History And Development Of Corporate Governance

Published Date: 02 Nov 2017

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ROSA FERNÁNDEZ TIESSEN

INDEX

Discuss the history and development of Corporate Governance.

Definition.

History.

Types of Corporate Governance.

What are the characteristics of good corporate governance and how are they contributing factors in enhancing the value of the firm?

Main characteristics.

Benefits.

How to control corporate governance.

How has Amazon developed and promoted corporate governance?

Since 1997

Letter to shareholders

Corporate governance guidelines

Committees

Bibliography

DISCUSS THE HISTORY AND DEVELOPMENT OF CORPORATE GOVERNANCE

The definition of corporate governance involves discussion on the appropriate company´s management and control structures. It also includes the standards that regulate relations between owners, the board of directors and executives but also between employees, suppliers, customers and the general public.

Good corporate governance protects the interests of the company and its shareholders and monitors the creation of value and the efficient use of the company´s sources.

Corporate governance can also be defined as the scheme of controls and habits by which a board of directors guarantees accountability, fairness, and transparency in a company´s relationship with its stakeholders, which are the ones that I have mentioned above, customers, suppliers, managers, employees, etc.

To understand corporate governance we can think about some deals or contracts between the company and stakeholders to get to an arrangement about the distribution of responsibilities and procedures for their duties, their roles, rights and privileges and procedures for a proper supervision.

After this brief introduction, we will discuss the history of corporate governance, where I would like to differentiate between two stories. On the one hand the first time that someone mentioned the term "corporate governance" (1) and in the other hand the first time that any company tried to incorporate corporate governance to an organization (2).

(1) The term corporate governance comes from a parallelism between the government of countries and the government of corporations.

In the academic literature has been first used by Richard Eells(Professor of business urged philanthropy), during the 1960´s to indicate the "the structure and functioning of the corporate polity".

(2) But how to manage companies and the question for the best structure to achieve and efficient use of resources is as old as the history of companies. (One of the first corporations was British East India Company in 1600).

The history of corporate governance is very difficult to synthesize because corporate structures depend on the structure a country had at earliest times, in particular the structures with which the company started. Law and politics can also influence corporate governance. It is also difficult to determine where the very beginning of corporate governance was. There are some evidence that is was in England for example because the term "director" was first used at the end of the seventeenth century by the Bank of England and Bank of Scotland. Little stories like the following also evidence that.

During the post Christ era the availability of boats was improved, as well as the navigation. Due to these improvements the tradesman from Europe, specially Portuguese and Dutch, explored the earth and global trading entities appeared. This was the beginning of trading entities, and when these entities had to inform the king, it was the beginning of corporate governance.

Near 1600s, England, the most powerful trading country at those times, created some regulations and regulations authorities like limited companies and the Bank of England to regulate all trading activities, on a level of accountability, effectiveness and efficiency, and stakeholder´s satisfaction. Corporate governance was the base for all this regulations, and later the term and the practice took a firm base for all trading activities.

But later, in the United States, the term corporate governance acquired the importance that it now has.

In the nineteenth century, corporations get the right to govern without unanimous permission of shareholders to make corporate governance more efficient. This was in return of some benefits for shareholders, such as evaluation benefits. Since that decision the majority of large companies adopted that method. That is why the rights of owners and shareholders became more and more derivative and dissipative.

After the Wall Street Crash of 1929, Ronald Coase (from the Chicago School of Economists), to try to explain why companies are created and how they continue to behave, he mentioned the term "transaction costs".

After World War II many multinational companies were founded in the United States, but according to what Lorsch and Maclver (from Harvard Business School) said "many large corporations have dominant control over business affairs without sufficient responsibility or monitoring by their board of directors".

During the 1980s Eugene Fama (American Economist) said that the principal problem of corporate governance was that "the firm is seen as a series of contracts".

Ten years later, the term corporate governance received considerable press attention, due to the dismissals of loads of CEO by their boards of directors in the USA. Also in in 2001 with the massive bankrupt of Enron, and in 2002 of Worldcom, as well as minor scandals like Arthur Andersen or Tyco increased the interest in corporate governance.

These types of scandals, as well as the financial crisis in 2008 create considerable press and political attention to corporate governance.

