Académique Documents
Professionnel Documents
Culture Documents
Term Report
Scope of Disclosure in
Corporate
Governance
Ace Institute of Management
January, 2014
Submitted By:
Sudarshan Paudel
MBAe, VIII Term, Sec B
Table of
Submitted To:
Dr. Resham Raj Regmi
Lecturer, Corporate Governance
Contents
1
Background.............................................................................................................1
Introduction.............................................................................................................2
Disclosure by directors..................................................................................13
7.2
7.3
7.4
Disclosures by Organization..........................................................................15
Empirical evidence...............................................................................................19
Conclusion............................................................................................................20
Background
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal
scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means
pondered on the changing role of the modern corporation in society. From the
Chicago school of economics, Ronald Coase introduced the notion of transaction
costs into the understanding of why firms are founded and how they continue to
behave.
US expansion after World War II through the emergence of multinational corporations
saw the establishment of the managerial class. Studying and writing about the new
class were several Harvard Business School management professors: Myles Mace
(entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch
(organizational behavior) and Elizabeth MacIver (organizational behavior). According
to Lorsch and MacIver "many large corporations have dominant control over business
affairs without sufficient accountability or monitoring by their board of directors."
In the 1980s, Eugene Fama and Michael Jensen established the principalagent
problem as a way of understanding corporate governance: the firm is seen as a series
of contracts.
In the first half of the 1990s, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,
Honeywell) by their boards. The California Public Employees' Retirement System
(CalPERS) led a wave of institutional shareholder activism (something only very
rarely seen before), as a way of ensuring that corporate value would not be destroyed
by the now traditionally cozy relationships between the CEO and the board of
directors (e.g., by the unrestrained issuance of stock options, not infrequently back
dated).
In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and
Worldcom, as well as lesser corporate scandals, such as Adelphia Communications,
AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in
corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of
2002. Other triggers for continued interest in the corporate governance of
organizations included the financial crisis of 2008/9 and the level of CEO pay.
Introduction
Corporate governance refers to the system by which corporations are directed and
controlled. Sound corporate governance is an important element of sustainable private
sector development - not only because it strengthens businesses ability to attract
investment and grow, but also because it makes them, stronger, more efficient, and
more accountable. The governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators, and other
stakeholders) and specifies the rules and procedures for making decisions in corporate
affairs. Governance provides the structure through which corporations set and pursue
their objectives, while reflecting the context of the social, regulatory and market
environment. Governance is a mechanism for monitoring the actions, policies and
decisions of corporations. Governance involves the alignment of interests among the
stakeholders.
The vast amount of literature available on the subject ensures that there exist
innumerable definitions of corporate governance. To get a fair view on the subject it
would be prudent to give a narrow as well as a broad definition of corporate
governance. In a narrow sense, corporate governance involves a set of relationships
amongst the companys shareholders management, its board of directors, its
shareholders, its auditors and other stakeholders. These relationships, which involve
various rules and incentives, provide the structure through which the objectives of the
company are set, and the means of attaining these objectives as well as monitoring
performance are determined. Thus, the key aspects of good corporate governance
include transparency of corporate structures and operations; the accountability of
managers and the boards to; and corporate responsibility towards stakeholders.
Whatever may be the definitions of corporate governance, the most widely used
definition of Corporate Governance as defined by OECD Corporate Governance
principle, 2004 is Corporate governance involves a set of relationships between a
companys management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performances are
determined. determined. Good corporate governance should provide proper
incentives for the board and management to pursue objectives that are in the interests
of the company and shareholders and should facilitate effective monitoring, thereby
encouraging firms to use resources more efficiently.
3
Auditors should be independent of the board and management and the companys
performance, and objectives. They should also be reputable and, as mentioned earlier,
they are one of the two most important professional advisers within the insurance
supervisory system.
2003 to take into account recent developments through a process of extensive and
open consultations. The new Principles were agreed by OECD governments in April
2004. The revision of the Principles reflects not only the experience of OECD
countries but also that of emerging and developing economies, including those
involved in the policy dialogue of the Regional Corporate Governance Roundtables
established by the OECD in co-operation with the World Bank Group. Consultations
with non-member partners were first undertaken through meetings of Roundtables
held in Asia, Eurasia, Latin America, Russia and Southeast Europe. Lessons and
conclusions emerging from this work were summarised in the publication,
Experiences from the Regional Corporate Governance Roundtables, OECD 2003.
