Corporate Governance PERTEMUAN XIVXV Dr Rilla Gantino SE

Corporate Governance PERTEMUAN XIV-XV Dr Rilla Gantino, SE. , AK. , MM MAKSI-FEB

KEMAMPUAN AKHIR YANG DIHARAPKAN - Mahasiswa memamhmi konsep CG dan langkah-langkah untuk mencapai CG serta mampu menjelaskan hubungan Internal audit dengan CG dan Risk Management

What is Corporate Governance ? Corporate Governance refers to the structures & processes for the efficient & proper direction & control of companies (both private and public) in the interest of all stakeholders

What is Corporate Governance ? - Is a concept; one size does not fit all, HOWEVER: - Basic Principles of Corporate Governance: Accountability Rights of Shareholders Transparency Interests of Stakeholders Fairness Good Faith Integrity Trust Disclosure Responsibility Controls Commitment Diligence

Corporate Governance Framework Governance Principles Legal / Regulatory Codes of Best Practice Stakeholder Relations Self Regulation Ethical Standards Risk Management

Why Corporate Governance Matters • Enhances performance of companies • Enhances access to capital • Enhances long term prosperity. • Provides a barrier to corrupt dealings- limiting discretionary decision making, increasing oversight, introducing Codes of Ethics etc • Impacts on the society as a whole: Better companies, Better societies.

Good Corporate Governance and Good Public Governance are complementary “ The proper governance of companies will become as crucial to the world economy as the proper governing of countries”. James Wolfensohn President of WB, 1999

Corporate Governance. Channel of Growth & Development Country level Sector level Individual firms

Corporate Governance. Channel of Growth & Development • Increases access to external financing leading to larger investment, high growth & creation of more jobs • Better allocation of resources • Better management creating wealth • Reduces the risk of financial crisis • Better relationship with all stakeholders

Corporate Governance. Principles for the Public Sector • Generally derived from the private sector • Ensures public accountability • Promotes responsive and accountable institutions • Good financial management of resources • Good stewardship – – Responsibility to protect the wealth of the state and its citizens – Maintain and safeguard it in the interest of the citizens

Good Corporate Governance, Good Government & Good Business go hand in hand • Good Governance by Host Country • Good Governance by Private Sector • Good Governance by Investment Promotion Agencies • Good Governance by Investors

Good Governance by Host Country Transparent, stable and predictable investment climate: • Appropriate legislation to support investment • Anti corruption measures • Effective , speedy and transparent resolution of disputes • Forum for Investors • Capacity Building

Good Governance by Private Sector • Institutional Framework • Role of Board of Directors • Management • Risk factors • Transparency & Disclosure • Reputation

Good Governance by Investment Promotion Agencies • Self Regulation • Transparency & Disclosure • Accountability • Commitment • Sound and Clear Administrative Policies • Stakeholder engagement

Good Governance by Foreign Investor • Good faith • Business Integrity • Governance Policies • Human Capital • Corruption Practices

Recommendations • Continued advocacy on the benefits of Corporate Governance • Codes of Corporate Governance for countries • Capacity building • Sourcing of funds to support Corporate Governance development. • Every institution , every stakeholder should provide input into the corporate governance agenda

Contoh penerapan CG

Corporate Governance Best Practices: Implications for Commercial Underwriters Dr. Gail S. Russ Dr. Meredith Downes Associate Professors of Management Illinois State University

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Corporate Governance • Core concern: How do we make sure that top managers are doing what they’re supposed to be doing? 20

The Agency Perspective • Separation of ownership & control q q Principals & agents Misalignment of interests • What’s good for the managers may not be what is good for the owners 21

The Agency Perspective • The Agency Problem: q The misalignment of agents & principals’ interests leads to agents (managers) pursuing strategies that are not in the best interests of the principals (stockholders). 22

The Agency Perspective • The Agency Problem: q q The misalignment of agents & principals’ interests leads to agents (managers) pursuing strategies that are not in the best interests of the principals (stockholders). Focus is on protecting shareholder rights 23

The Stakeholder Perspective • The board has broader responsibilities q Focus is on protecting key stakeholder rights • • • Shareholders Employees Vendors Customers Society as a whole 24

Best Practices • The board of directors • Executive compensation • Anti-takeover measures 25

The Board of Directors • Role is to monitor & evaluate top management • But, is the board a complete solution? 26

Best Practices: Board of Directors • Separate CEO & Chairman of the Board q Role duality gives CEO too much power 27

Best Practices: Board of Directors • Separate CEO & Chairman of the Board q Role duality gives CEO too much power • Appointment of lead outside director 28

Best Practices: Board of Directors • Separate CEO & Chairman of the Board q Role duality gives CEO too much power • Appointment of lead outside director • Former CEO does not continue to sit on the board 29

Best Practices: Board of Directors • Active board members q Not a rubber-stamp board 30

Best Practices: Board of Directors • Active board members q Not a rubber-stamp board • Evidence that the directors are in contact with employees, vendors, & customers 31

Best Practices: Board of Directors • Active board members q Not a rubber-stamp board • Evidence that the directors are in contact with employees, vendors, & customers • Board composition q q Size Age Diversity Expertise 32

Best Practices: Board of Directors • Board composition q Insiders versus outsiders 33

Best Practices: Board of Directors • Board composition q q Insiders versus outsiders “Having a board monitor itself is like having the fox watch the henhouse. ” 34

Best Practices: Board of Directors • Board composition q q q Insiders versus outsiders “Having a board monitor itself is like having the fox watch the henhouse. ” The majority should be independent 35

