Corporate Governance and Accountability

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Corporate Governance and Accountability

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Corporate governanceProtects the rights of shareholders to trade shares, to obtain timely and regular information about corporate well being, participate and vote in general shareholder meetings, elect and remove members of the board, and share in corporate profits. Recognises and protect the rights of stakeholders.

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Ethical principles supported by lawHonesty and Transparency Responsibility and Accountability Fairness and Justice Avoidance of conflicts of interest and related party dealings Application of the principles of good corporate governance

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Corporate governance underpins corporate survival Not just formal accountability but vital for investor confidence - affects capitalisation, regulation, reputation Now measured by GovernanceMetrics International cf. Corporate Governance Authority, Transparency International. http://www.gmiratings.com/(svoakc45be23zh450xr2pw45)/Default.aspx World Bank sponsored Global Corporate Governance Forum

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Why is good corporate governance important? It can lower the cost of capital. It promotes investor confidence. It is important to respond to global best practice.

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How is good corporate governance achieved?There are various models of good corporate governance. Most recently, the OECD has set guidelines. The Cadbury Committee in the UK, benchmarked CG and then the General Motors Guidelines on Significant Corporate Governance Issues. The Canadians and the ASX Corporate Governance Council have espoused similar principles.

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OECD recommendations 2004Disclosure of The financial and operating results of the company. Company objectives. Major share ownership and voting rights. Remuneration policy for members of the board and key executives, and information about board members, including whether they are independent. Related party transactions. Foreseeable risk factors. Issues regarding employees and other stakeholders. Governance structures and policies

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Good corporate governance and development1991 - following collapse of firms declared healthy in audited returns, the Financial Reporting Council, the London Stock Exchange and the UK accountancy profession established the Cadbury Committee to inquire into financial aspects of corporate governance.

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What is corporate governance?Corporate governance is the system by which companies are directed and managed. Good corporate governance structures add value to corporations and provide accountability and control systems.

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Good corporate governance and development 1991 - following collapse of firms declared healthy in audited returns, the Financial Reporting Council, the London Stock Exchange and the UK accountancy profession established the Cadbury Committee to inquire into financial aspects of corporate governance.

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Cadbury Report RecommendedConformity with its Code of Best Practice. This was voluntary. More clear and detailed financial reporting in order to: Inspire public confidence in corporations Enable directors to advance the best interests of the company and to avoid concentrations of power. The clear separation of the responsibilities of CEO and chair of the board.

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Non-executive directors shouldHave a stronger role on boards Should be selected according to formal processes Be clearly independent from the management of the company Not have business interests which could conflict with those of the company

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Cadbury also recommendedThe establishment of an Audit Committee with at least 3 non-executive directors and access to independent audit advice

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ImplementationSince 1993, the London Stock Exchange has, required listed companies to include in annual reports statements of compliance with the Code of Best Practice or, give reasons for not doing so. In December 1994, Guidance to the interpretation of the Cadbury Code was issued. This was perceived as a watering down of the Code.

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Implementation 2The Code had called upon the directors to report on the effectiveness of the company’s system of internal control, the Guidance requires only that directors state : that directors are responsible for the company’s system of internal financial control that such a system is only relatively secure, not absolutely so the most important procedures for internal financial control that directors have reviewed the system of control Ernst and Young, The Cadbury Codes Requirements on Internal Control at http:/www.ernsty.co.uk/accting/ifc/ifc2.htm.

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ASX principlesDerived substantially from the lead of Cadbury, but good practice in any setting.

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Formalise and disclose the functions reserved to the board and those delegated to management. Adopt a formal board charter that details the functions and responsibilities of the board or a formal statement of delegated authority to management. Principle 1: Lay solid foundations for management and oversight

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Principle 2: Structure the board to add value A majority of the board should be independent directors. An independent director is independent of management and free of any business or other relationship that could materially interfere with – or could reasonably be perceived to interfere materially with – the exercise of their unfettered and independent judgment.

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Principle 3: Promote ethical and responsible decision-making Clarify the standards of ethical behaviour required of company directors and key executives Establish a code of conduct Promote integrity

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Principle 4: Safeguard integrity in financial reportingRequire written statements from the CEO and the CFO to the board that the company’s financial reports present a true and fair view of its financial condition in accordance with relevant accounting standards. Establish an audit committee of at least 3 non-executive directors, not chaired by chair of board.

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Principle 5: Make timely and balanced disclosureDevelop continuous disclosure policies and procedures.

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Principle 6: Respect the rights of shareholdersDesign and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings.

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Principle 7: Recognise and manage risk Establish a system to identify, assess, monitor and manage risk inform investors of material changes to the company’s risk profile. The CEO and CFO should certify to the board that the company’s risk management and compliance systems are operating effectively.

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Principle 8: Encourage enhanced performance Disclosure of performance evaluation of the board. Induction program for new directors. All board members to have direct access to company secretary. Board members to have access to independent advice at company expense.

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Principle 9: Remunerate fairly and responsibly Disclose company’s remuneration policies including cash, fees and other benefits. The board should establish a remuneration committee

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Why were not such measures already in place?Why did it take the collapse of Enron, WorldCom, HIH Insurance and many other firms to move the industry, investors and governments to act? Was it because of the accepted dogma that high risk is good for business because it produces high returns?

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Last Updated: 8th March 2018

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