Public listed companies are also required to follow additional governance standards stipulated by stock exchanges in the country.
These principles are guidelines only for firms to follow, that is, firms have the choice either to implement those principles or state reasons for deviations in annual reports in the case of a failure to achieve full compliance GLG, There are eight main principles which are used to evaluate compliance of a company to corporate governance guidelines.
Germany The corporate governance system in Germany is significantly different from the Anglo-American model Solomon, German companies have a two-tier board and significant employee ownership Solomon, The Supervisory board is intended to provide monitoring function. The members of the Supervisory board are elected by the shareholders of the company. The Management board is responsible for managing the company. The US approach to corporate governance is based much more on hard law and a regulatory state Jackson, Disclosure requirements This section of the report reviews the disclosure requirements in four countries with regards to board of directors, audit committee and internal controls and risks.
Board of directors The board of directors represent the interest of shareholders, and is accountable to them for a series of specific duties, including oversight of executive management, and implementation of internal controls Banks, The best practice regarding the structure of the board of directors is that governing bodies of companies should include completely independent directors and they should preferably constitute a majority of all directors Lipman and Lipman, The main corporate governance disclosures regarding the board of directors of a company are shown in Table 1.
Board structure is analysed by considering three items — separation of the Chairman and CEO; the number and percentage of independent directors; and size of the board Leblanc and Gillies, Diversity in the Board of Directors is also important because it increases performance through new insights and ideas Knippenberg et al.
Germany scored only 7 out of This does not mean that corporate governance, with regards to board of directors, is substantially low in Germany. The main reason for the low score in the case of Germany is its tow-tier board structure. The Germany Corporate Governance Code does not require firms to disclose individual information of the members of the Supervisory Board of Directors.
This is partly to do with the fact that many of the members of the Supervisory Board in a company in Germany are its employees only, and were included on the basis of recommendation of worker unions. This nomination process reflects the nature of management-worker relationship in Germany. Disclosure of information about independent directors in the UK, the US and Australia shows the wealth of information they bring to the Board of Directors.
The inclusion of names and skills of all directors of Supervisory Board in companies based in Germany is not going to have same information impact on stakeholders. The lack of information regarding the directors on the Supervisory Board is also reflected in the absence of information regarding the members of committees and their individual participation in meetings of those committees.
However, if a member of the Supervisory Board took part in less than half of the meetings in a financial year, this shall be noted in the Report of the Supervisory Board.
The German disclosure requirements do not require the qualitative description of the compensation. Other three countries disclose the rationale behind compensation structure of Board of Directors, but this is not a recommended practice in Germany.
Du Plessis et al. Both unitary and two-tier board structures recognise a supervisory function and a management function du Plessis et al. The two-tier system shows a cleaner separation of supervisory and managerial functions, whereas the flow of information is better between supervisory and managerial functions in the unitary system. Audit committee The purpose of an audit committee is to assist the board in the financial reporting process Braiotta et al.
Audit committees are formed to improve external auditor independence by reducing the influence of the management on auditors. The main corporate governance disclosures regarding the audit committee are shown in Table 2. Audit committee disclosure norms. The score of Germany was 5, which is because of the composition of its Board of Directors. The non-disclosure of individual information about the Supervisory Board of Directors implies that the information regarding the financial experience of audit committee members and their individual attendance cannot be obtained.
Some countries, such as the UK, allow variation in the minimum number of audit committee members on the basis of the size of the company. As part of a practice to reduce the possibility of financial statement frauds, the UK recommends that all members should be independent non-executive directors. Also, at least one member of the audit committee must be a qualified accountant in a UK-listed company and his name must be disclosed Deloitte, Similar requirement is also observed in the three other countries, which illustrates the importance of financial knowledge and experience in detecting and preventing financial statement frauds.
Internal control facilitates the effectiveness and efficiency of operations Turnbull guidance, Internal control also ensures the reliability of internal and external reporting. This is especially important because some of the large financial statement frauds, such as Enron and WorldCom, happened because of falsified external reporting. The main corporate governance disclosures regarding internal control and risk are shown in Table 3, 4 parameters are used to review disclosures with respect to internal control and risk.
