Corporate Governance Principles, Policies, and Practices SECOND EDITION Bob Trlcker OXFORD UNIVERSITY PRESS
Contents List of Case Studies List of Boxes List of Figures List of Tables xvi xviii XX xxi Introduction What the book is about Who the book is for The basis of the book How the book came to be written: a personal note from the author xxiii xxiii xxiii xxiv XXIV PART ONE Principles 1 Corporate Governance: A Subject Whose Time Has Come 3 In which we see how corporate governance has evolved: All corporate entities need governing 3 Corporate governance is old, only the phrase is new 4 The early days: merchants and monopolists 5 The invention of the limited-liability company 6 The separation of ownership from operations 7 Developments in the 1970s: audit committees, two-tier boards, and corporate responsibility 9 Developments in the 1980s: corporate collapses 10 Developments in the 1990s: corporate governance codes arrive 12 Developments early in the 21 st century: reactions to more corporate collapses 15 Corporate governance implications of the global financial crisis 18 New frontiers for corporate governance 21 2 Governance and Management 29 In which we recognize: Definitions of corporate governance 29 The scope of corporate governance 31 The significance of constitutions for corporate entities 35 The difference between governance and management 42 The performance and conformance aspects of governance 44 Alternative board structures 48
Xl'i. CONTENTS 3 Theories and Philosophies of Corporate Governance 58 The agency dilemma 58 Agency theory 60 Transaction cost economics " 64 Stewardship theory 65 Resource dependency theory 67 Managerial and class hegemony Psychological and organizational perspectives 69 The societal perspective: stakeholder philosophies 70 Enlightened shareholder theory 74 Differing boundaries and levels: systems theory 74 A subject in search of its paradigm 76 N 68 4 The Governance Partnership: Investors, Companies, and Directors 86 In which we study: Shareholder rights 86 Shareholder stewardship and activism 90 Shareholder information 95 Different types of director 96 Directors'legal duties and rights 102 The board leadership role of the chairman 104 The corporate officers 107 5 The Regulatory Framework 110 Legislation, regulation, and corporate governance codes 110 Corporate regulation in the US 111 Corporate regulation in the UK 119 Corporate regulation in other countries 127 Codes from international agencies 131 Codes from institutional investors 135 Company codes 138 Codes for the public and voluntary sectors 140 The importance of compliance: corporate governance reports 143 Principles or prescription: the governance debate 148 6 Models of Corporate Governance 151 How context and culture affect corporate governance 151 The American rules-based model 153 The UK/Commonwealth principles-based model 154 The continental European two-tier model 157 The Japanese business network model 157 The Asian family-based model 162 Corporate governance: convergence or differentiation? 162 Institutions necessary for successful corporate governance 165
CONTENTS [ xiii PART TWO Policies 7 Functions of the Board 173. * What the board does 173 Balancing the board's performance and conformance roles 185 Board committees: functions and authority 186 Delegating board functions to management 189 Corporate transparency 194 8 The Governance of Corporate Risk 198 The USCOSO integrated framework for enterprise risk management (ERM) 199 The global financial crisis: a new emphasis on corporate risk 199 Levels of risk: the concept of enterprise risk management 201 Responsibility for risk profiling, risk strategy, risk policy, and risk supervision 204 Identifying types of risk 206 Risk analysis 211 Risk recognition and assessment 213 Risk evaluation 216 Risk management information systems 218 Risk transfer 219 9 Corporate Social Responsibility and Sustainability 224 The concept of corporate social responsibility (CSR) 224 Changi ng expectations i n the governance of organ izations 227 Enlightened shareholder value (ESV) 229 CSR strategies and policies ' 230 The CSR competency framework 232 Balancing corporate responsibilities 234 Sustainability and the triple bottom line 236 Communication with stakeholders: integrated reporting 239 The United Nations Global Reporting Initiative 244 10 The Governance of Listed Companies 250 Ownership of listed companies 250 Shareholder rights 251 Shareholder activism and the role of institutional investors 253 Shareholder relations 254 Disclosure of substantial shareholdings and directors' interests 255 The governance of complex corporate structures 256 Block-holders and universal ownership 268 Dual-listed companies 270 Dual-class shares 271 Listings on alternative stock markets 272
Xiv CONTENTS 11 The Governance of Private Companies and Other Corporate Entities 275 The governance of private corporate entities 275 The governance of individual and family-owned companies 276 The governance of subsidiary and associated companies 278 The governance of joint ventures 282 The governance of NGOs and non-profit corporate entities 284 The governance of partnerships and limited-liability partnerships 287 The governance of hedge funds, private equity, and sovereign funds 289 The state as shareholder 297 PART THREE Practices 12 Board Membership: Directors' Appointment, Roles, and Remuneration 303 In which we review: The appointment of directors 303 Desirable attributes in a director 306 Core competencies of a director 310 Roles that directors play. 311 Directors' duties, rights, and powers 314 Directors' disclosures, service contracts, and agreements 316 Directors'remuneration 318 13 Board Leadership: The Reality of the Boardroom 327 How people, power, and politics affect practice 327 The chairman's leadership role 328 ' Sources of governance power 333 Games that directors play 335 Board styles and the culture of the board 342 The ethical dimension: corporate values and business ethics 347 Corporate codes of ethics and their enforcement 348 Implementing corporate governance below board level 352 14 Board Activities: Corporate Governance in Practice 357 In which we review: Committees of the board 357 The influence of the audit committee 359 The role of internal audit in corporate governance 375 The importance of the external auditor 378 The significance of the company secretary 383
CONTENTS! XV 15 Board Effectiveness: Building Better Boards 390 Making a board effective 390 Director orientation and director induction programmes 392 Director development, training, and updating " 394 Directors' liabilities and indemnity 397 Board information 401 Managing meetings, agenda, and minutes 408 Communications with shareholders and other stakeholders 411 Appendix to Chapter 15: Director's induction checklist 416 16 Board Assessment: Reviewing Directors and Boards 420 Assessing boards and board committees 420 Assessing individual directors' performance 431 Corporate governance rating systems for companies 433 Corporate governance assessment systems for countries 437 17 Corporate Governance Around the World 441 Corporate governance in China 441 Corporate governance in India 450 Corporate governance in Russia 452 Corporate governance in Brazil 456 Corporate governance in Hong Kong and Singapore 457 Corporate governance in South Korea: the chaebol 462 Corporate governance in the Middle East and North Africa (Islamic finance) 462 18 The Future of Corporate Governance 466 The frontiers of corporate governance 466 Beyond the frontiers of corporate governance 473 New corporate governance policies and practices 485 Society's changing expectations 488 Appendix 1 Corporate Governance Codes Around the World,497 Appendix 2 Enron 505 Appendix 3 The Evolution of the UK Corporate Governance Code 507 Appendix 4 The New York Stock Exchange Corporate Governance Listing Standards 511 Appendix 5 Answers to End-of-Chapter Self-Test Questions 525 Index 535