CORPORATE GOVERNANCE Lecture 2 Contextualising corporate governance RETURNING

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CORPORATE GOVERNANCE Lecture 2: Contextualising corporate governance

CORPORATE GOVERNANCE Lecture 2: Contextualising corporate governance

RETURNING TO STAKEHOLDER & AGENCY THEORY • Different starting points, so different conclusions •

RETURNING TO STAKEHOLDER & AGENCY THEORY • Different starting points, so different conclusions • What is the role of the corporation? • How are corporations to be evaluated? • Morally or financially?

RUNNING A COMPANY • If you were to set out how a company should

RUNNING A COMPANY • If you were to set out how a company should be run – a plc ideally – what would you do? • Who should be in charge? • Should there be any limits on their powers? • Who should they be accountable to? • Should they be forced to be accountable?

ACCA • ACCA (the Association of Chartered Certified Accountants) is the global body for

ACCA • ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, offering business relevant, first choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. • ACCA supports its 200, 000 members and 486, 000 students in 180 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. ACCA works through a network of 101 offices and centres and more than 7, 200 Approved Employers worldwide, who provide high standards of employee learning and development. Through its public interest remit, ACCA promotes appropriate regulation of accounting and conducts relevant research to ensure accountancy continues to grow in reputation and influence. • ACCA is currently introducing major innovations to its flagship qualification to ensure its members and future members continue to be the most valued, up to date and sought after accountancy professionals globally. • Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability.

A SPECIFIC DEFINITION OF CORPORATE GOVERNANCE ACCA’s [previous] view is that there are three

A SPECIFIC DEFINITION OF CORPORATE GOVERNANCE ACCA’s [previous] view is that there are three complementary main purposes of corporate governance. • To ensure the board, as representatives of the organisation’s owners, protects resources and allocates them to make planned progress towards the organisation’s defined purpose. • To ensure those governing and managing an organisation account appropriately to its stakeholders. • To ensure shareholders and, where appropriate, other stakeholders can and do hold boards to account.

FIVE THEMES THAT ARE RECURRING IN THE CORPORATE GOVERNANCE DEBATE • the relationship between

FIVE THEMES THAT ARE RECURRING IN THE CORPORATE GOVERNANCE DEBATE • the relationship between companies and society • diversity and balance • enabling an effective board • executive remuneration • gatekeepers of corporate governance • https: //www. accaglobal. com/content/dam/ACCA_Global/professional insights/Tenets of good corporate governance/Tenets good corporate governance. pdf

THE RELATIONSHIP BETWEEN COMPANIES AND SOCIETY • Aligning the vision of a company with

THE RELATIONSHIP BETWEEN COMPANIES AND SOCIETY • Aligning the vision of a company with that of society will help that company to prosper in the long term. Aiming to be part and fulfilling the needs of a society will help a company to navigate its challenges and uncertainties and create value from opportunities. • Are the prosperity of businesses and that of society linked? • Financial Crisis? • ACCA respond: where society is dynamic and flourishing, there are greater opportunities for business to prosper. . • What people expect from business has changed. Beyond being financially sustainable and accountable to their investors, businesses are also expected to consider the well being of their stakeholders including employees and business partners, society and the environment. The public expects businesses to go beyond legal requirements.

THUS • There is no single model that all companies can use to align

THUS • There is no single model that all companies can use to align with the long term direction of society. Businesses need to approach this as a formal part of the strategic planning process with methodologies, frameworks and constant review processes that are appropriate to the company. • This long term approach is neither a ‘good to have’ luxury nor a corporate social responsibility (CSR) ‘tick box’: it’s a necessity for any business that hopes to prosper in a rapidly changing society. • Given that the role of leadership is fundamental, some might argue that leaders’ tenure is often too short for steering their companies towards a sustainable business model. Nonetheless, by changing organisational culture, leaders can embed values that embody their vision.

IS DIVERSITY IMPORTANT? • If so, why? • And what exactly is meant by

IS DIVERSITY IMPORTANT? • If so, why? • And what exactly is meant by diversity?

DIVERSITY AND BALANCE • The benefit of having diverse viewpoints on a board or

DIVERSITY AND BALANCE • The benefit of having diverse viewpoints on a board or within an organisation is well recognised today. Diverse viewpoints allow businesses to consider a broader range of scenarios, and to take into account the viewpoints of a greater number of stakeholders. This enables more robust decision making and more strategic discussion, leading to better performance in the long run. A board that is made up of people who have already known each other for a long time, or think too similarly, will be limited in its discussion and conclusions. • https: //www. theguardian. com/business/2017/jul/03/sports direct founder pubs mike ashley

SO • In addressing diversity issues, a company may adopt a number of methods,

SO • In addressing diversity issues, a company may adopt a number of methods, such as the use of a skills matrix and criteria, tailored to fit a company’s business model and strategy. Business leaders could approach this by examining the company’s objectives, its business model and its stakeholders and then developing tailored diversity criteria and a mechanism for introducing diverse viewpoints. Such mechanisms could include (but are not limited to) recruitment of non executive directors, the facilitation of additional stakeholder voices as guests in board meetings, or other means such as direct meeting stakeholders.

