Практика корпоративного управления

M Болтабаев; У Джуманиязов

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M.R. Boltabaev,

Professor of TSUE

U.I. Djumaniyazov,

Independent researcher of TSUE

CORPORATE GOVERNANCE PRACTICES

In this article studied the appearance, experiences and features of corporate

governance in the economical developed and developing countries.

Key words:

Organization for Economic Cooperation and Development

(OECD), Global Corporate Governance Forum (GCGF), China Securities
Regulatory Commission (CSRC), International Finance Corporation (IFC).

The Global Scenario

Corporate governance standards and practices vary across the world. Every

country develops its own code of corporate governance depending upon its socio-
economic conditions and political philosophy and modifies the code from time to
time based upon its own experiences. In this article, corporate governance practices
in leading economies will be discussed and will be presented.

In modern times, corporations are accessing capital and markets across national

boundaries. It is also seen that investors are also investing in global companies. The
investors want assurance that corporations conform to international norms of
corporate governance. The first effort to formulate a uniform global code was made
by the Organization for Economic Cooperation and Development (OECD). OECD
Principles of Corporate Governance (2004) provided for norms and standards
regarding:

(i)

The rights of shareholders,

(ii)

The responsibilities of shareholders,

(iii)

The rights of stakeholders,

(iv) Disclosure and transparency, and
(v) The role and structure of the board. In 1999, the World Bank and the

OECD joined to create the Global Corporate Governance Forum (GCGF) to promote
the cause of good corporate governance.

In spite of certain similarities, companies in the US and the UK differ on some

fundamental issues like board structure, position of chairman and executive pay. The
independent directors form a majority in the American Boards whereas executives
dominate UK Boards. In the UK, the positions of Chairman and CEO are mostly
separate, whereas most American companies prefer to club the two positions.
American companies prefer highly paid powerful CEOs, whereas British companies
are headed by loss visible non-executive chairman, with reasonable pay for CEO [1].

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Germany

In Germany, corporate governance has traditionally been characterized by a

relationship-based, insider governance system. Companies have long-term
relationships with banks and financial institutions that provide long-term investments
to the German companies. German companies have a two-tier board structure. The
supervisory board at the apex level is expected to provide the monitoring role, but the
appointment to the supervisory board is not considered transparent. Further,
companies hold shares in each other through series of cross-holdings. There are also
significant employee ownerships and employee representatives in the Board.

However, the traditional German corporate governance system does not attract

investments from global capital markets. Corporate governance code was involved in
Germany in 2000, which was revised in 2001 by a commission appointed by the
government. The objective was to harmonies German governance practices with
international standards.

France

The State plays a dominant role in the French companies with a number of

companies either owned or controlled by the State. The banks and financial
institutions are also owned or controlled by the State are the major capital providers
in the absence of significant investment community.

In order to attract foreign investment in French companies, France has

introduced corporate governance reforms through two codes of best practices in 1995
and 1999. The codes were in the line of best international practices in respect of
board structure, disclosure of compensation packages of top executives and
transparent practices. Currently, 30% of directors in French companies are
independent outsiders and 90% Boards had audit, remuneration and nomination
committees.

Japan

According to Monks & Minow (

Corporate Governance,

2004), the Japanese

system of corporate governance is characterized by powerful role for the government
and relationship investing by holding companies leading to cross-holdings under the

Keiretsu

system with inter-company directorship. Banks play a powerful role in

providing finance. Separation of ownership and control is minimum. The governance
is insider-dominated. The governments acted not as a regulator but as a promoter and
protector of domestic industry. Market control and shareholder activism is almost
non-existent. The objective of corporate governance is full employment and the
security of the nation. Transparency, accountability and disclosures are weak [2].

In the wake of globalization, Japan through its Corporate Governance Forum

issued a corporate governance code in May 1998 to align its corporations to
international norms of governance. The Forum called for independent audit,
formulation of board committees for financial supervision, pay and nomination

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committees. The forum stressed the need for more outside independent directors in
the Board in harmony with international practices.

Russia

Since the end of the Cold War, Russia has been opening its financial markets.

The Russian stock market has been developing. However, the political changes were
too rapid and the economy could not keep pace. In 1996, President Yeltsin introduced
reforms for enforcing shareholdersâ rights. There was large-scale privatization in the
nineties in Russia. However, the system of corporate governance is insider-
dominated. In order to attract foreign investment, Russia has been taking significant
steps towards corporate governance reforms. The Supreme Arbitraz Court and the
Federal Commission for Securities market have focused their attention on the need
for right corporate governance [3].

The Russian Corporate Governance code was introduced in 2002 to elevate

Russian corporate governance standards to levels expected by international investors.
However, much more work remains to be done to take full advantage of the benefits
of globalization. The Russian Corporate Governance Code recommends that the
byelaws of all joint stock companies should include a shareholderâs general meeting
stature, a board of directorsâ stature, a board committeesâ stature,
a CEO/Management Board stature, a company secretary stature, an audit commission
stature, a financial control service stature, an internal audit service stature, and
provision for dividend policy declaration and a company information policy.