Best Practices: Board of Directors • Board composition q q Insiders versus outsiders “Having a board monitor itself is like having the fox watch the henhouse. ” The majority should be independent Should have formal resolution requiring this AND a written definition of independence 36

Best Practices: Board of Directors • Board composition q What is meant by “independent”? • No material relationship with the company, either directly or as a partner, shareholder or officer of a firm that has a relationship with the company 37

Best Practices: Board of Directors • Board composition q What is meant by “independent”? • Five year “cooling off” period before can be considered independent: – Former employees of the firm – If formerly part of an interlocking directorate in which an executive of the firm sat on the compensation committee of the firm employing the director – Same applies to directors with immediate family members in the above categories 38

Best Practices: Board of Directors • Board members (insiders & outsiders) q Limits on number of other board memberships • Average director spends 176 hours a year for each board position 39

Best Practices: Board of Directors • Board members (insiders & outsiders) q Limits on number of other board memberships • Average director spends 176 hours a year for each board position q CEOs should not serve on each other’s boards (interlocking directorates) 40

Best Practices: Board of Directors • Board members (insiders & outsiders) q Limits on number of other board memberships • Average director spends 176 hours a year for each board position q q CEOs should not serve on each other’s boards (interlocking directorates) Directors & their firms barred from doing consulting, legal, or other work for the firm 41

Best Practices: Board of Directors • Board members (insiders & outsiders) q Limits on number of other board memberships • Average director spends 176 hours a year for each board position q q q CEOs should not serve on each other’s boards (interlocking directorates) Directors & their firms barred from doing consulting, legal, or other work for the firm Significant stock ownership of firm by directors 42

Best Practices: Board of Directors • Board committees q Key committees at least chaired by outsiders • Audit, compensation, corporate governance (nominating) committees 43

Best Practices: Board of Directors • Board committees q Key committees at least chaired by outsiders • Audit, compensation, corporate governance (nominating) committees q Preferred: Key committees composed entirely of independent directors 44

Best Practices: Board of Directors • Board committees q Compensation committee • Conduct formal evaluation of all company officers (including CEO) and set compensation 45

Best Practices: Board of Directors • Board committees q Corporate governance (nominating) committee • Create charter for board 46

Best Practices: Board of Directors • Board committees q Corporate governance (nominating) committee • Create charter for board • Conduct formal governance review using an external consultant 47

Best Practices: Board of Directors • Board committees q Corporate governance (nominating) committee • Create charter for board • Conduct formal governance review using an external consultant • Nominate board members 48

Best Practices: Board of Directors • Board committees q Corporate governance (nominating) committee • Create charter for board • Conduct formal governance review using an external consultant • Nominate board members • Board term limits 49

Best Practices: Board of Directors • Board committees q Corporate governance (nominating) committee • Create charter for board • Conduct formal governance review using an external consultant • Nominate board members • Board term limits • Elections – One class of directors – Each director stands for re-election each year 50

Best Practices: Board of Directors • Board committees q Audit committee • Select independent auditor – Not also employed for consulting work 51

Best Practices: Board of Directors • Board committees q Audit committee • Select independent auditor – Not also employed for consulting work – Do not seek SEC exemption to do so 52

Best Practices: Board of Directors • Board committees q Audit committee • Select independent auditor – Not also employed for consulting work – Do not seek SEC exemption to do so • Rotate auditors – at least rotate the lead auditor, if not the entire firm, every 5 years 53

Best Practices: Board of Directors • Board committees q Audit committee • Select independent auditor – Not also employed for consulting work – Do not seek SEC exemption to do so • Rotate auditors – at least rotate the lead auditor, if not the entire firm, every 5 years • CEO & CFO should not be former employees of the auditing firm 54

Best Practices: Board of Directors • Board meetings q Frequency of overall board & committee meetings 55

Best Practices: Board of Directors • Board meetings q q Frequency of overall board & committee meetings Attendance 56

Best Practices: Board of Directors • Board meetings q q q Frequency of overall board & committee meetings Attendance “Executive” sessions • Lead outside director with term limit 57

Best Practices: Board of Directors • Board meetings q q q Frequency of overall board & committee meetings Attendance “Executive” sessions • Lead outside director with term limits q Risk assessment function • Reports identifying risks & methods of addressing 58

Best Practices: Board of Directors • Board meetings q q q Frequency of overall board & committee meetings Attendance “Executive” sessions • Lead outside director with term limits q Risk assessment function • Reports identifying risks & methods of addressing q Access to internal information 59

Best Practices: Executive Compensation • CEO has substantial stock ownership 60

Best Practices: Executive Compensation • CEO has substantial stock ownership • Salary, bonuses, & stock options reward superior performance q not size of the company 61

Best Practices: Executive Compensation • CEO has substantial stock ownership • Salary, bonuses, & stock options reward superior performance q not size of the company • AND penalize poor performance 62

Best Practices: Executive Compensation • CEO has substantial stock ownership • Salary, bonuses, & stock options reward superior performance q not size of the company • AND penalize poor performance • No modification of performance goals q No re-pricing or swapping stock options 63

Best Practices: Executive Compensation • CEO has substantial stock ownership • Salary, bonuses, & stock options reward superior performance q not size of the company • AND penalize poor performance • No modification of performance goals q No re-pricing or swapping stock options • Expense stock options 64

Best Practices: Anti-takeover measures • Lack of provisions designed to thwart a hostile takeover q Golden parachutes 65

Best Practices: Anti-takeover measures • Lack of provisions designed to thwart a hostile takeover q q Golden parachutes Poison pill provisions 66

Best Practices: Anti-takeover measures • Lack of provisions designed to thwart a hostile takeover q q q Golden parachutes Poison pill provisions Greenmail 67