ENABLING AN EFFECTIVE BOARDROOM • What do you think makes an effective board? •

ENABLING AN EFFECTIVE BOARDROOM • What do you think makes an effective board? • • A strong leader able to make decisions? Teamwork? Expertise? Something else?

ENABLING AN EFFECTIVE BOARDROOM • The board should be able to ‘scan the horizon’

ENABLING AN EFFECTIVE BOARDROOM • The board should be able to ‘scan the horizon’ strategically: identifying what is happening in the world and deciding how to respond; recognising what the company should do to achieve its objectives; and determining how it can create value sustainably. • A company’s board shares the same goal as the executive team, but their roles are different. Their common goal is the long term prosperity of the organisation. But the board monitors long term progress and gives stakeholders confidence, while taking actions to steer the organisation; in contrast, executives are engaged in day to day achievement of more immediate goals, while managing available resources.

PRACTICAL STEPS ENABLING AN EFFECTIVE BOARD PROCESS • The role of the chair is

PRACTICAL STEPS ENABLING AN EFFECTIVE BOARD PROCESS • The role of the chair is vital: the chair facilitates discussion and debate, and enables each individual board member to challenge and question. The chair has a substantial impact on the social and psychological dynamics in the boardroom. The rest of the board take their tone from both the chair and, where available, the senior independent director. These two need to build trust among the board members, but also need to be trusted by those members. • https: //www. bbc. co. uk/news/business 45134768

EXECUTIVE REMUNERATION • Why doesn’t the pay debate go away? • One of the

EXECUTIVE REMUNERATION • Why doesn’t the pay debate go away? • One of the issues is the mismatch between pay and performance. Executive pay has risen steadily over years, generally surpassing the rate of inflation where many employees have seen stagnant or failing wages in real terms. The global financial crisis resulted in some restraint on executive pay for a period, but this seems to have lost some of its drive over the following decade. • a ‘fat cat’ view of executives has emerged, particularly in light of recurring corporate failures. • https: //www. theguardian. com/business/executive pay bonuses

THEREFORE • Companies, and particularly their remuneration committees, must regularly look at the way

THEREFORE • Companies, and particularly their remuneration committees, must regularly look at the way executive pay is structured and see if it aligns with the company’s overall purpose, value and mission, and organisational culture, particularly if executives’ pay structure is very different from that for the rest of the organisation. • Although investors frequently discuss remuneration issues when engaging with companies, they are often criticised for green lighting pay proposals when voting on remuneration policies. Ultimately, investor stewardship is about facilitating companies to achieve long term prosperity. Matching pay with performance is a part of this, but may not necessarily be the most important part of the engagement.

GATEKEEPERS OF CORPORATE GOVERNANCE • The ‘gatekeeping’ of corporate governance involves more than just

GATEKEEPERS OF CORPORATE GOVERNANCE • The ‘gatekeeping’ of corporate governance involves more than just companies and their owners: the wider public and policymakers also play a role. • Who are those really responsible for corporate governance? • Examinations of failures in governance often highlight the role of the external gatekeepers of corporate governance, particularly investors and their stewardship responsibilities. • Stakeholders have a role to play, but the impact is not necessarily equal

THUS • Many company law and corporate governance codes have implicitly or explicitly included

THUS • Many company law and corporate governance codes have implicitly or explicitly included the concept of a ‘(social) licence to operate’: the idea that a business gains the legitimacy it needs to exist and operate from the consent of those who are affected by it. This would imply that a company operating at odds with its society would be rejected and ultimately fail.

SO WHAT HAS CHANGED? • Consider first in terms of agency theory vs stakeholder

SO WHAT HAS CHANGED? • Consider first in terms of agency theory vs stakeholder theory • Agency theory diminished • Diversity, society, CSR, legitimacy • Leadership, and the role of the board

HOW EFFECTIVE ARE ACCA RECOMMENDATIONS? • ACCA aims to be global • And largely

HOW EFFECTIVE ARE ACCA RECOMMENDATIONS? • ACCA aims to be global • And largely is because of relation to City of London • Thus corporate governance standards are set beyond the will of any one government • Not legally binding so rests on accountability • ACCA effectively set norms against which boards can be held accountable • Once prefigured (i. e. a model of corporations, accountability, etc. already being used), now seeking to act as a force for change that might, or might not, change the role of companies more generally. But does not affect fundamental power relationships.

BACK TO RUNNING A COMPANY • If you were to set out how a

BACK TO RUNNING A COMPANY • If you were to set out how a company should be run – a plc ideally – what would you do? • Who should be in charge? • Who should they be accountable to? • Should they be forced to do this? • Have you changed your mind?