Simultaneously, the number of independent directors in Russian companies has

been gradually growing. Despite these achievements, the Russian corporate
community still needs dramatic improvements in a number of variety important areas
such as disclosure of ownership structure, clear rules for mergers and acquisitions,
reorganizations, dividend payments, board composition, independent and effective
practices.

China

After 20 years of exploring gradual reforms, more than 1,200 companies in

China have diversified their ownership through public listing. 80 percent of small and
medium-sized firms have been transformed into-state owned enterprises. Most listed
companies in China were reformed state-owned enterprises. Since the beginning of
2000, the China Securities Regulatory Commission (CSRC) has adopted a series of
measures with regard to the improvement of the corporate governance structure of
listed companies. First, CSRC has formulated the basic norms of corporate
governance so that listed companies can follow the rules; secondly, CSRC issued the
Guide to the Establishment of Independent Directors System with the aim of
standardizing the operations of the board of directors of each listed company, which
should have at least one-third independent directors. According to the countryâs
company law, a board of directors should consist of 5 to 19 directors. The average
size of boards in 1999 was 9.9 (Tenev and Zhang 2002).

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The World Bank and the International Finance Corporation (IFC) published a

report that two-thirds of all directors are executive directors. Apart from such
common problems as limited time and energy and asymmetrical information, the
other constraints include:

1) Lack of legal backing for the role of independent directors;
2) Lack of incentives;
3) Drawbacks in the independent directorsâ own credentials and abilities; and
4) The impact of the social and cultural environment [4].
The Code for Corporate Governance for Listed Companies in China was issued

in January 2002. The code sets forth, among other things, protection of investorsâ
interests and rights and the basic rules and standards to be followed. The code is
composed of seven aspects like:

a)

Shareholders and shareholdersâ meetings;

b)

Listed companies and their controlling shareholders;

c)

Directors and Boards of directors;

d)

The supervisors and supervisory board;

e)

Performance assessments and incentive and disciplinary system;

f)

Stakeholders; and

g)

Information disclosure and transparency.

South Africa

Significant corporate governance reforms were introduced in South Africa

through the first King Report in 1994. The report was characterized by its stress on
the stakeholder-oriented approach. The report included for the first time, a code of
business ethics for companies as well as for the stakeholders. In this way, the King
Report is one of the most forward-looking codes of corporate governance. The code
was updated by the King Report in 2002 by the chairman of the Corporate
Governance Committee, Mervyn E. King. The King (2002) defines relationship
between the company and its shareholders as:

ï·

The modern approach is for a board to identify the companyâs stakeholders,

including its shareowners, and to agree to policies as to how the relationship with
these stakeholders should be advanced and managed in the interest of the company;

ï·

Board must apply the test of fairness, accountability, responsibility and

transparency to all acts or omissions and be not only accountable to the country, but
also be responsive and responsible towards the companyâs identified stakeholders.

South Korea

Until well after World War II, Korea was occupied by Japan. This meant that

Korean business was influenced substantially by the Japanese structure of business.
As in Japan, the corporate ownership structure has been characterized by founding
family ownership concentration. The Korean

chaebol

or conglomerate business

groups have arisen from small family-run companies and are now global players (e.g.
Hyndai and LG). Until very recently, the corporate governance structure in Korea has
kept its traditional insider character. There has been little separation of ownership and

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control at the highest level. Indeed, outdated hierarchical business strategies have
been blamed in part for the way in which South Korea succumbed to the Asian crisis
in 1997.

The Asian financial crisis in 1997 hit South Korea heavily and resulted in

significant expropriation of monitory shareholder wealth by majority shareholders in
such companies as Samsung Electronics and SK Telecom. Such transfers of wealth
highlighted a need for tightening of company law. The government has had a
substantial impact on company activities as state-owned banks provide finance. The
government also instructed Korean companies on the strategic direction they wish
them to take. Links with the state are now being lessened to allow greater autonomy
to the companies.

Japanese vs. American Corporate Governance Practices

Masaru Yoshimori (2005) stated that the performance of two Japanese

companies Toyota and Canon is superior to that of their American rivals like GM and
Xerox despite the traditional Japanese style of governance. The author opined that
corporate governance alone does not assure sustained corporate performance. Values,
culture and strategy play an equal or perhaps more important role in corporate
performance [5].

Yoshimori held that independence is extremely difficult to define. Outside

directors are only as good as the CEO. A self-interested CEO can undermine their
independence with relative ease, as the Enron case illustrates. As such it may be time
to look more closely at internal governance mechanisms, instead of trying to refine
the external governance system [6].

Malaysia

A definition by the Finance Committee on Corporate Governance in Malaysia

in the Report on Corporate Governance (2002) stated that:

âCorporate governance is

the process and structure used to direct and manage the business and affairs of the
company towards enhancing business prosperity and corporate accountability with
the ultimate objective of realizing long term shareholder value, whilst taking account
the interests of other stakeholdersâ

. This indicates that corporate governance is not

only applied to the shareholders but the other stakeholders as well.

