Title: Corporate Governance
1corporate governance
2Class Announcements
- Assignment 7 due March 6th (today)
- Research Paper Part 3 due March 10th
- Mondays class (March 10th) is at 500-700pm in
SCHW 110 (Movie) - Business Banquet - April 2nd 545-8pm, Catering
- Gabrieau's Bistro Keynote Speaker - Annette
Verschuren, Past President of Home Depot for
Canada and Asia
3Class Objectives
- Contracts as a means to manage the expectations
and relationship between principals and agents - Corporate Governance addresses agency issue
4Agency Theory
- Positive accounting theory envisions firms as a
nexus of contracts. - (e.g. compensation agreements, debenture
contracts) - Two parties with conflicting interests to a
contract 1) agent 2) principal - Partys actions are motivated by the contract
itself - Corporate governance addresses the contract
between agent and principal via the Board of
Directors
5Corporations Corporate Governance
- Private and Public Corporations
- Separation of Ownership (Shareholders) and
Management - Corporate Governance is the relationship between
- Shareholders (owners)
- Board of Directors
- Corporate Officers
6Corporate Governance Conflict
- Separation of ownership and management
- Manager and shareholder interests alignment
- Information asymmetry
- Incentives to conceal bad news (agency theory -
adverse selection) - Incentives to shirk (agency theory moral
hazard) - Agency Theory attempt to modify behavior
7Corporate Governance Defined
- Corporate Governance is the relationship between
shareholder, the board of directors and other top
managers in the corporation - Corporate governance processes attempt to ensure
proper functioning of management - Corporate governance is implemented and evaluated
through various processes within the organization - Board of Directors internal and external
directors - Audit Committee meet with auditor and review
audited financial statements - Compensation Committee set corporate officers
compensation - Nominating Committee nomination of qualified
members - Securities Exchanges (e.g. OSC, SEC)
- Reporting in Annual Report
8Corporate Governance Importance
- Why is corporate governance important?
- Owners can not easily observe the corporate
officers who are managing the owners investment - Companies lack oversight by investors
- Board of Directors have failed to provide proper
checks and balances - Markets have stirred distrust instead of building
confidence (e.g. Enron) - Rules for Board of Directors make accountability
explicit
9Corporate Governance Need
- 94 of investors say corporate governance is
important - 83.5 believed new regulations should be put in
place to strengthen investor confidence in global
markets - Regulatory requirement
- US SOX (2002)
- Canada National Policy 58-201(2005)
- Globalization of world capital markets
- Internally imposed obligation
- Ownership responsibility
- Competitive advantage
10Corporate Governance Issues
- 1. Better Boards
- Independence, skill, accountability
- 2. Executive Compensation
- Link pay to performance, disclose metrics and
links, executive overcompensation (US Canada) - 3. Financial reporting
- Improved disclosure in financial statements
- 4. CEO Performance
- 5. Cost compliance/time
11Corporate Governance Proposed Solutions
- Better Boards
- Director independence How many? Who is
independent? - Independent and financially literate audit
committee to whom external auditors would report
directly - Independent compensation committee
- Only one management representative on board of
directors - Continuing education
- Truly independent directors
12Corporate Governance Proposed Solutions
- Financial Reporting
- Management attest to financial statements and to
the presence of reasonable internal controls - Codes of conduct/ethics
- Transparency
13Corporate Governance Proposed Solutions
- Audit Committees
- Charter
- Qualifications (financial literacy)
- Auditors
- Participate in public oversight program
established by CPAB - Reduce concerns over loss of client
- Reduce commodification of audit by reducing cost
pressure - Increase oversight with firm review
14Corporate Governance National Instrument 58-101
- National Instrument 58-101 - Disclosure of
Corporate Governance Practices - Board of Directors
- Board Mandate
- Position Descriptions
- Orientation and Continuing Education
- Ethical Business Conduct
- Nomination of Directors
- Compensation
- Other Board Committees
- Assessments
15Corporate Governance Multilateral Instrument
58-110
- Multilateral Instrument 58-110 - Disclosure of
Corporate Governance Practices - Audit Committee Charter
- Composition of the Audit Committee
- Relevant Education and Experience
- Reliance on Certain Exemptions
- Reliance on Exemption in 3.3(2) or 3.6
- Reliance on Section 3.8
- Audit Committee Oversight
- Pre-approval Policies and Procedures
- External Auditor Service Fees (by Category)
16Corporate Governance Shoppers Drug Mart
- The Corporation and its Board of Directors
recognize the importance of corporate governance
to the effective management of the Corporation
and to its shareholders and other stakeholders.
The Corporations approach to significant
corporate governance issues has been, and
continues to be, designed with a view to ensuring
that the business of the Corporation is
effectively managed to enhance long-term
shareholder value. The Corporation has
implemented certain structures and procedures to
ensure that effective corporate governance
practices are followed and that the Board of
Directors functions independently of management.
Prior to March 2005, the directors reviewed and
considered the Corporations corporate governance
framework with a view to complying with the
guidelines of the TSX and, more recently, with
Multilateral Instrument 52-110 (MI 52-110)
pertaining to audit committees. On June 30, 2005,
National Instrument 58-101, Disclosure of
Corporate Governance Practices (NI 58-101)
was proclaimed into force, and National Policy
58-201, Corporate Governance Guidelines (NP
58-201) was adopted with the objective of
providing greater transparency to Canadian
capital markets regarding issuers corporate
governance practices. Schedule B to this
Circular sets out the Corporations overview of
its corporate governance practices, as assessed
in the context of NI 58-101 and NP 58-201. This
overview has been prepared by the Nominating and
Governance Committee of the Board and has been
approved by the Board of Directors. (Shoppers
Drug Mart)
17Class Objectives - Revisited
- Contracts as a means to manage the expectations
and relationship between principals and agents - Corporate Governance addresses agency issue