1. 22/2/2012
Corporate Governance, Developments and Current 1. Introduction and evolution of CG
Status
2. Code of Best Practices
Presents by Group 02
Date : 19th Feb 2012 3. Learnings from the Corporate Sector
4. Best Practices and addressing issues
MBA Weekday Program ,Semester I – Second half (2011/2013)
MBA 539 Financial Reporting and Management Control System
(Course Lecturer: Mr. R.M.R.B Rajapakshe, Senior Lecturer)
5. Conclusion
2
Corporate governance (CG) Right & Expectations of Stakeholders
CG is "the system by which companies are directed
and controlled" (Cadbury Committee, 1992)
What is the importunacy?
It involves a set of relationships between a company’s
management, its board, its shareholders and other
stakeholders; it deals with prevention or mitigation
of the conflict of interests of stakeholders.
1

2. 22/2/2012
Development of Corporate Governance
ENTERPRISE
GOVERNANCE
The Cadbury Report (UK, 1992)
Dimensions Dimensions after the collapse of the Maxwell publishing group the structure
and composition of the main board and board committees and
highlighted the importance of nonexecutive directors.
Importantly, it established the ‘comply or explain’ principle
CORPORATE BUSINESS
GOVERNANCE GOVERNANCE whereby companies should comply with the Code or give
(Conformance) (Performance) reasons for any areas of non-compliance.
The two dimensions need to be in balance !
Development of CG Cont… Development of CG Cont…
• The Greenbury Report,1995 - dealt with directors remuneration The Sarbanes-Oxley Act of 2002 (US, 2002)
• The Hample Report, (combined code) 1998 – Highlighted the role of With the collapse of Enron and Worldcom
corporate governance as contributor to business prosperity
• Concept of independence of external auditors
• The Turnbull Committee, 1998 - prepared guidelines for corporate
governance • Reinforced the duties of CEOs and CFOs by imposing strict
penalties for mis- interpretation the financial position in
• The Higgs Report, 2003- New code emphasizing internal control, Financial reports listed companies
audit committee, the board, chairman and nonexecutive directors etc;
• Majority must consist with independent directors and they
must adopt and disclose code of business ethics and if any
waivers reasons for the same
2

3. 22/2/2012
The Principles of Corporate Governance Development of Corporate Governance
(OECD, 1998 and 2004)
2004 additions
I. Ensuring the basis for an effective corporate
governance framework
II. The rights of shareholders and key ownership
Main Agents in SL
functions
III. The equitable treatment of Shareholders
ICASL SEC CSE CBSL
IV. The role of stakeholders in corporate governance
V. Disclosure and transparency
Corporate Governance in SL Code of best Practices in Sri Lanka
The board Directors’ Remuneration
Chairman and CEO Disclosures of
2006 /2008
2004 SEC set
Revised on Chairman’s Role Remuneration
guidelines for
2003 Best Audit and Code of Best Financial Acumen Relations with
Practices on CG Audit Practices on
Board balance shareholders
jointly by ICASL committees of CG by ICASL
and SEC listed and SEC Supply of Information Accountability and Audit
2002, ICASL companies Financial Reporting
Code of Best *Mandatory Appointments to the Internal Control
Practices on
Audit
Listing Rules Board Audit Committee
1997, ICASL on CG
issued voluntary Committee Re-Election Adheres to Corporate
Code of Best
Practices Appraisal of Board Governance
performance
Appraisal of CEO
3

4. 22/2/2012
Responsibility keep the organizational sustainability. CO-OPERATIVE GORVERNANCE
Shareholders Owners Owner
(providers of capital)
Elects, reports, delegates Board of Directors
Board of Directors Other
Governance
) parties
CEO CEO
Appoints, reports, delegates
Executives
Executive
management Managers Employees
Operations Responsibility is to keep the organizational
sustainability.
Board of directors & Remuneration
Committee
• Should include at least two non- executive directors or one third
Responsibilities of Directors Chairman’s role of non-executive directors, which ever is higher in the board.
• Majority of Non executive directors should be independent.
Formulate business Chairman should conduct • Board should be required to assess performance of the CEO.
strategies board proceedings
Adoption of an effective With effective participation • Details of the directors to be published in the annual report.
strategy for CEO and of the board
• Board of directors should set up a remuneration committee only
management team All directors are from non executive directors to review remuneration policy and
Ensuring compliance with encouraged to contribute advice to the board.
laws, regulations ethical effectively
• Responsible to structure remuneration packages , to attract,
standards Balance of power among retain, & to motivate high caliber individuals to lead the
directors organization.
4

5. 22/2/2012
Accountability Audit committee
Financial reporting Responsibilities:
• Company’s financial position & prospects
• Business going concerns
• Ensure objectivity and effectiveness of the audit
• Overlook on preparation and presentation of FS
Internal Control • Supervise company’s compliance
• System of internal controls • Ensure internal controls & risk management procedures
• Risk management
• Involve in appointing and removal of external auditors
• Discuss the Company’s annual audited FS
Audit • Regular meetings with the external and internal auditors;
• Board should establish formal and transparent arrangements • Report regularly to the Board of Directors
• The Audit Committee - a minimum of two independent non-
executive directors or exclusively by non-executive directors
which ever is higher
Relationship with Shareholders Benefits of CG
• The Board maintains healthy relationships with its • Corporate success and economic growth
key shareholders – individual & institutional. • A system of internal control
• Brand formation and development
• Maintain a dialogue with potential shareholders. • Business for a longer period
• Trust of its stakeholders
• The Annual General Meetings to communicate
• Effective monitoring
(corporate website, the annual report, quarterly
financial statements and press releases) with the • Equity investors
shareholders and encourage their participation. • Higher market valuation
• Security on Shareholders’ investment
5

