Archive for June, 2009

Corporate governance: Lessons from the financial crisis

by OECD for oecd Observer at OECD,  June 30, 2009.

If there is one major lesson to draw from the financial crisis, it is that corporate governance matters.

Directors, regulators and shareholders, but also policymakers and the general public, need to pay more attention to corporate governance. This tells us how firms operate, their motives and principles, their reporting lines, who they are accountable to, and how they manage profit, remuneration and, in the case of many financial firms, other people’s money. When times were good, too many people took their eye off the ball and now we see the consequences.

The public outcry has been loud and understandable, not least in relation to executive pay. And even some top executives have now admitted the lack of relationship between pay and performance and called for a salaries shake-up. We now realise that constantly rising share prices is not necessarily a sign of good corporate governance. In fact, as recent history shows, it could actually be the opposite…(read more)

Governance Matters 2009: Learning From Over a Decade of the Worldwide Governance Indicators

by Dani Kaufmann for blog.worldbank.org, June 29, 2009.

Today we are releasing the report Governance Matters VIII, which includes the new update of the Worldwide Governance Indicators (WGI).   Now collaborating from the Brookings Institution, I continue to take part in this research project with my former World Bank colleagues Aart Kraay and Massimo Mastruzzi.

In the WGI we construct and measure six dimensions of governance, namely: Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption.

The new WGI is based on 35 different data sources, aggregating data from hundreds of disaggregated questions posed to tens of thousands respondents, covering 212 countries around the world…(continue reading)

Focus 6: Drivers of Corporate Governance Reforms: Take-Over and Tender Offer Experiences in Chile and Panama

by Alvaro Clarke and Carlos Barsallo, for Global Corporate Governance Forum.

PROLOGUE
By Mike Lubrano
In the wake of highly publicized scandals related to poor governance, there
followed demands for some kind of legal/regulatory response. As seen after the
East Asian crisis in 1997, the series of corporate collapses in the United States,
starting with Enron, and the Royal Ahold and Parmalat scandals in Europe,
investors and other stakeholders strongly urged governments, legislators,
and regulators to “do something about it.” But what should be done? The
circumstances surrounding each crisis were different and only rarely were there
obvious solutions at hand. Politicians, regulators, and businessmen usually
disagreed as to the underlying causes of the scandal in question and therefore
had different views regarding the recipe to avoid a repetition of the situation.
And of course, policymakers do not operate in an environment unconstrained
by political, economic, and practical constraints. When one reviews the last
10 years of corporate governance-related scandals in Asia, the Americas, and
Europe, what emerges is an impressive variety of policy outcomes. In some cases,
governments acted precipitously; in others, they acted very slowly. Some reforms
were comprehensive in scope; others more narrowly targeted. Some governments
and regulators devised responses in the framework of longer-term strategies, while
others engaged in blatant opportunism. Naturally, both the outcomes and the
reactions of the community and the market were mixed; to this day, they are the
subject of fierce criticism and intense debate.
Over the past 10 years, Latin America has had its own corporate governance
scandals, followed by public opinion reactions and reform initiatives. Shenanigans
related to non-voting shares, takeovers, and withdrawal of listings prompted
Brazil’s efforts in 2000 to reform legislation on companies and securities. The TV
Azteca case, and other instances of improper treatment of minority investors,
triggered the subsequent reform of Mexico’s stock market laws and gave rise
to the Investment Promotion Corporation (IPC), a completely new legal entity
for companies that were listed on the stock exchange and those that were not.
There were also major, albeit partial, reforms in Argentina, Colombia, and Peru.
Since 2000, the protagonists of all these public and private sector efforts have
been meeting regularly to exchange ideas and experiences at the Roundtable on
Corporate Governance of the OECD, co-organized from the start with the IFC and
supported throughout by the Global Corporate Governance Forum (GCGF).

12.2A84Prologue by Mike Lubrano.

