Corporate Governance Regulation

The changing roles and responsibilities of boards of directors

Alice Klettner

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781138910003
• eBook ISBN:
  9781317437109
• Topic: Business
• Subtopic: Business General
• Index: Business

Corporate governance regulation has been through numerous cycles of reform, and yet we still see instances of companies collapsing suddenly. Codes of corporate governance have been implemented in most developed countries, recommending detailed governance frameworks for publicly listed companies and their boards, but our understanding of how these codes influence behaviour is still limited.

In this book, Alice Klettner draws on the domains of law and business to explore the effectiveness of corporate governance codes. Using interview evidence from company directors and officers, as well as published evidence of companies' corporate governance systems, she discusses the theory and practice of corporate governance and its regulation – with a focus on how corporate governance codes can affect board behaviour and company performance.

This interdisciplinary book will be valuable reading for advanced students and researchers of corporate governance, and will also be directly relevant to governance practitioners and policymakers.

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CORPORATE GOVERNANCE CODES

Introduction

Significance of corporate governance and its regulation

Recent years have shown that large and powerful companies can collapse very suddenly causing great damage to national economies and the livelihoods of the people who work and invest in them. As a consequence, corporate governance has become a regular issue on most government policy agendas. Corporate governance regulation, which can include both hard law and softer forms of regulation, has been through several cycles of reform and yet collapses continue to occur. Codes of corporate governance have been implemented in most developed countries recommending detailed governance frameworks for publicly listed companies, yet our understanding of how these codes influence behaviour is still limited. This book explores the development and reform of corporate governance regulation over the last two decades, particularly the impact of corporate governance codes on organisational behaviour.

The book presents research of practical relevance to a wide variety of governance professionals: directors, company secretaries, lawyers and consultants, as well as executives and regulators. It aims to demonstrate the value of corporate governance codes in improving board practices as well as identifying where they might be improved. For researchers and those studying corporate governance, the book places practical problems in the context of academic theory, preparing the ground for future research that will advance our understanding of the relationship between regulation and board performance. Also the book strives to demonstrate the relevance of corporate governance to wider society. The way in which companies are run has the potential to affect individuals across many dimensions. Indeed, we all have daily contact with corporations whether as employees, customers or through our pension fund investments. The manner in which those companies are directed and controlled can impact on our working life, our retirement savings, the products we buy and the air that we breathe. Thus the gradual development of codes of corporate governance over the last 25 years is of increasing relevance to us all, particularly since codes have expanded their scope to include broad social issues, such as gender diversity and environmental responsibility, as well as the detail of boardroom procedures.

Aims and objectives

The book explores some of the theories behind the different methods of regulating corporate governance, particularly the use of codes of good practice. Its aim is to develop knowledge of how some of these new soft regulatory mechanisms can cause changes in behaviour. One of the practical objectives of the book is to provide evidence and ideas to assist future regulatory reform. It asks whether the policy of regulating through voluntary principles is effective and explores the conditions required for optimal impact: is the ‘comply-or-explain’ mechanism strong enough to instigate meaningful behavioural change or is it simply a method for improving accountability and information disclosure? Understanding how codes of corporate governance work also assists the companies targeted by such regulation: corporate governance regulation is not intended to be a burden, rather it is designed to assist companies in improving efficiency and decision-making. If this is not the case in practice then we need to understand why and make changes. The novel approach of this book comprises an attempt to bring together the management-based research on the functioning of boards of directors with emerging ideas on regulatory mechanisms. Combining these areas of research enables a more comprehensive view of the aims and objectives of corporate governance regulation. A detailed understanding of the modern role of the board is essential if we are to design regulation that effectively facilitates fulfilment of that role.

Book structure

This Chapter 1 introduces the topic of codes of corporate governance, placing them in the context of corporate governance regulation as a whole. Chapter 2 goes on to detail the history of corporate governance codes: how and why they have been developed over the last two decades. Chapter 3 introduces some of the theories behind corporate governance and the role of the board of directors together with regulatory theory relevant to the use of voluntary codes. Chapter 4 then provides a review of research on corporate governance and its regulation: explaining the different methodological approaches that are possible and the need for more qualitative work of the type presented in this book. The next four chapters are research-based, discussing the response of companies to specific topics covered by corporate governance regulation:

Chapter 5 examines the practice of board performance evaluation and the insights it gives us into the role of the board of directors in corporate governance and the factors contributing to good board performance. All corporate governance codes contain a multitude of suggestions regarding board composition, board committees and board responsibilities: do these correlate with the factors seen in practice as essential for an effective board?

Chapter 6 continues the discussion of board effectiveness in the context of recent code provisions promoting diversity in leadership, particularly gender diversity. It explores the modern dilemma of whether regulation can and should be used to increase the number of women in corporate leadership both for economic reasons and to improve social equity.

Chapter 7 then broadens this discussion to encompass corporate responsibility more widely. The question of whether corporations should be responsible for social and environmental issues, and to what extent, is complex. This chapter notes the increasing integration of corporate responsibility into corporate governance and explores how soft regulation can encourage ethical and responsible behaviour.

