CORPORATE GOVERNANCE PRINCIPLES & BEST PRACTICES Dr. Andreas G. Koutoupis CMIIA, CIA, CICA, CCSA, Associate Professor of Financial Accounting & Auditing University of Thessaly 1
Con onten tents ts A.1 Corporate governance definition A.2 Systems of Corporate Governance A.3 Causes of Corporate Governance development A.4 Principles & Criteria of Corporate Governance Β.1 The Greek Reality Β.2 Greek Legislation and Corporate Governance Β.3 Corporate Governance Code by SEV C. Survey Approach – PILLARS of Corporate Governance D. Preliminary Conclusions 2
A. A.1 C 1 Cor orporate porate gove overna rnance nce de defin init itio ion ➢ The Shleifer and Vishny (1997) report on their research that a very important part addressed by the CG is how the various business sponsors will ensure that they will get the return for the investments they have made. ➢ The La Porta (2000) argues that CG has to do with the mechanisms that are responsible for the protection of outside investors (creditors and shareholders) against any irregularities of the Interior, which is the Management and managers. ➢ According to the Greek relevant Laws and Regulations, Corporate Governance is defined as all practices applied by an undertaking to ensure the protection of its shareholders and of all those who have legitimate interests in the company and ensure the operation and business performance to a satisfactory level. ➢ The OECD (1999) and the Cadbury Committee define the concept of Corporate Governance as a system that enables companies to be controlled and monitored. ➢ A commonly accepted definition has as follows: The term Corporate Governance is a comprehensive system of rights, procedures and controls, established internally and externally to the company's management, in order to protect the 3 interests of the stakeholders.
A. A.2 2 Sys ystem tems s of of Cor orpor porate ate Go Gover ernanc nance ❖ Τ he Anglo-Saxon or external (shareholder-based system) . Its basic characteristics are the existence of large and highly liquid capital markets, short-term investment horizon and large dispersion in the equity of companies and an active market in corporate control (hostile takeovers). ❖ Τ he European or domestic (stakeholder-based system) . Its basic characteristics are existence of small and illiquid capital markets, capital markets with long-term investment horizon, a high concentration of share ownershipor voting rights, aggressive acquisitions are limited and long- term relationships between partners and Administration are usual. A. A.3 3 Cause auses s of of Cor orporate porate Go Gover ernanc nance ➢ The global wave of privatization ➢ Pension funds and active investors ➢ Mergers and Acquisitions ➢ Deregulation and integration of primary market ➢ The Need of Institutional Investors 4 ➢ Conflicts of Interest
A. A.4 4 Pr Prin inci ciples les an and C d Crit iter eria ia of of Cor orporate porate Go Gover ernanc nance Criteria for strong Corporate Generally, the commonly accepted Governance : principles of corporate governance ➢ Application procedures for assessing the include : board and its members ➢ Rights and equitable treatment of ➢ Participation of non-executive and independent members to the Board shareholders . ➢ The remuneration of non-executive and ➢ Interests of other participants - independent members of the Board ➢ Functioning and Independence of Board stakeholders - associated Committees (stakeholders) with the company ➢ Size of Group Executives (suppliers, lenders, regulators, ➢ Separation of roles of Chairman / Chief customers, etc.). Executive Officer (CEO) ➢ Frequency of board meetings ➢ Role and Responsibility of the ➢ Adequacy of the audit committee members Board . ➢ Reputation of the external auditors ➢ Integrity and ethical behavior . ➢ Separate meetings of non-executive and independent board members ➢ Disclosure and transparency . ➢ Social Corporate Responsibility 5
B. B. THE E FRAMEWORK RAMEWORK OF OF COR ORPO PORATE RATE GOV OVER ERNAN NANCE CE B.1 The e Gree eek k Rea ealit ity In April 1999 , the OECD published its Principles of CG.The Securities and Exchange Commission recommended the Committee on CG in Greece, which adopted in 1999 a text entitled “Principles of CG in Greece: Recommendations for strengthening the effectiveness and Competitive Transformation”. In 2000 , the Securities and Exchange Commission, with the Decision 5/204/2000 on Standards of Conduct of companies which have introduced their shares in ASE, determines that every company must have a Service of Shareholders. In 2001 , the Athens Stock Exchange (ASE) and the Federation of Greek Industries proceeded to the issue of a Code of Principles of CG. In August 2001 , the ASE predetermined quality criteria for Publicly traded companies, which were based on the principles of CG. In 2002 passed the Law 3016/17.5.02 entitled ‘CG Issues of Payroll & other devices’ . 6