Additional input was obtained from a special meeting attended by 43 non-member
countries organised in cooperation with the Global Corporate Governance Forum.
This article shows how the Principles take into account the lessons and conclusions
from non-member countries so that the Principles can continue to be relevant globally.
The OECD principles prescribe that the corporate governance framework should
ensure that timely and accurate disclosure is made on all material matters regarding
the corporation, including the financial situation, performance, ownership, and
governance of the company. There are however specific issues that need to be
addressed in regard to the requirements of disclosure and transparency. The following
are excerpts from the Annotations to the OECD Principles of Corporate Governance
(1999). They are quoted here because of the clarity and simplicity of the language
used in explaining the various issues involved.
A. Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
Audited financial statements showing the financial performance and
the financial situation of the company (most typically including the
balance sheet, the profit and loss statement, the cash flow statement
and notes to the financial statements) are the most widely used source
of information on companies. In their current form, the two principal
goals of financial statements are to enable appropriate monitoring to
take place and to provide the basis to value securities. Managements
discussion and analysis of operations is typically included in annual
reports. This discussion is most useful when read in conjunction with
6
performance
of
the
company.
Disclosure
may
include
11
(but good reporting doesnt necessarily lead to good governance, as has been
demonstrated in the economic downturn).
In simple language, transparency refers to the decision making and its enforcement in
a manner that follows rules and regulations. It also means that information is freely
available and is directly accessible to those who will be affected by such decisions
and their enforcement. It also means that enough information is provided and that is
provided in an easily understandable forms and media. Public disclosure is typically
required, at a minimum, on an annual basis though some countries require periodic
disclosure on a semi-annual or quarterly basis, or even more frequently in the case of
material developments affecting the company. Companies often make voluntary
disclosure that goes beyond minimum disclosure requirements in response to market
demand. A strong disclosure regime that promotes real transparency is a pivotal
feature of market-based monitoring of companies and is central to shareholders
ability to exercise their ownership rights on an informed basis. Experience in
countries with large and active equity markets shows that disclosure can also be a
powerful tool for influencing the behavior of companies and for protecting investors.
A strong disclosure regime can help to attract capital and maintain confidence in the
capital markets. By contrast, weak disclosure and non-transparent practices can
contribute to unethical behavior and to a loss of market integrity at great cost, not just
to the company and its shareholders but also to the economy as a whole. Shareholders
and potential investors require access to regular, reliable and comparable information
in sufficient detail for them to assess the stewardship of management, and make
informed decisions about the valuation, ownership and voting of shares. Insufficient
or unclear information may hamper the ability of the markets to function, increase the
cost of capital and result in a poor allocation of resources.
Disclosure also helps improve public understanding of the structure and activities of
enterprises, corporate policies and performance with respect to environmental and
ethical standards, and companies relationships with the communities in which they
operate. Disclosure requirements are not expected to place unreasonable
12
13
There are various laws in Nepal in regards to disclosure by the organization and
directors. Company Act 2006 for all the companies registered in company of register
and Bank and Financial Institutions Act (BAFIA) for all the banks and financial
institutions which are regulated by Nepal Rastra Bank look after the respective
organizations. Here are some of the legal provisions laid by these two laws in Nepal:
If he has made any dealing in the shares or debentures of the company or of its
holding or subsidiary company, about matters of such dealing.
If the following situation occurs, any director of a company shall give written
information thereof to the company in which he is a director no later than fifteen days
after such situation comes to his knowledge:
If, for any reason, he is going to acquire title to any shares or debentures of the
company in which he is a director or of a company which is a subsidiary or
holding company of that company or of another subsidiary company of the
company;
If a company which is a subsidiary or holding company of the company in
which he is a director or another company which is a subsidiary of such
company or other subsidiary of the holding company grants authority to him to
The provisions contained in this Section shall also apply to the close relative of a
Director as if such relative were a director.
15
17
Details of fixed component and performance linked incentives, along with the
performance criteria.