The main sources of the Corporate Governance reforms agenda in Malaysia are

from the Malaysian Code on Corporate Governance by Finance Committee on
Corporate Governance, Capital Market Master Plan (CMP) by Securities
Commission and Financial Sector Master Plan (FSMP) by Bank Negara Malaysia on
the financial sector. It provides guidelines on the principles and best practices in
corporate governance and the direction for the implementation as well as charts the
future prospects of corporate governance in Malaysia.

The initiative started with the establishment of Finance Committee on

Corporate Governance in 1998 that consists of both government and industry.

Recognition of corporate governance in Malaysia was significantly evidenced

by the released of the Malaysian Code on Corporate Governance by the Committee in

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March 2000. The principles underlying the report focus on four areas including:
board of directors, directorâs remuneration, shareholders and accountability and audit.
The code is hybrid in nature, which is similar to the Combined Code on Corporate
Governance (United Kingdom). Under the approach, the companies in Malaysia
should apply the broad principles of good corporate governance sets out by the code
flexibly and with common sense to the varying circumstances of individual
companies.

Nigeria

For a developing country such as Nigeria, corporate governance is of critical

importance. In its recent history, that lack of corporate governance has led to
economic upheavals. Two examples illustrate the point being made. In the late 1980âs
and early 1990âs the country witnessed a near collapse of the financial sector through
the phenomenon of failed banks and other financial institutions. In consequence, the
failed Banks and financial malpractice in Bank act was promulgated to facilitate the
prosecution of those who contribute to the failure of Banks and to recover the debt
owed to the failed banks. Secondly, privatization and commercialization program of
the Nigerian Government was a reaction to the failure of corporate governance in
state owned enterprises. The privatization functions lies with the Bureau of public
Enterprises (Vincent O. Nmehielle and Eyinna S. Nwauche, 2004).

Other corporate governance failures in Nigeria include:

ï·

In the Bank loans case, capital market operators were charged, accused of

sale of forged certificates and were required to buy back.

ï·

A number of publicly quoted companies have gone into oblivion for reasons

bordering on ineffective and non-existent systems e.g. NASCOM Plc.

ï·

Falsification of accounts by the then directors/management of Lever

Brothers Plc., where over-valuation of stocks running into millions of naira
discovered, and African Petroleum Plc. where about N24 billion credit facilities were
not disclosed, in spite of the due diligence review carried out by the core investors
and reporting accountants. It is noteworthy that the last AGM before privatization AP
still paid N3 as dividend and a section of shareholders Association praised then to
high heaven.

In the last five years, corporate governance has become one of the most

debated corporate issues in Nigeria. In 2001 the securities and Exchange Commission
(SEC) of Nigeria set up a committee that came up with a code of best practices for
public companies in Nigeria (âThe Codeâ in 2003) in 2005 the institute of Director of
Nigeria set up a center for corporate governance to champion the cause of good
corporate governance amongst its members. In 2006 the Central bank of Nigeria
issued post-consolidation corporate guidelines for all banks operating in Nigeria.

The Nigerian code of Corporate Governance is primarily aimed at ensuring that

managers and investors of companies carry out their duties within a framework of
accountability and transparency. This should ensure that the interest of all
stakeholders are recognized and protected as much as possible.

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The code of Best practices for Public Companies in Nigeria (âThe Codeâ) is

voluntary even though it is recommended that all Nigerian public companies comply
with the code and are required to state reason for non-compliance.

Corporate Governance simply put, is ensuring good business behavior. It is

about the way in which boards oversee the running of a company by its managers,
and how board members are in turn accountable to shareholders and the company.
This has implications for the company behavior towards employees, shareholders,
customers, and other stakeholders. Poor corporate governance can weaken a
companyâs potential and can pave way for financial difficulties and even fraud.

In the case of Nigeria, the need is for good business behavior is even more

important, in view of the countryâs image of corruption and lawlessness.

REFERENCES:

1.

Monks and Minow (2004),

Corporate Governance,

p-341.

2.

Monks and Minow (2004), Corporate Governance,

pp-313-314

3.

Solomon Jill and Solomon Aris, (2004),

Corporate Governance and

Accountability,

p-176.

4.

Dr. Lu, Tong (2004), Director Chinese Centre for Corporate Governance,

Institute of World Economics and Politics, Chinese Academy of Sciences,

Corporate

Governance in China,

e-mail:

tonglu@95777.com

5.

Mosaru Yoshimori (2005)

Does Corporate Governance Matter? Why the

Corporate Performance of Toyota and Canon is Superior to GM and Xerox,

Blackwell Publishing, Oxford.

6.

Mosaru Yoshimori (2005) Does Corporate Governance Matter? Why the

Corporate Performance of Toyota and Canon is Superior to GM and Xerox,
Blackwell Publishing, Oxford.

Практика корпоративного управления

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