Overall, corporate governance codes are very similar in the four countries. The main differences observed were because of the two-tier board structure in the case of Germany. Evaluation of disclosures by companies This section compares corporate governance disclosures by 5 companies in each of the 4 countries. All data is collected from annual reports of companies in the UK, Australia and Germany, and statements Schedule 14A information filed as part of the annual reports in the case of companies in the US.
Board of Directors The data collected was converted into a score for each aspect and then added to arrive at a score for each company Refer Appendix I for converting data into scores. The maximum possible score was Companies in the UK performed well in this aspect of corporate governance with an average score of Also, diversity in terms of experience of directors was relatively low.
However, the lower score of Tesco does not reflect poor corporate governance. It is just that its corporate governance practice regarding the percentage of independent directors was considered to be relatively inferior since higher percentage of executive directors reduces the influence of independent directors. Also, this is just a measure of independence of directors.
Actual independence depends upon actions taken by the Board of Directors and is not possible to analyze with the data in annual reports.
Apple and Nike had lowest scores of 10 each. Apple scored low because of the smaller size of the Board of Directors, poor description of skills of directors, and smaller number of sub-committees. Given the low score of Apple, it would be expected that investors would not like to purchase shares of the company.
Therefore, the simple correlation between the score in this report and actual share price performance is difficult to argue for. Companies in Australia were similar to the US since their average score was However, this was mainly because of the low score of 9 of Seek Ltd.
Seek Ltd had a low score because of the small size of its Board of Directors and higher percentage of executive directors on the Board of Directors. Large companies scored high as compared to smaller ones, mainly because of the large size of their Board of Directors. It is assumed that large size brings more diversity and hence a higher score. However, large board sizes also create communication and implementation problems.
German companies had the lowest average score of 9 Figure 4. This was mainly due to the two-tier board structure and low information sharing regarding the members of the Supervisory Board.
No information regarding the directors of the Supervisory Board also makes it difficult to give any score on independence of directors. Further, not every company disclosed the number of meetings. The lowest score of German companies implies that their shareholders may be getting less than expected information to make economic decisions. Overall, firms in the UK were the highest scorer on the Board of Directors corporate governance aspect.
They were followed by firms in Australia and the US. German firms were the lowest scorer, mainly due to their two-tier board structure. The two-tier board structure is not bad for corporate governance; it is just that the firms in Germany did not disclose enough information about the directors on the Supervisory Board. However, as significant members of the Supervisory Board are elected by workers, it can result in lower independence of the Board of Directors, as well as less diversity and expertise at the highest level.
Audit Committee The data collected regarding with respect to audit committees was converted into a score for each aspect and then added to arrive at a score for each company Refer Appendix II for converting data into scores. Companies in the UK performed decently in this aspect of corporate governance with an average score of 9.
GSK was the best performer with a score of 11, which implies that it fully disclosed all information, as well as had higher number in terms of attendance, number of meetings and size of audit committee. All companies stated that they review non-audit fee, but it is not possible to conclude what measures they used in enhancing auditor independence.
There was no mention of the maximum non-audit fees, either as an absolute number or as a percentage of audit fees. Companies in the US also performed decently with an average score of 9. Apple was again the lowest scorer among the US companies in this category.
The review of non-audit fees is more important in the US because of the regulatory requirement under the Sarbanes-Oxley Act. However, there was no mention of the maximum non-audit fees, either as an absolute number or as a percentage of audit fees, allowed under guidance issued by the audit committee of the company.
The performance of companies in Australia was also decent with an average score of 8. The diversion in scores was very low. The relatively lower scores of companies in Australia and the UK and the US were because of the smaller size of audit committees in Australia.
Companies in Australia also scored lower in the number of audit committee meetings in a year. The lower score in Australia should not be seen as a reflection of poor corporate governance with respect to the audit committee if smaller size audit committees were equally effective in preventing and detecting financial statement frauds, a parameter beyond the scope of this report.
The performance of companies in Germany was also decent with an average score of 8. There was no data regarding the attendance in the audit committee; a score of 1 was awarded to each of the 5 companies. One interesting aspect of the audit committee in Germany was the relatively large size of audit committees.