Nowadays there are many different types of corporate governance around the world, this is because what I mentioned before, and each country has their own structure, laws and politics. That is why I think it would be interesting to mention each of them.

Anglo-American model: It is focused on the interests of shareholders, based on a single-tiered board of directors, in which non-executive directors predominate. These non-executive directors are named by shareholders and they must have key posts.

USA and UK differ in one aspect, in the UK the CEO is not Chairman of the board as well, but in the US the norm is to have both roles.

Continental Europe: This type is based on a two-tiered board of directors to improve corporate governance. The first board is the Executive board, which is made by company executives, while the second board is made by non-executive directors (represents shareholders and employees). The Executive board is in charge of the day to day operations, and the second board hires and dismisses members of the first board, determines their salary and reviews their decisions.

India: In this model of corporate governance, the shareholders should have the rights of the true owners of the company. The base of this model is the commitment to value and ethical business conduct.

What are the characteristics of good corporate governance and how are they contributing factors in enhancing the value of the firm?

In 1991 in the UK Sr Adrian Cabury developed the Cadbury Report, published in 1992.

It is a very long report which includes some recommendations about a good corporate management, contained on the Code of Best Practice. These recommendations are voluntary.

The following are the main characteristics of good corporate governance:

Integrity and ethical behavior: integrity should be indispensable when it comes to choose the executives and board members. They must be able to develop a code of conduct that promotes ethical and responsible decision making.

Transparency and Disclosure: Companies have to make public the responsibilities and roles of the executives and board. This means that the investors and shareholders have to obtain the truth about what is going on in the company.

Board roles and responsibilities: the board needs capable skills to carry out their responsibilities and be able to review management performance. Obviously the board needs to have enough members to be able to deal with all their responsibilities and they also need to have commitment and independence.

Rights and fair treatment of shareholders and other stakeholders: The owners should take shareholders ´rights in to account, for example sharing all the information they get with them and inviting them to general meetings and the ones they can assist.

They also have to respect the rights of the rest of stakeholders, not only shareholders.

Independence: Everything is done inside the company, every process and decisions have to be taken in order to try to avoid potential conflicts of interest between both shareholders and owners.

Social responsibility: The Company would experience economic benefits such as improved productivity and also would achieve good reputation if it respects environmental and human rights, in a way that a corporate cannot be either discriminatory or exploitative.

They are contributing factors in enhancing the value of the firm because, if the corporate governance takes into account the mentioned above characteristics, it would generate the following benefits:

Good corporate governance guarantees the success of the company and its economic growth, what is good for both managers and owners and it also lowers the capital cost.

It maintains investor’s confidence, so company can raise capital efficiently and effectively.

Corporate governance positively affects the share price and it also minimizes wastes, corruption and risks.

Corporate governance gives incentives to the owners of a company to achieve goals that are in interests of the shareholders and also for the company.

Corporate governance also improves strategic thinking at the top by having independent directors who in experience and new ideas, but limiting the liability of top management and directors by carefully articulating the decision making process. IT also assures the integrity of financial reports.

It improves strategic thinking at the top of the company. This is because if the company has independent directors they will provide new experiences and ideas.

Corporate governance also ensures the integrity of financial or other reports.

It is also important to know how corporate governance controls internal and external activities of the company. Some examples of controlling activities can be the following, divided by internal and external:

Internal controls:

Internal auditors who control if the design of the internal control procedures of the company is right and the authenticity of its financial reports.

Internal control procedures are policies carried out by the board, the audit committee and other employees to verify if the company is achieving reliable financial reports, and to test the efficiency of the company operations as well as the compliance of laws and regulations.

The company must be monitored by the board of directors. They have access to information because they have higher familiarity with the decision making process. They will also be able to evaluate the top management.

Monitoring by large shareholders, banks and other large creditors. They invested a lot in the company so they have inducements to monitor the management of the corporation.

Balance of power where the simplest way would be having different President and Treasurer.

External controls: External controls include controls that the stakeholders exercise over the organization.

Competition and government regulations.

Media pressure.

Performance information.

Takeovers.

How has Amazon developed and promoted corporate governance?

