Corporate Governance in a Global World

KripTech Organization
Chairman Siti Aminah

CEO Safni

Financing Department Azniezawati

Operation Department Nurul Hafizah

Marketing Department Siti Nur Aziah

One system more robust than the others and will this system prevail and become universal?

Functional convergence towards the market based system seemed to be occurring, inexorably driven by forces such as:

Increasingly massive international financial flows which offered deep Growing influence of the great regional stock exchanges Developing activity of fever-expanding Anglo-American based on institutional investor Expending revenues and market capitalization of multinational enterprises Accelerating convergence towards international accounting standards

Globalization affects the corporate governance reform agenda in two ways

It heighten anxiety over whether particular corporate governance system confer competitive economic advantage. Comes from capital markets pressure on corporate governance

What globalization means?

Globalization of industry refers to an evolving pattern of cross-border activities of firms involving international investment, trade and collaboration for purposes of product development, production and sourcing, and marketing. These international activities enable firms to enter new markets, exploit their technological and organizational advantages, and reduce business costs and risks.

Categorizing Corporate Governance

One in which a countrys publicly listed companies are owned and controlled by a small number of major shareholder. Also referred to commonly as relationship-based system in the literature, the dedicated-capital system, and welfare capitalism. Prevails in German, Japan and other countries. exit model where shareholders sell shares to express dissatisfaction with management. In Germany, this occurs through a legally mandated system of work councils and co-determination. In Japan, most large companies have enterprise unions and joint committees with access to senior management. Managerial ethos employee an important corporate stakeholder and that managements job is to mediate between shareholders, employees, and other stakeholders such as business group member and supplier.

Refer to systems of finance and corporate governance where most large firm are controlled by their managers but owned by outside shareholders. This situations result in the notorious separation, or divorce, of ownership and control, outlined by Berle and Means (1932) Also referred to frequently as Anglo-Saxon or Anglo American system, the market-outsider system or simply stock market capitalism. Shareholder have voting right that provide them with some level of control.

Insider
Firm owned predominantly by insider shareholder who also wield control over management. System characterized by little separation of ownership and control such that agency problem are rare. Hostile takeover activity is rare

Outsider
Large firms controlled by managers but owned predominantly by outside shareholders. System characterized by separation of ownership and control, which engenders significant agency problem. Frequent hostile takeovers acting as a disciplining mechanism on company management. Dispersed ownership.

Concentration of ownership in a small group of shareholders (founding family member, other companies through pyramidal structures, state ownership) Excessive control by a small group of insider shareholders. Wealth transfer from minority shareholders to majority shareholders. Weak investor protection in company law.

Moderate control by a large range shareholders . No transfer of wealth from minority shareholders to majority shareholders. Strong investor protection in company low.

Potential for abuse of power by majority shareholders.

Majority shareholders tend to have more voice, in their investee companies.

Potential for shareholder democracy.

Shareholding characterized more by exit than voice.

Legal System
1. 2. Characterized by law levels of investor protection were found to be associated with poorly developed capital markets. Main problem, without strong investor protection, management could expropriate shareholders fund. Manager could expropriate shareholders funds by blatantly abs coding with their money. Only way for shareholder to counter weakness in legal investor by significantly large.

3. 4.

The French
Knows to afford the lowest level of investor protection whereas the English origin legal system of common law afford the highest level of investor protection.

German & Scandinavian

Origin system lie somewhere in between these two extremes.
(La Porta Et Al (1998))

(La Porta et.al (1999))

La Porta et al (1998) *Studied the ownership structure of the 10 largest non-financial corporations for cross section the insider mould. *Found the concentrated ownership structure in those countries that have traditionally fallen into the insider mould.

La Porta et.al 1999

*Investigated the ownership structure of large companies in 27 countries around the world in order to identify the ultimate controlling shareholders in those companies.

*Country to the portrayal of corporate ownership by berbe&means(1932), suggested that companies were owned by a widely dispersed group of shareholders and controlled by a small group of managers.
*Found evidence that the weight of companies were controlled either by families or by the state. *The shareholders with ultimate control tented to have power over their investee companies that was significantly greater than their cash flow rights.

Global Convergence in Corporate Governance

Derives from the existence of forces leading to international harmonization in financial markets, with increasing international investment, foreign subsidiaries and integration of the international capital markets.
Standardization is one way of building confidence in a countrys financial markets and enticing investors to risk funds.

i) The OECD principles

Organization for Economic Co-operation and Development( OECD, 1999). Based in Paris Membership comprises 29 countries from all around the world. Represent a lowest common denominator of principles for good corporate governance. Purposes is structure of relationships and corresponding responsibilities among a core group consisting of shareholders, board members and managers designed to best foster the competitive performance required to achieve the corporations primary objective ( IMF, 2001).

ii) The ICGN statement on OECD principles

the

The International Corporate Governance Network (ICGN) An international organization comprising many groups interested in corporate governance reform. The ICGN approach to the OECD Principles was

reproduced in Monks and Minow (2001)

iii) The revised OECD principles 2004

The OECD issued has expanded to include 30 members, with the accession of the Slovak Republic in December 2000. The revised principles cover the following areas a) Ensuring the basis for an effective corporate governance framework b) The rights of shareholders and key ownership functions c) The equitable treatment of shareholders d) The role of stakeholders e) Disclosure and transparency f) The responsibilities of the board

iv) The CalPERS principles

The California Public Employees Retirement System, in the USA. The aim of this standards was to allow markets across the world to function freely and equitably for all investors.

v) The European Union

There are at present 42 corporate governance codes of practice existing in European Union member countries. The commission is focusing on increasing transparency and disclosure, as well as improving effective exercise of shareholder rights. The commission requires listed companies in all EU members states to publish an annual statement of their structures and practices for corporate, which should as a minimum cover: - the operation and powers of the shareholder meeting - the composition and function of the board and relevant committees - the national codes of conduct to which the company subscribes -the steps taken for compliance along with an explanation for any failure to do so( European Financial Services Regulation, (2003).

The Commonwealth Guidelines

Focused attention in the last couple of years on the evolution of corporate governance systems in a numbers of developing African economies

The United Nations Conference on Convergence

UNCTAD group dedicated to International Standard of Accounting and Reporting have decided to publish guidance on corporate governance disclosure (Corporate Governance Update,2004).