Bob Tricker

Corporate Governance –
Principles, Policies and Practices 2e

Chapter 2
Governance and management
 Governance and management

in which we recognise:
• definitions of corporate governance
• the scope of corporate governance
• the significance of constitutions for corporate
entities
• the difference between governance and
management
• the performance and conformance aspects of
governance
• alternative board structures

Tricker: Corporate Governance 2e

 Governance and management

Definitions of corporate governance

Definitions vary according tot the perspective of

the user
– operational
– relationship
– stakeholder
– financial economics
– societal

Tricker: Corporate Governance 2e

 Governance and management

Defining corporate governance ᾶ operational

Corporate governance is the process by which

companies are directed and controlled
Cadbury Report 1992 and OECD 1999

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 Governance and management

Defining corporate governance ᾶ relationship

is the relationship among various participants in
determining the direction and performance of
corporations. The primary participants are the
shareholders, the management and the board of
directors Monks and Minow 2001
The corporate governance structure specifies the
distribution of rights and responsibilities among the
different participants in the organization – such as the
board, managers, shareholders and other
stakeholders – and lays down the rules and
procedures for decision-making OECD 2002
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 Governance and management

Defining corporate governance - stakeholder

Corporate governance is the process by which

corporations are made responsive to the rights and
wishes of stakeholders
Demb and Neubauer, 1992

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 Governance and management

Defining corporate governance

ᾶ financial economics perspective

Corporate governance deals with the way suppliers

of finance assure themselves of getting a return on
their investment
Shleifer and Vishny, 1997

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 Governance and management

Defining corporate governance - societal

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
Blair, 1995
Corporate governance is concerned with holding the
balance between economic and social goals and
between individual and communal goals.
Cadbury, 2000

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 Governance and management

Defining corporate governance ᾶ overall

Corporate governance is the exercise of power over a

corporate entities
Tom Clarke, 2004

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 The spheres of Corporate Governance

Other sources of
finance Institutional investors
Stock
CG activists
Markets
Societal Market
influences and Investment
analysts intermediaries
other Providers of
stakeholders debt capital
Shareholders
Governing body i.e. members
Government - board of
and other directors
corporate
regulators External
Contractual auditors
stakeholders:
Suppliers, Management
Customers
bankers

Law courts Investigative

Media

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 Governance and Management
Every corporate entity needs a constitution
THE MEMBERS
Shareholders in a limited company
Members of the profession in a professional body
Club members in a sports, arts or other private club
Registered members in a trades union
Members of academic bodies
Voting members of other corporate entities

THE CORPORATE ENTITY

Limited liability company
Professional organisation
Sports, arts or other club
Trades union
University or college
Other corporate entities

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 Governance and Management

Incorporating a joint stock limited liability company

Companies Registrar

Memorandum
- name of company
- objectives
- registered office
- share capital
- liability of shareholders limited

Articles of Association
- detailed rules for running the entity
- Table A

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 Governance and Management

Types of limited liability company

• Private companies limited by shares

• Private companies limited by guarantee
• (Private unlimited companies)
• Public companies
– offer to general public
– in UK title XYZ Plc
– prospectus needed to offer shares

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 Governance and Management

Other forms of incorporation

– Savings and loans association, building societies
– Co-operatives: supplier (Canada), customer (UK)
– State corporate entities
– Federal National Mortgage Association (Fannie Mae)
– QUANGOs Quasi-autonomous non-governmental
organisation
– Not for profit entities
e.g. Charities, sports associations, arts and cultural societies
Trust law, friendly societies law, charities law etc.

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 Governance and Management

The essence of governance

The members

Governing body

Corporate
entity
Management

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 Governance and Management

Management involves an organisational hierarchy

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 Governance and Management

Governance is different from management

governance

management

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 Governance and Management

INED
Board Structure

ED

Co. Secretary
Investment (Compliance
Manager Officer)

General
Manager

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 Governance and Management

Management runs the business:

the board ensures that the business is well run
and running in the right direction

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 Governance and Management

• Wherever management is separate from ownership or

membership, organisations need governing
– Public listed company – board of directors
– Small/medium company - board of directors
– Subsidiary/associate/joint venture – board
– Company limited by guarantee
– University, college – council, governing body
– Charity, club, hospital – board, committee
– Quasi-governmental bodies– council, committee, board
– Family firm

• Many corporate governance ideas are universal and can be applied

to any governing body

(contrast organisations where management and governance are in the same

hands – sole traders, small partnerships)

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 Governance and Management

The basic board processes

Outward looking

Accountability Strategy formulation

Supervising
executive activities Policy making
Inward looking

Past and present focused Future focused

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 Governance and Management

Outward
looking Providing Strategy
Accountability Formulation

Approve and work with

and through the CEO

Monitoring and Policy

Inward Making
Supervising
looking

Past and Future

present focused focused

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 Governance and Management

The conformance and performance roles

of the unitary board

conformance performance

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 Governance and Management

Guidelines for a board strategy seminar or workshop

• Careful planning, well in advance, is essential
• Agree a time when all directors can attend
• Fix a location where all directors can participate
• Define the objectives clearly, for example:
- to explore the strategic situation
- to discuss the implications
- to consider alternative strategies
- to determine the next steps to be taken
(but not to take strategic decisions immediately)
• All directors must be fully informed about the objectives
• All directors should be supportive of the event
• All directors need briefing with relevant data in advance

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 Governance and Management

Guidelines for a board strategy seminar or workshop

(continued)

• Do not hold the event in the board-room (the board-room culture is

decision orientated)
• Decide who is going to run the event (this need not be the chairman)
• Decide whether other people should be invited to participate
(senior executives to brief the directors, external experts
to give briefings, experts to contribute to process)
• At the first session establish the ground-rules
- this is not a board meeting to make decisions, but a free-
ranging exchange of views and insights
- strategic decisions will not be made
- call for imaginative contributions however unusual
- discourage negative comment ('we tried that - it won't
work', 'no good for us')
• The output of the strategy session should be an agreed list of next
actions, and who is responsible for taking them and by when.

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 Alternative board structures

– All executive board

– Majority executive board
– Majority non-executive board
– All non-executive board
• Supervisory board
• Two-tier board
– Board structures around the world
– Some complex structures

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 The all-executive board

O
O O
O O

O = executive
directors

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 The majority-executive board

N N
O
O executive directors O
N non-executive directors O O O

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 The majority non-executive board

N
N N
N N
O

N non-executive directors O O
O executive directors

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 Directors and board architecture

Board Structure Exercise

Group 1
ED NED INED Total

• MCM 3 8 0 11
• BCOM 3 3 0 6
• Excel Technology 4 1 3 8
• Esprit Holding 5 2 3 9
• Giordano 3 4 0 7

• Percentage

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 Directors and board architecture

Two-tier board N
N N
N N
N N
N N
N non-executive directors
O executive directors
O
O O
O

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 Governance and management

We have considered
• definitions of corporate governance
• the scope of corporate governance
• the significance of constitutions for corporate
entities
• the difference between governance and
management
• the performance and conformance aspects of
governance
• alternative board structures

Tricker: Corporate Governance 2e