preferred treatment for the risks; and communicating these to shareholders.

Chapter 8 makes the case that we often measure and reward the wrong things. The resulting measures and their associated rewards promote irresponsible behavior by CEOs and their top management team in particular, leading to a failure to assess long-term risk either to the company or to the system within which it operates. Existing measures also fail completely to take into account the social, environmental and human costs of courses of action that mean companies get away with damaging their social and environmental ecosystem. It also explores the fact that the time value of money can put future generations at a disadvantage in any investment evaluation by understating the cost or benefit of results in the future.

To round things off, we look at the current problems of capitalism as a result of the GFC and what needs to be done to save it from itself and rebuild public trust in the system.

Chapter 9 owes its title to an excellent book by Raghuram Rajan and Luigi Zingales.1 It looks at the failure of modern Anglo-Saxon capitalism and concludes that there is a better way forward which can maintain the unrivalled success of capitalism in raising standards of living, but without its excesses. Such an approach requires boards to understand that they have a wider responsibility than simply that to their shareholders. They must find ways of reconciling the claims of customers, employees, and the community if they are to stay in business. This in turn means that they need to think ahead about how society perceives what their companies do, as this will change over time. Failure to understand this may lead to the company being put out of business altogether or being so heavily regulated that it becomes difficult to provide a fair return.

It is my hope that readers of this book will recognize that the fault does not lie in capitalism per se but in its defective implementation. I hope that the Anglo-Saxon model will find a way of healing itself and correcting its excesses, which are so socially disruptive and in violation of the principles of moderation adopted by all great cultures and religions. Should it fail to do so, there will no doubt be more crises and they will be more serious. As a result, the US and the UK will lose their moral authority when it comes to matters of governance and surrender their leadership to an Asia that is only too keen to step into their shoes.

Endnote

1 Rajan, R. G. and Zingales, L. 2003, Saving Capitalism from the Capitalists, Princeton, NJ: Princeton University Press.

CHAPTER 1

DO WESTERN CODES OF CORPORATE GOVERNANCE APPLY IN ASIA?

This chapter makes the case that good corporate governance (CG) does matter, but that adopting Western codes of CG without understanding the underlying differences in market structures, types of ownership and culture may lead to unexpected problems in implementation within the board in many Asian markets.

Why CG Matters

As a general principle, CG matters because investors are vulnerable to conflicts of interest and managerial incompetence. They are not well protected by contract and so have to rely on the law to protect them from conflicts of interest and on good CG to protect them from managerial incompetence.1 If good CG protects shareholders from managerial incompetence, it should lead to better performance, justifying any interest third parties have in how the company is run.

Although there is a fair amount of evidence to suggest that good CG does have a positive impact, there is also evidence to the contrary.2 On balance, it seems that good CG does in fact lead to better results in terms of higher profits and better dividends. Also the cost of debt (using bond yield spreads as a proxy) would appear to be lower the more independent the board—one of the indicators of good CG.