Chapter 8 continues the ethical discussion into the area of executive remuneration. Can regulation encourage well-designed remuneration schemes that provide fair reward and encourage executives to strive for long-term sustainable performance rather than short-term gain?

This tour through some of the most topical and tricky areas of corporate governance is then discussed in terms of regulatory theory and the modern role of the board. Chapter 9 goes back to the humble code of corporate governance and its potential for encouraging change in these areas. By comparing and contrasting the effect of code provisions across the four subject areas it is possible to see how the design of codes and their interaction with other institutional forces (law, markets, politics and society) can impact on effectiveness.

Defining corporate governance

First it is important to define corporate governance and hence corporate governance regulation. Early attempts to define the concept of corporate governance appear in the United Kingdom Cadbury Report (1992) and the South African King Report (1994) where it is defined at its simplest as ‘the system by which companies are directed and controlled’. Since then, there have been many attempts to elucidate the concept in more detail. Table 1.1 includes a selection of definitions of corporate governance both from academic scholarship and corporate governance codes. The wide variation in these definitions reflects the different approaches of academic disciplines and changing attitudes over time. The OECD definition is often cited as an authoritative, internationally agreed definition. It states:

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.

(OECD 2015, p. 9)

TABLE 1.1 Corporate governance definitions

Academic definitions
Friedman (1970) Economics	Corporate governance is to conduct the business in accordance with the owner’s or shareholders’ desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.
Demb and Neubauer (1992) Management	Corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders.
Blair (1995) Law	The whole set of legal, cultural and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised and how the risks and return from the activities they undertake are allocated.
Monks and Minow (1995) Management	Corporate governance involves the relationships among various participants, including the chief executive officer, management, shareholders and employees, in determining the direction and performance of corporations.
Shleifer and Vishny (1997) Finance	Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.
Tomasic, Bottomley and McQueen (2002) Law	…the structures, processes and systems, both formal and informal, by which power is exercised, constrained, monitored and accounted for in the management of a corporation.
Tricker (2012) Management	Corporate governance is about the way power is exercised over corporate entities. It covers the activities of the board and its relationships with the shareholders or members and with those managing the enterprise, as well as with the external auditors, regulators and other legitimate stakeholders.
du Plessis, Hargovan, Bagaric and Harris (2014) Law	The system of regulating and overseeing corporate conduct and of balancing the interests of all internal stakeholders and other parties (external stakeholders, governments and local communities) who can be affected by the corporation’s conduct, in order to ensure responsible behaviour by corporations and to create long-term, sustainable growth for the corporation.
Mees (2015) Management	Corporate governance is best seen as a movement to improve the performance and standards of the directorial and executive teams at the top of listed companies and to improve the confidence of international investors in local securities markets.
Code definitions
Australian Corporate Governance Principles and Recommendations (2014)	Corporate governance is ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations’. It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimised. Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration and provide accountability and control systems commensurate with the risks involved.
Belgian Code on Corporate Governance (2009)	Corporate governance is a set of rules and behaviours that determine how companies are managed and controlled. A good corporate governance model will achieve its goal by setting a proper balance between leadership, entrepreneurship and performance on the one hand and control as well as conformity with this set of rules on the other hand.
Japan’s Corporate Governance Code (2015)	In this Corporate Governance Code, ‘corporate governance’ means a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities.
OECD Principles of Corporate Governance (2015)	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.
UK Corporate Governance Code (2014)	Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board 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. Corporate governance is therefore about what the board of a company does and how it sets the values of the company. It is to be distinguished from the day-to-day operational management of the company by full-time executives.

Corporate governance is a broad topic – it covers the structures and processes that define and guide the roles and relationships of the key players in a corporation – including shareholders, directors, managers and wider stakeholders such as employees and creditors. As explained by a respected Australian judge, ‘the expression ‘corporate governance’ embraces not only the models or systems themselves but also the practices by which that exercise and control of authority is in fact effected’ (Owen 2003, p. xxxiii).

Mechanisms of corporate governance are often distinguished as either internal or external (Hopt 2011; Kingsford Smith 2012). Internal corporate governance concerns the relationships and balance of powers within a corporation, primarily among the board, managers and shareholders but also other internal stakeholders such as employees. External corporate governance refers to outside forces that exercise a disciplining influence on managers, such as takeover markets, financial markets and regulatory intervention. This is an important distinction because corporate governance codes, as well as comprising an external regulatory force themselves, can be aimed at both improving internal organ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface and acknowledgements
• 1 Corporate governance codes: Introduction
• 2 Development of codes of corporate governance
• 3 Theories of corporate governance and its regulation
• 4 Researching corporate governance codes
• 5 Board effectiveness and performance evaluation
• 6 Gender diversity in corporate leadership
• 7 Governance and corporate responsibility
• 8 Executive remuneration
• 9 Conclusions
• Index