Английский язык. Практический курс для решения бизнес-задач

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Rules versus principles

Rules are typically thought to be simpler to follow than principles, demarcating a clear line between acceptable and unacceptable behavior. Rules also reduce discretion on the part of individual managers or auditors.

In practice rules can be more complex than principles. They may be ill equipped to deal with new types of transactions not covered by the code. Moreover, even if clear rules are followed, one can still find a way to circumvent their underlying purpose – this is harder to achieve if one is bound by a broader principle.

Corporate governance models around the world

There are many different models of corporate governance around the world. The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. Both models have distinct competitive advantages, but in different ways. The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition.

In the United States, a corporation is governed by a BoD, which has the power to choose the CEO. He has broad power to manage the corporation on a daily basis, but needs to get board approval for certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or other expensive projects. Other duties of the board may include policy setting, decision making, monitoring management’s performance, or corporate control.

The BoD is selected by and responsible to the shareholders. It is the responsibility of directors to endorse the organization’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. But the bylaws of many companies make it difficult for all but the largest shareholders to have any influence over the makeup of the board; normally, individual shareholders are not offered a choice of board nominees among which to choose, but are merely asked to rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many corporate boards, with board members beholden to the chief executive whose actions they are intended to oversee. Frequently, members of the BoDs are CEO’s of other corporations, which some see as a conflict of interest.

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, or institutional investors, with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.

Companies quoted on the Toronto and London Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert pressure on listed companies for compliance.

In contrast, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve its own governance capacity. Such documents may have a multiplying effect prompting other companies to adopt similar documents and standards of best practice. One of the most influential guidelines has been the 1999 OECD Principles of Corporate Governance revised in 2004.

Corporate governance and firm performance

In its ‘Global Investor Opinion Survey’ of 200 institutional investors undertaken in 2000, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly outside directors, undertook formal evaluation of its directors, and was responsive to investors’ requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory background was least certain (in Morocco, Egypt and Russia).

Other studies have linked broad perceptions of the quality of companies to superior share price performance. A study of five-year cumulative returns of Fortune’s survey of ‘most admired firms’ found that those

«most admired» had an average return of 125%, whilst the ‘least admired’ firms returned 80%. In a separate study Business Week enlisted institutional investors and ‘experts’ to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns.

Source: Wikipedia

Essential Vocabulary

1. corporate governance – корпоративное управление

2. fiduciary (fid) a – доверенный, порученный, фидуциарный, основанный на доверии; доверенное лицо, опекун, душеприказчик по завещанию, попечитель

3. constituent n – составная часть, элемент; избиратель

constituent a – имеющий право голоса, избирающий; законодательный; составной

4. best practice – лучшая практика

5. information asymmetry – информационная асимметрия

6. regulator n – регулирующий орган, орган надзора

regulation n – регулирование, правило

regulate v – регулировать

regulatory a – регулирующий

7. Securities and Exchange Commission (SEC) – Комиссия по ценным бумагам и биржам