BUSN9181 Business Law Ethics And Governance

BUSN9181 Business Law Ethics and Governance
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Question:

The concept of ‘good governance’ often emerges as a model to compare ineffectiveorganisations with effective organisations (or else to compare ineffective economies with healthy economies or ineffective political bodies with viable political bodies). Perhaps this is because, until recently, the majority of the ‘successful’ governments and companies in the contemporary world were found in liberal democratic states and concentrated in Europe and the Americas. As a result, it is these countries whose institutions tend to set the standards by which the companies and institutions of other states are compared.

The term ‘good corporate governance’ can be focused on different forms or types of ‘governance’. Organisations such as the United Nations or aid organisations and the authorities of developed countries often focus the meaning of ‘good governance’ on a set of requirements that conform to that entity’s particular agenda. As a result, ‘good governance’ may imply many different things in many different contexts.

You want to apply for this job and the application asks you to answer two questions:

The aim of this corporate governance reform project is to improve the functioning of the financial markets in ASEAN countries. Explain in this context:

(a) What does corporate governance mean?

(b) How and why corporate governance should be developed and what does it include?

(c) What does ‘good’ or ‘successful’ governance mean to you?

(d) What is required to improve corporate governance? Justify your answer.

(a) What factors would you study if you used the COSO Treadway Report as your guiding framework?

(b) Could the COSO/Treadway factors be studied from the published information of companies which are listed on ASEAN stock exchanges?

(c) What could you observe and assess about ASEAN financial markets by reviewing company reporting?

(d) If the average board in Cambodia has 4 executive directors and 2 nonexecutive directors and the average board in Indonesia had 1 executive director and 3 non-executive directors, what conclusions could you draw?

There is little research into corporate governance in emerging markets. As a result, recommendations for policy makers, companies as well as for investors usually focus on what ‘works in the West.’

However, some argue that a fundamental difference exists between the governance challenge in developed markets, where shareholders are many and dispersed (e.g. the UK and US), and the challenge in emerging markets (e.g. ASEAN) and elsewhere (e.g. Germany) where companies tend to be dominated by controlling shareholders (e.g. family members, a small group of business partners, a state-owned enterprise or a financial institution).

As a result, the solutions proposed for developed markets like the UK, where listed companies have many shareholders, may not address the governance weaknesses and be relevant to the issues found in countries where companies are dominated by controlling shareholders.

For example, the challenge for investors in emerging markets is determining how to weigh the risk factors associated with the country – weaknesses in the rule of law, risk of corruption, competitive intensity and lower capital market capabilities – against the firm-specific risk issues, especially the structure of ownership.

Those who want to invest in emerging market companies must make practical decisions about their investments on the basis of incomplete and at times conflicting information. Two dimensions of ownership structure may be important in that decision process: the quality of board independence and the mechanisms which are in place that are likely to mitigate (i.e. reduce) the risks associated with concentrated business control.

Research supports this view. It finds that director independence can make a difference in the performance of emerging market companies even though it does not appear to do so in US companies. Perhaps this is because in emerging markets a higher level of board independence results in company actions which are consistent with the best interests of shareholders and better firm performance.

This difference between developed and emerging markets suggests that boards may matter more in countries with weak or less well developed legal and regulatory systems.

Warning Signs Of Potential Problems
Opaque ownership structures.
Mismatch between economic stake and voting rights (e.g. different share classes that grant voting influence to controlling shareholders above their ownership stake).
Weak legal and regulatory environment for shareholder protection.
Lack of board independence and expertise.
No evidence of succession planning.
Poor disclosure about board practices
Lack of shareholder access to board members.
Poor disclosure about executive remuneration or remuneration policies that focus on short-term performance.
Required:
1. What is the potential problem with corporate governance codes like Cadbury? Discuss the governance problem when a company’s ownership structure is dominated by controlling shareholders. Justify your answer. (25 marks – maximum word limit 1200 words)
 
2. In emerging markets, many institutional investors expect that the boards of companies, controlled by families, other firms, or government, should have a meaningful number of independent directors to protect their minority interests. Prepare a briefing about director independence and what it can achieve in ASEAN listed companies.

(a) First, explain the risks/costs? and benefits of concentrated ownership;

(b) then, explain the background to the ‘independence’ issue;

(c) considering ‘independence’, what recommendations might be appropriate in the context of concentrated ownership in ASEAN. Justify your answer.