6. 22/2/2012
Learnings from Corporate Sector Major Corporate Collapses
UK : The Maxwell publishing group
BCCI (Bank)
Marconi (Telco)
USA : Enron (Energy Company)
World Com (Telco)
Tyco
Germany : Berliner Bank
Babcok
Australia : HIH Insurance
OneTel
Ansett Airlines ,
Harris Scarfe SL Context
•Golden Key
Italy: Parmalat •Premuka Savings & Dev. Bank
The Maxwell publishing group (1991) Enron - Energy Company (2001)
• America’s most innovative company ranked in the US’
CG deficiencies Fortune Top 10 companies based on turnover
– Heavy borrowing to led to unsustainable levels of debt. • 30000 employees
• Debts of GBP (Sterling Pound) 4 billion • $111 billion revenue in 2000
– Robert Maxwell held the positions of both chairman • World leading company
and chief executive. • CG deficiencies
– The effectiveness of the non executive directors was • Board has allowed to Off-the book transaction
also questioned • 50% of assets ($27b)were moved off the balance sheet
• Consequence • Increased risk and liabilities without proper disclosure
• Excessive compensation plans
– Suicide of Robert Maxwell, leading to greatest fraud in
– Paid $750 bonuses , though net income was $975 in 2001.
20th Century
• Questionable of the role of the Auditor
– Arise CG issues in public ,business and political arena.
• Consequences:
– Implemented Cadbury Report (1992) – One of the largest bankruptcies in US history
– US quickly implanted CG reforms (NYSE listing requirements)
6

7. 22/2/2012
WorldCom Impact of the Fraud
• WorldCom was the darling of Wall Street and the Telecom
Industry of the 90’s Executives and Accounting Staff
Grew rapidly through acquisitions and from increased demand for telecom 6 individuals convicted of fraud / conspiracy / false filings
services Ebbers – CEO 25 years in prison
• 1996: Acquired MFS (including internet backbone) Sullivan – CFO 5 years in prison
• 1998: Acquired MCI (more than twice it’s size) Myers – Controller 1 year in prison
Yates – Dir of Acctg 1 year in prison
• Accounting Fraud Vinson – Acctg Dept 5 months in prison
$11 Billion Accounting Fraud over 3 year period (1999 – 2002) Manager 5 months house arrest
Understatement of operating expenses of $7B Normand –Acctg Dept 3 years probation
Overstatement of revenues of $1B.
Manager
• Impact Above 6 individuals agreed to pay a total of $24-34M to
$180B of shareholder value lost (based on peak stock price) settle securities class action case
$180B of shareholder value lost (based on peak stock price)
57,000 employees lost jobs
25 26
Golden Key Reasons for collapse
• Many depositors lost their savings,
• Directors arrested and CEO remand • High rate of interest
• FCs related to the Ceylinco conglomerate (Shriram, • Interest paid not from Interest
F&G, etc.) also affected.. • Decline in new deposit
• Credibility issue on Ceylinco group of company • Unable to return deposit
– Over 300 subsidiary more than 350 offices
• Asset over valuation
– Over 20,000 employees • Dubious Investment
• Property market was affected, construction sector • Not invest in profitable ventures
suffered, etc. • Not issued properly audited account
• All this contributed to the financial instability
7

8. 22/2/2012
Pramuka Savings & Development Bank Business Today To 20, 2010/11
First banking failure in Sri Lanka in Oct 2002
– Total No. Of Accounts - 15, 886
– Total Deposit Liabilities - Rs. 2,2 bn
Reasons for collapse
• Irregularities of financial reporting
– External Auditors
• Inadequate internal controls and risk
• Non or under performing loan
• Disclosure & Transparency
• Mismanagement of the chairman & the MD
– Money withdrawal
Five companies do not comply with
separation of Chairman and CEO
How to practice CG How to practice CG
• “ Public Policy ” rather than narrow interest of • Balancing of conflicting stakeholder expectations
shareholders • Provide additional financial information even not
• Sound legal framework mandatory
• The difference between “ Managing ” and • Avoid weaker environments by adopting voluntary
“Governing” CG measures
• Non Executive Directors say “ Yes people”
• Rotation of External Auditors
• Bottom line profit analysis
• Build a reputation in business world
8

9. 22/2/2012
Set the Trend by Set the Trend by doing it right cont..
doing it right
Public enterprises should have a mission statement summarizing objectives rather
than activities Senior Management should have operational independence without
influences
Audit Committees empowered by the Management.
A legal entity must seriously take action to implement the current CG to attract
the hearts of potential investors to the country
True independence and effectiveness of an independent Director can only
Responsibility of CSE / ICASL Financial Regulatory body to encourage the be measured by the Director’s action in the board room
companies to implement CG and make it compulsory. Implementation voluntarily is most needed
For diversified business future all Boards of Directors to put their thoughts to
practice good CG
Q&A Thank you
Pls note that
If any one needs ppt file, let me know, can’t upload as it’s a heavy.
ckodituwakku@hotmail.com
9