Bob Tricker

Corporate Governance –
Principles, Policies and Practices 3e

Chapter 2
Governance and management

© Bob Tricker, 2015. All rights reserved.

 Governance and management

in which we recognise:
• Definitions of corporate governance
• The scope of corporate governance
• The significance of constitutions for corporate
entities
• The difference between governance and
management
• The performance and conformance aspects
of governance
• Alternative board structures.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Definitions of corporate governance

Definitions vary according to the perspective of

the user
– operational
– relationship
– stakeholder
– financial economics
– Societal.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Defining corporate governance – operational

Corporate governance is the process by

which companies are directed and controlled
- Cadbury Report 1992 and OECD 1999.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Defining corporate governance – relationship

The relationship among various participants in determining the
direction and performance of corporations. The primary
participants are the shareholders, the management and the
board of directors - Monks and Minow 2001

The corporate governance structure specifies the distribution of

rights and responsibilities among the different participants in the
organization – such as the board, managers, shareholders and
other stakeholders – and lays down the rules and procedures
for decision- making - OECD 2002.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Defining corporate governance -

stakeholder

Corporate governance is the process by

which corporations are made responsive to
the rights and wishes of stakeholders
- Demb and Neubauer, 1992.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Defining corporate governance

– financial economics perspective

Corporate governance deals with the way

suppliers of finance assure themselves of
getting a return on their investment
- Shleifer and Vishny, 1997.

Tricker: Corporate Governance, 3rd edition

 Governance and management

Defining corporate governance - societal

The whole set of legal, cultural, and institutional
arrangements that determine what (public)
corporations can do, who controls them. How that
control is exercised, and how the risks and return
from the activities they undertake are allocated
Blair, 1995

Corporate governance is concerned with holding the

balance between economic and social goals and
between individual and communal goals.
Cadbury, 2000
Tricker: Corporate Governance, 3rd edition
 Governance and management

Defining corporate governance – overall

Corporate governance is the exercise of power over a

corporate entities
- Tom Clarke, 2004

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 The spheres of Corporate Governance

Figure 2.1:
The scope
of corporate
governance

Tricker: Corporate Governance, 3rd edition

 Governance and Management
Every corporate entity needs a constitution
THE MEMBERS
Shareholders in a limited company
Members of the profession in a professional body
Club members in a sports, arts or other private club
Registered members in a trades union
Members of academic bodies
Voting members of other corporate entities

THE CORPORATE ENTITY

Limited liability company
Professional organisation
Sports, arts or other club
Trades union
University or college
Other corporate entities

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 Governance and Management

Incorporating a joint stock limited liability company

Companies Registrar

Memorandum
- name of company
- objectives
- registered office
- share capital
- liability of shareholders limited

Articles of Association
- detailed rules for running the entity
- Table A

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 Governance and Management

Types of limited liability company

• Private companies limited by shares

• Private companies limited by guarantee
• (Private unlimited companies)
• Public companies
– offer to general public
– in UK title XYZ Plc
– prospectus needed to offer shares.

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 Governance and Management

Other forms of incorporation

– Savings and loans association, building societies
– Co-operatives: supplier (Canada), customer (UK)
– State corporate entities
– Federal National Mortgage Association (Fannie Mae)
– QUANGOs Quasi-autonomous non-governmental
organisation
– Not for profit entities
e.g. Charities, sports associations, arts and cultural
societies
Trust law, friendly societies law, charities law etc.

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 Governance and Management

The essence of governance

Figure 2.3: The

board and
management

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 Governance and Management

Management involves an organisational hierarchy

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 Governance and Management

Governance is different from management

governance

management

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 Governance and Management

INED
Board Structure

ED

Co. Secretary
Investment (Compliance
Manager Officer)

General
Manager

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 Governance and Management

Management runs the business:

The board ensures that the business is well run

and running in the right direction.

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 Governance and Management

• Wherever management is separate from ownership or

membership, organisations need governing
– Public listed company – board of directors
– Small/medium company - board of directors
– Subsidiary/associate/joint venture – board
– Company limited by guarantee
– University, college – council, governing body
– Charity, club, hospital – board, committee
– Quasi-governmental bodies– council, committee, board
– Family firm

• Many corporate governance ideas are universal and can be applied

to any governing body

(contrast organisations where management and governance are in the same

hands – sole traders, small partnerships).

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 Governance and Management

The basic board processes

Outward looking

Accountability Strategy formulation

Supervising
executive activities Policy making
Inward looking

Past and present focused Future focused

Tricker: Corporate Governance, 3rd edition

 Governance and Management

Outward
looking Providing Strategy
Accountability Formulation

Approve and work with

and through the CEO

Monitoring and Policy

Inward Supervising Making
looking

Past and Future

present focused focused

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 Governance and Management

The conformance and performance roles

of the unitary board

conformance performance

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 Governance and Management

Guidelines for a board strategy seminar or workshop

• Careful planning, well in advance, is essential
• Agree a time when all directors can attend
• Fix a location where all directors can participate
• Define the objectives clearly, for example:
- to explore the strategic situation
- to discuss the implications
- to consider alternative strategies
- to determine the next steps to be taken
(but not to take strategic decisions immediately)
• All directors must be fully informed about the objectives
• All directors should be supportive of the event
• All directors need briefing with relevant data in advance.

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 Governance and Management

Guidelines for a board strategy seminar or workshop

(continued)

• Do not hold the event in the board-room (the board-room culture is

decision orientated)
• Decide who is going to run the event (this need not be the chairman)
• Decide whether other people should be invited to participate
(senior executives to brief the directors, external experts to
give briefings, experts to contribute to process)
• At the first session establish the ground-rules
-this is not a board meeting to make decisions, but a free-
ranging exchange of views and insights
- strategic decisions will not be made
- call for imaginative contributions however unusual
-discourage negative comment ('we tried that - it won't
work', 'no good for us')
• The output of the strategy session should be an agreed list of next
actions, and who is responsible for taking them and by when.

Tricker: Corporate Governance, 3rd edition

 Alternative board structures

– All executive board

– Majority executive board
– Majority non-executive board
– All non-executive board
• Supervisory board
• Two-tier board
– Board structures around the world
– Some complex structures.

Tricker: Corporate Governance, 3rd edition

 The all-executive board

Figure 2.9: The all-executive director board

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 The majority-executive board

Figure 2.10: The majority executive director board

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 The majority non-executive board

Figure 2.11: The majority non-executive director board

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 Directors and board architecture

Board structure exercise:

ED NED INED TOTAL

MCM 3 8 0 11
BCOM 3 3 0 6
Excel 4 1 3 8
Technology
Esprit 5 2 3 10
Holding
Giordano 3 4 0 7

• Percentage

Tricker: Corporate Governance, 3rd edition

 Directors and board architecture

Two-tier board

Figure 2.13: The two-tier or supervisory board

Tricker: Corporate Governance, 3rd edition

 Governance and management

We have considered
• definitions of corporate governance
• the scope of corporate governance
• the significance of constitutions for corporate
entities
• the difference between governance and
management
• the performance and conformance aspects of
governance
• alternative board structures.

Tricker: Corporate Governance, 3rd edition