B. B.2. 2. G Gree eek Le Legis islati ation on ❖ Law 2190/1920 , which is amended by several provisions of the above EU- inspired laws) contains the basic rules of governance. ❖ Law 2533/1985 (regarding the transparency of company operations), requires all Listed Companies to publish half-yearly and quarterly financial statements. ❖ Law 3016/2002 “Corporate Governance, payroll issues and other provisions” (Government Gazette 110/17.05.2002), as amended by Article 26 of Law 3091/2002 (Official Gazette, 330/24.12.2002). ❖ Law 3693/2008 requires the establishment of audit committees, as well as important disclosure requirements with regard to ownership and governance of a company. ❖ Law 3873/2010 , serves as a reminder of the need for the CG Code of Best Practice. ❖ Law 3884/2010 is relating to rights of shareholders and additional corporate disclosure obligations to shareholders in preparation of the General Assembly. 7
B. B.3 Corp orpora orate te Go Governance ernance Cod ode e by by SEV EV In January 2011, “the Code“ was completed and published by the Hellenic Federation of Greek Enterprises. Its main objective is the training and guidance of the Board members of Greek companies in matters of good governance practices, as well as the creation of an accessible and understandable reporting system for listed companies. The Code is addressed to the Greek public limited companies based in Greece, but can be useful tool in unlisted companies as well. It contains 2 types of provisions: "general principles", addressed to all companies, listed or not, and “specific practices”, which involve only in listed companies. The Code follows the approach of compliance or explain approach. The Code will be regularly reviewed and updated to reflect developments in both the best practices and the regulatory framework and in line with the needs of the Greek business world. The first review of implementation of the Code is expected 8 to be in 2012.
C. SURVEY APPROACH C. “PILLARS” of Corporate Governance Based on the above mentioned regulations and Best Practices and after a pilot survey we applied to 3 Greek listed manufacturing companies (Petros Petropoulos S.A., Mytilineos S.A. & YALCO S.A. – S.D. Konstantinou and Son S.A.). , during which we interviewed with their internal auditors, as well as with 3 potential investors interested in their stocks, mainly friends of mine, we have reached to the following important criteria for the assessment of CG quality within any enterprise: 1. Equitable treatment of Shareholders - Investor Relations 2. Board of Directors 3. Audit Committee 4. Remuneration of Executive Management and Non executive members of the Board of Directors – Remuneration Committee 5. Other Subcommittees of the Board 6. Strategy - Risk Management – System of Internal Controls 7. Internal Audit 8. Financial Reporting and External Audit 9. Compliance with Laws and Regulations plus Adoption of Best Practices 9 10. Corporate Social Responsibility
FULFILMENT PROPOSE PERSON PROPOSE PERSON INFOR D AL D RATING AL MATI (1) WEIGHTI WEIGHT (4)=(1)*(2) RATING ON NG (2) ING (3) (5)=(1)*(3 CRITERIA NO PARTLY YES P I 0,5 0 1 1. Equitable treatment of 10% Shareholders -Investor Relations Existence and promotion of a Χ 10% 10% continuous and satisfactory communication with shareholders The Board of Directors ensures the Χ 20% 20% proper conduct and use of GA of shareholders in order to safeguard the rights of shareholders Equal treatment of shareholders is Χ 10% 5% ensured by the Management Existence of effective Shareholder Χ 20% 20% Service, which is responsible for direct and equal information of shareholders and their service on the exercise of their rights Existence of effective Corporate Χ 20% 20% Communications Office Ensure Transparency and Disclosure Χ 1O% 5% of Information Effective communication with X 10% 10% investors 10 100% 100% 90% 0%
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