Stock option details, if any and whether issued at a discount as well as the
period over which accrued and over which exercisable.
The company shall disclose the number of shares and convertible instruments
held by non-executive directors in the annual report.
(F) Management
As part of the directors report or as an addition thereto, a Management Discussion
and Analysis report should form part of the Annual Report to the shareholders. This
Management Discussion & Analysis should include discussion on the following
matters within the limits set by the companys competitive position:
18
Outlook
Senior management shall make disclosures to the board relating to all material
financial and commercial transactions, where they have personal interest, that
may have a potential conflict with the interest of the company at large (for e.g.
dealing in company shares, commercial dealings with bodies, which have
shareholding of management and their relatives etc.)
For this purpose, the term "senior management" shall mean personnel of the company
who are members of its core management team excluding the Board of Directors).
This would also include all members of management one level below the executive
directors including all functional heads.
(G) Shareholder
In case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:
Names of companies in which the person also holds the directorship and the
membership of Committees of the Board; and
offer for issuances and any related filings made to the stock exchanges where
the company is listed.
dividends
etc.
This
Committee
shall
be
designated
as
To expedite the process of share transfers, the Board of the company shall
delegate the power of share transfer to an officer or a committee or to the
registrar and share transfer agents. The delegated authority shall attend to
share transfer formalities at least once in a fortnight.
Empirical evidence
Empirical work has produced strong evidence that disclosure and corporate
governance do indeed at both the country and Individual Corporation levels. High
levels of disclosure, as measured by indices of opacity, are found to be associated with
lower country risk premium and costs of capital and higher trading volumes or
liquidity. Disclosure is a key factor contributing to financial market efficiency and for
providing the information necessary for market discipline to be effective. Market
discipline and disclosure, in turn, are of central importance to the provision of the
robust corporate governance necessary for stable markets and investor confidence.
This analysis suggests that changes to disclosure requirements, while directly
beneficial to owners, also carry indirect costs. As such, the optimal level of disclosure
could be less than maximal disclosure even if disclosure were otherwise free (i.e., if
one were free to ignore the actual costs arising from stricter accounting rules, more
record keeping, etc.). Going beyond that level would then reduce firm value.
20
Consequently, reforms that affect all three factors, such as those proposed in response
to the Financial Crisis of 2008, affect executive compensation through multiple
channels. To the extent that such reforms independently reduce firm profits or reduce
managerial bargaining power.
A firms disclosure policy is fundamentally connected to its governance. Improved
disclosure provides benefits, but it also entails costs. These costs are both direct, in
terms of greater managerial compensation, and indirect, in terms of the distortions
they induce in managerial behavior (e.g., managements actions aimed at signal
distortion). Stronger disclosure rules and greater scrutiny of firms should be
associated with an increase in actions aimed at signal distortion (a past example of
such actions being, perhaps, Enrons use of special-purpose entities, which led to its
financial statements being particularly uninformative). In addition to accountingrelated actions, increased disclosure requirements could lead to changes in real
investments, particularly an increase in myopic behavior (e.g., substitution away from
longer term investments, such as R&D, toward shorter term investments or actions
that affect reported numbers sooner).
Conclusion
Corporate governance refers to the system by which corporations are directed and
controlled. Transparency involves the timely disclosure of adequate information
concerning a companys operating and financial performance and its corporate
governance practices. Transparency also dictates openness regarding non-financial
performanceparticularly relating to a companys business operations and
competitive position.
The OECD Principles of Corporate Governance provide specific guidance for
policymakers, regulators and market participants in improving the legal, institutional
and regulatory framework that underpins corporate governance, with a focus on
publicly traded companies. Transparency refers to the decision making and its
enforcement in a manner that follows rules and regulations. It also means that
information is freely available and is directly accessible to those who will be affected
by such decisions and their enforcement.
21
The two fundamental ways of protecting investors are found in mandatory disclosure
and anti-fraud rules. The value of disclosure has been well recognized, and the
relationship between the amount of information available in the market place and the
"efficiency" of the stock market has been well analyzed. There are various laws
regarding disclosure in Nepal and disclosure helps in great extent to ensure corporate
governance because research has shown strong evidence between disclosure and
corporate governance at both the country and Individual Corporation levels.
22