WHO DEFINES WHAT IS CORPORATE GOVERNANCE? • Legal, economic and social contexts • Sometimes

WHO DEFINES WHAT IS CORPORATE GOVERNANCE? • Legal, economic and social contexts • Sometimes distinct, sometimes overlapping • Social context widely argued over • partly shown in terms of Corporate Social Responsibility (CSR)

CORPORATE SOCIAL RESPONSIBILITY • Important when discussing Corporate Governance • If it is accepted

CORPORATE SOCIAL RESPONSIBILITY • Important when discussing Corporate Governance • If it is accepted that companies should display corporate social responsibility, then this will come with a set of specific stakeholders • Thus akin/allied to stakeholder theory • But contentious, and rubs up hard against agency theory model • A range of definitions employed

WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT • Corporate Social Responsibility is the continuing commitment

WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT • Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large • Wide definition of stakeholders • Workforce, families, local community, society at large

CORPORATE PHILANTHROPY • Corporate philanthropy or corporate giving is the act of corporations donating

CORPORATE PHILANTHROPY • Corporate philanthropy or corporate giving is the act of corporations donating some of their profits, or their resources, to charitable causes. • Corporate giving is often handled by the corporation directly, or it may be done through a company foundation. (non profit. org) • Now seen as a part of CSR but has a long history • https: //www. youtube. com/watch? v=2 Sgmmp. Ei 5 HQ

FRIEDMAN (1970) The Social Responsibility of Business is to Increase its Profits The discussions

FRIEDMAN (1970) The Social Responsibility of Business is to Increase its Profits The discussions of the "social responsibili ties of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom… [CSR is] a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. "

CSR AND CORPORATE GOVERNANCE • Similar theoretical divisions as to what, if anything should

CSR AND CORPORATE GOVERNANCE • Similar theoretical divisions as to what, if anything should be covered. • Responsibility only to maximise profits (Friedman) • A different, but connected, take on agency theory • Or a wider responsibility • Taking in more stakeholders • Or philanthropy • Close to laissez-faire capitalism

TAKING IN THE SOCIAL: LEGITIMACY THEORY • Starts with a question of what are

TAKING IN THE SOCIAL: LEGITIMACY THEORY • Starts with a question of what are corporations for? And what should they be allowed to do? • A wider theoretical perspective: legitimacy theory • “Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995) • At a broad institutional level, this means that ‘capitalism’, ‘government’, ‘social arrangements’ are considered normal and appropriate. • “Within this tradition, legitimacy and institutionalization are virtually synonymous. Both phenomena empower organizations primarily by making them seem natural and meaningful” (Suchman, 1995)

LEGITIMACY THEORY • “Organisations seek to establish congruence between the social values associated with

LEGITIMACY THEORY • “Organisations seek to establish congruence between the social values associated with or implied by their activities and the norms of acceptable behaviour in the larger social system in which they are a part. In so far as these two value systems are congruent we can speak of organisational legitimacy. When an actual or potential disparity exists between the two value systems there will exist a threat to organisational legitimacy”. (Matthews, 1993) • Legitimacy associated with normative social values, then, and changeable. Arguably shares some theoretical roots with accountability theories.

THIS ADDS COMPLEXITY • “Community expectations are not considered static, but rather, change across

THIS ADDS COMPLEXITY • “Community expectations are not considered static, but rather, change across time thereby requiring organisations to be responsive to the environment in which they operate. An organisation could, accepting this view, lose its legitimacy even if it has not changed its activities from activities which were previously deemed acceptable (legitimate)” (Deegan et al. , 2002)

LEGITIMACY THEORY • Certain political/economic relations are seen as acceptable at some times, not

LEGITIMACY THEORY • Certain political/economic relations are seen as acceptable at some times, not so at others • Consider Japan in the 1960 s – the post war miracle • Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%. • Country was generally accepting of need for modernisation, but • Cadmium poisoning from industrial waste, methylmercury poisoning, air pollution from automotive and industrial exhaust fumes, arsenic poisoning, waste disposal • https: //www. youtube. com/watch? v=VIIz. Hw 3 wk. Pg • Changes what is considered acceptable for companies

OTHER EXAMPLES • Financial crash – calls into question banking activities and status of

OTHER EXAMPLES • Financial crash – calls into question banking activities and status of banks • China – also concerns about pollution. Partly addressed by CSR reports by public companies • Enron – calls for changes in corporate governance

LEGITIMACY THEORY AT ORGANIZATIONAL LEVEL • Organizations have to fit in with social norms.

LEGITIMACY THEORY AT ORGANIZATIONAL LEVEL • Organizations have to fit in with social norms. • These can be loose or rigid, and can change • They will differ across countries • So Friedman will have greater recognition in US (and UK) than France or Germany, because his ideas are closer to their norms • Corporate governance is one way in which legitimacy plays out • And thus will work in different ways in different countries • So where does this leave global efforts such as ACCA?