This implies that more emphasis was given on preventing financial fraud than other aspects of corporate governance. The scores of companies in the UK and the US were similar, while average score of companies in Australia and Germany were lower. Some of the lower score in Germany is because of less information, which means that disclosure is relatively poor even though actual practice may not be.
Reporting on internal control and risks The data collected regarding with respect to reporting on internal control and risks was converted into a score for each aspect and then added to arrive at a score for each company Refer Appendix III for converting data into scores.
The maximum possible score was 5. All companies in the UK achieved a score of 4, which implies that the average score in the UK was 4 also Figure 9.
The requirement to attest is a regulatory requirement in the US under the Sarbanes-Oxley Act of Hence, companies in the UK have not shown an interest in implementing this since it will increase their costs due to payments to the external auditor. One important issue in the quantitative analysis of reporting on internal control and risks is the difficulty in capturing substantial differences in the amount of coverage given to this aspect in annual reports of companies.
All companies state that they have procedures for risk assessment and measuring effectiveness of internal control, but some corporations devote substantial part of their annual report on describing risks and controls. The OECD guidelines suggest this principle is of particular importance in companies, such as Republic Bank Guyana Limited, who is the controlling shareholder and thus by de facto is able to select all board members.
A sound corporate governance system requires that shareholders can actively participate in, and exert influence on, corporate strategic decision-making. If designed well, this can be done effectively through annual general meetings and proxy voting. Additionally, shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes. The company host an annual general meeting to which all stakeholders are given due notice of.
The company also issues an annual report and quarterly financial statements to stakeholders and the general public. Pursuant to the mandate to ensure that the interests of the various stakeholders are considered the board of directors meets, at a minimum, on a quarterly basis while the Executive Sub-Committee of the Board, comprising seven Board members, meets monthly for the remaining months.
The board of directors of Republic Bank Guyana Limited is committed to proper standards of corporate governance and maintaining these standards at the highest level. The board retains the responsibility for reviewing and approving credit applications above a specified limit. The performance of all management officers is reviewed by the Board of Directors on an annual basis. Additionally, taking into account the increasing need for risk assessment, the board of directors has established a risk management committee, known as the other risks committee.
To select, compensate, and monitor key executives As stated in the annual report of , the managing director and management team are appointed by the board of directors. Each management officer has a written mandate and is required to execute the stated functions as outlined therein.
OECD At Republic Bank Guyana Limited, the board of directors approves the organisational structure for the Bank which ensures a reporting structure with prudent and effective controls. The board of directors comprises nine directors including one executive director. Of the eight non-executive directors, five are independent. The board is comprised of an executive director and a majority of independent directors. The managing director of Bank Guyana Limited is the only executive director on the board.
To ensure integrity of accounting and financial systems Several committees have been set up by Republic Bank Guyana Limited to ensure integrity of accounting and financial systems.
When necessary, the Audit Committee is responsible for reviewing the independence, competence and qualifications of the External Auditors. The other risks committee The other risks committee, which meets quarterly, is responsible for reviewing policies and procedures and ensuring that the Bank is not exposed to unnecessary risks with respect to its operations.
Corporate social responsibility activities of Republic Bank Guyana Limited are conducted under its Power to make a difference program. Republic Bank Guyana Limited 4. It was found that Republic Bank Guyana Limited in its governance aims to be a good corporate citizen by complying with rules and regulation stipulated at a national level and also meeting international standards of corporate governance. However, there are areas that could stand improvement and as such the following recommendations are made: Having a connected non-executive director as chairman hinders board objectivity.
With the development of large public companies, a separation between ownership and management has occurred. Companies are now owned by a large number of investors who cannot directly rule the company.
Therefore shareholders appoint directors and pass on the control of the company to them. These, collectively known as the board of directors, hire the CEO and managers. The main task of the board of directors is to represent the owners and protect their interests in the company. But problems arise because directors and shareholders may have diverging objectives. In academic literature this is called a principal agent problem, which finds its theoretical base in the agency theory.
According to this theory, a principal, in this case the shareholder, hires an agent, the director, to perform a task on his or her behalf.
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