In the wake of highly publicized scandals related to poor governance, there followed demands for some kind of legal/regulatory response. As seen after the East Asian crisis in 1997, the series of corporate collapses in the United States, starting with Enron, and the Royal Ahold and Parmalat scandals in Europe, investors and other stakeholders strongly urged governments, legislators, and regulators to “do something about it.” But what should be done? The circumstances surrounding each crisis were different and only rarely were there obvious solutions at hand. Politicians, regulators, and businessmen usually disagreed as to the underlying causes of the scandal in question and therefore had different views regarding the recipe to avoid a repetition of the situation.

And of course, policymakers do not operate in an environment unconstrained by political, economic, and practical constraints. When one reviews the last 10 years of corporate governance-related scandals in Asia, the Americas, and Europe, what emerges is an impressive variety of policy outcomes. In some cases, governments acted precipitously; in others, they acted very slowly. Some reforms were comprehensive in scope; others more narrowly targeted. Some governments and regulators devised responses in the framework of longer-term strategies, while others engaged in blatant opportunism. Naturally, both the outcomes and the reactions of the community and the market were mixed; to this day, they are the subject of fierce criticism and intense debate.

Over the past 10 years, Latin America has had its own corporate governance scandals, followed by public opinion reactions and reform initiatives. Shenanigans related to non-voting shares, takeovers, and withdrawal of listings prompted Brazil’s efforts in 2000 to reform legislation on companies and securities. The TV Azteca case, and other instances of improper treatment of minority investors, triggered the subsequent reform of Mexico’s stock market laws and gave rise to the Investment Promotion Corporation (IPC), a completely new legal entity for companies that were listed on the stock exchange and those that were not.

There were also major, albeit partial, reforms in Argentina, Colombia, and Peru. Since 2000, the protagonists of all these public and private sector efforts have been meeting regularly to exchange ideas and experiences at the Roundtable on Corporate Governance of the OECD, co-organized from the start with the IFC and supported throughout by the Global Corporate Governance Forum (GCGF)…

To download the file click here.

Also available in Spanish.

Speech by SEC Commissioner: “The American Corporation and its Shareholders: Dooryard Visits Disallowed”

by Elisse B. Walter for US Securities and Exchange Commission (SEC), June 27, 2009.

…Our thinking on corporate governance issues in this country appears divided, however. There are those who believe that the capital markets themselves will improve corporate governance. And, there are those, like me, who believe that making improvements in corporate governance will enhance the capital markets. No matter which view you ascribe to, I think we can all agree that the relationship of the capital markets to corporate governance is complex and dynamic.

We have all seen an increased focus on corporate governance at the federal level over the past year. With resignations of CEOs and mandatory Say on Pay legislation for TARP recipients, I think it is fair to say that the Obama administration and the Congress are taking the initiative to demand governance excellence in fact and not just in appearance. This theme runs throughout the Administration’s white paper, which includes a recommendation for mandatory Say on Pay votes at all public companies…(read the complete sspeech here)

Private Sector Opinion, Issue 5: Whistleblowing: Recent Developments and Implementation Issues

by  Mak Yuen Teen for Global Corporate Governance Forum.

61.3DB0Foreword by Stephen B. Young.

Mak Yuen Teen has raised some very important considerations for the internal governance of corporations when he argues for additional legal protections for whistleblowers. Boards of Directors should respond positively and constructively to his suggestions because his arguments go to the heart of board powers and responsibilities.

Whistleblowing occurs when there is bad news to report; news so unsettling that it is feared and covered up. That is why it often takes a “whistleblower” to bring the unsavory tidings to public attention. Normal channels for reporting and disclosure have failed.

In short, the information that is to be conveyed to responsible authorities by whistleblowers points to dangers and risks, sometimes grave dangers and high risks. One thinks of Sharon Watkins at Enron seeking to inform the CEO Ken Lay of systemic financial misreporting of actual earned income. What had been covered up and what she sought to disclose was of life and death consequence to the company. Public disclosure of her information led directly to Enron’s bankruptcy. Suffice to say a more responsible board should have prevented that event by taking early preventive action…

To download this file click here.