Jeff Bezos, the founder and CEO of Amazon opened Amazon.com´s online store in July 1995. The Company´s principal corporate officers are located in Seattle. Their first public offering was in 1997, and its common stock is listed on the NASDAQ Global Select Market under the symbol AMZN.

In 1997 they wrote their "Letter to Shareholders", where they stated that their "fundamental measure of success will be the value they create over the long term". (Extracted from Amazon.com] "a message to our shareowners")

From the beginning their emphasis has been on the long term. That is why they may make decisions and weigh tradeoff differently than some other companies. In this letter they include their fundamental management and decision-making approach so their shareholders can ensure that it is consistent with their own investment philosophy. These are the following:

Focusing inexorably on their customers.

Making investment decisions taking into account long term leadership considerations instead of short-term profitability considerations. They believe there is more innovation looking ahead.

Focusing on cash. When they have to choose between the appearance of their GAAP (Generally Accepted Accounting Principles) and maximizing the present value of future cash flows, they chose cash flows.

Working hard to spend prudently and maintain their lean culture because they understand that it is important to reinforce continually their cost-conscious culture.

Hiring and retaining multifaceted and capable employees. They weight their employee´s compensations to significant stock ownership instead of cash.

After this, they finish the letter this way:

"We are firm believers that the long-term interests of shareholders are tightly linked to the interests of our customers. If we do our jobs right, today's customers will buy more tomorrow, we'll add more customers in the process, and it will all add up to more cash flow and more long-term value for our shareholders.

As Amazonians, we thank you, our owners, for your support, your encouragement, and for joining us on this adventure. If you're a customer, we thank you again! " ( [Extracted from Amazon.com] "letter to shareholders").

It is also important to have a look to Amazon´s corporate governance guidelines.

The Board is composed by a majority of independent directors and the Chief Executive Officer serves as a director. The responsibility of this board is to control and direct the company, and their initial goal is to build long-term value for shareowners.

There is also an independent lead Director, who is chosen by the independent directors. His responsibility is to preside the independent director`s sessions and chair boards meeting in the Chair´s absence not attendance.

About the stock ownership, "Each non-employee director shall hold Company shares equal to at least three times the director's annual compensation, as measured by the number of shares scheduled to vest annually, on a pro rata basis, under the director's most recent restricted stock unit award. This ownership level shall be achieved by the latest of January 1, 2015, the fifth anniversary of a director's initial election to the Board, and three years of vesting under the director's most recent restricted stock unit award. The Nominating and Corporate Governance Committee may make exceptions for individual directors based on financial hardship."( [Extracted from Amazon.com] "Corporate governance guidelines").

The directors must attend to the meetings, or at least they are expected to make the possible effort to attend.

The board must review the performance of the CEO as well as their own performance, and they will set objectives at least once a year. The succession planning will also be review at least once a year. The Leadership Development and Compensation Committee and the board are responsible for this.

The compensation of the CEO as well as the performance of other executive officers will be reviewed by the independent directors periodically.

Amazon´s current committees are the Audit Committee, the Leadership Development and Compensation Committee and the Nominating and Corporate Governance Committee. They must keep the board informed of their actions and they must also provide assistance to them in achieving their responsibility to the shareowners.

The ones mentioned above are the committees that Amazon counts with. I will explain them a little bit below:

Audit Committee: For this committee the board selects at least three directors. They will meet NASDAQ stock requirements in respect to independence, as determined by the board. At least one member will be an audit committee financial expert.

Their purpose is to assist the board of directors in fulfilling its responsibility regarding to Amazon´s financial statements and financial reporting process; the qualifications, independence and performance of Amazon´s independent auditors; the performance of Amazon´s internal audit function and Amazon´s compliance with legal and regulatory requirements.

Nominating and corporate governance committee: it is appointed by the board and consists of at least two directors.

Their purpose is to review and assess the composition of the board; indentifying potential new candidates for directors; recommend candidates for election as directors and provide a leadership role with respect to corporate governance of Amazon.

Leadership development and compensation committee: it also consists of at least two directors.

Their purpose is to evaluate Amazon´s programs and practices relating to leadership development; establishing and reviewing compensation of Amazon´s executive officers and administering Amazon´s equity-based and certain other compensation plans.