Foreword
Mak Yuen Teen has raised some very important considerations for the internal
governance of corporations when he argues for additional legal protections for
whistleblowers.
Boards of Directors should respond positively and constructively to his suggestions
because his arguments go to the heart of board powers and responsibilities.
Whistleblowing occurs when there is bad news to report; news so unsettling that it
is feared and covered up. That is why it often takes a “whistleblower” to bring the
unsavory tidings to public attention. Normal channels for reporting and disclosure
have failed.
In short, the information that is to be conveyed to responsible authorities by whistleblowers
points to dangers and risks, sometimes grave dangers and high risks. One
thinks of Sharon Watkins at Enron seeking to inform the CEO Ken Lay of systemic
financial misreporting of actual earned income. What had been covered up and
what she sought to disclose was of life and death consequence to the company.
Public disclosure of her information led directly to Enron’s bankruptcy. Suffice to
say a more responsible board should have prevented that event by taking early
preventive action.

Corporate Governance, Norms and Practices

by Luc Laeven and Vidhi Chhaochharia, at SSRN, June 26, 2009.

Abstract:
We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we differentiate between minimally accepted governance attributes that are satisfied by all firms in a given country and governance attributes that are adopted at the firm level. Despite the costs associated with improving corporate governance at the firm level, we find that many firms choose to adopt governance provisions beyond those that are adopted by all firms in the country, and that these improvements in corporate governance are positively associated with firm valuation. Firms that choose not to adopt sound governance mechanisms tend to have concentrated ownership and free cash flow consistent with agency theories based on self interested managers and controlling shareholders. Our results indicate that the market rewards companies that are prepared to adopt governance attributes beyond those required by laws and common corporate practices in the home country…

To download this paper click here.

Private Sector Opinion, Issue 4: Auditors and Independence

by John Plender for Global Corporate Governance Forum.

Foreword
An old riddle loved by Abraham Lincoln asks, “How many legs does a cow have,
if you call a tail a leg?” The answer: Four. Calling a tail a leg doesn’t make it one.
And claiming an auditor is independent doesn’t make it so, either. In this essay,
excerpted from All You Need To Know About Ethics and Finance, Avinash Persaud
and John Plender correctly place independence as the foundation of the credibility
of the capital markets.
And they are correct to say that independence is particularly important when it
comes to auditors. Investors cannot be in the room when the entries are made
in the company’s books. They must believe that the auditors who check and
approve the figures are independent enough to represent their interests, instead
of being captive to the people who select them and approve payment. But
independence has been difficult to achieve and difficult to discern. Attempts, for
example, to tie the independence of directors to lower risk or greater return have
failed to show any special connection. The problem is not that independence is
not important—the problem is that independence is difficult to determine based
on the indicators required to be disclosed by the SEC and the stock exchanges.

62.1AA6Foreword by Nell Minow.

An old riddle loved by Abraham Lincoln asks, “How many legs does a cow have, if you call a tail a leg?” The answer: Four. Calling a tail a leg doesn’t make it one. And claiming an auditor is independent doesn’t make it so, either. In this essay, excerpted from All You Need To Know About Ethics and Finance, Avinash Persaud and John Plender correctly place independence as the foundation of the credibility of the capital markets.

And they are correct to say that independence is particularly important when it comes to auditors. Investors cannot be in the room when the entries are made in the company’s books. They must believe that the auditors who check and approve the figures are independent enough to represent their interests, instead of being captive to the people who select them and approve payment. But independence has been difficult to achieve and difficult to discern. Attempts, for example, to tie the independence of directors to lower risk or greater return have failed to show any special connection. The problem is not that independence is not important—the problem is that independence is difficult to determine based on the indicators required to be disclosed by the SEC and the stock exchanges…

To download the file click here.


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Leaders in Corporate Governance

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Blog da Governança


(in Portuguese) A weekly chronicle about shareholders' rights & duties, activism and capital markets regulation, by Renato Chaves.
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