Independent Directors and their role in corporate governance Essay

Corporate administration refers to the regulations and inducements by which the direction of a company is directed and controlled to maximise the profitableness and long-run value of the house for stockholders while taking into history the involvement of other legitimate stakeholders ( Stone, Hurley, and Khemani 1998 ) .

Hong Kong Exchange and Clearing Limited ( HKEX ) is the primary regulative organisation responsible for the supervising and ordinance of listed companies. In order to do certain that listed companies run decently and the rights of minority stockholders are protected. HKEX issue some listing regulations for beef uping the rules and pattern of corporate administration in listed companies ( with the support of authoritiess and international organisations ) . These regulations require companies to carry through their fiducial responsibilities and follow the criterions set by the Torahs of Hong Kong. For illustration, they require at least two non-executive managers to sit on the board of an organisation to guarantee independent and wo n’t enlarge the power of bulk stockholders. They besides require revelation of manager ‘s emoluments and other information and statement of manager ‘s involvement. However, all these Listing Rules are non lawfully bounded, the penalty of it being public animadversion and a period of cold shouldering. The Securities Disclosure of Interest Ordinance ( SDIO ) besides provides some model and revelation demand for related minutess. Related minutess mean a dealing between a listed issue or its subordinate and a affiliated individual. HKEX requires related minutess to be to be approved by stockholders in a general meeting and restrains the related individual from voting on it. The Securities ( Insider Dealing ) Regulation supervises the usage of price-sensitive information in securities trading. Like sign language of an of import contract, construct up a joint venture, coup d’etat and amalgamations, fund raising activitiesaˆ¦etc to guarantee an orderly market.

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Importance of corporate administration

Corporate administration has wider deductions and is critical to economic and societal well being, foremost in supplying the inducements and public presentation steps to accomplish concern success, and secondly in supplying the answerability and transparence to guarantee the just distribution of the ensuing wealth. The significance of corporate administration was designed for the stableness and equity of society between economic and societal ends, and between single and communal ends. The administration model is at that place to promote the efficient usage of resources and every bit to necessitate answerability for the stewardship of those resources.

A listed company is non expected to province whether it has complied with a recommendation or to print its grounds for non following the recommended patterns. After two full old ages of operation we understand our Exchange is now reexamining whether there is a demand to revise the Code. The Code provides the basic corporate administration outlook for companies listed in Hong Kong. But that is merely the beginning. For each person listed company, the pressing issue is to inquire itself what is the right corporate administration for its company. Merely like it is for each legal power to make up one’s mind what is right for its ain market taking into consideration the local fortunes, the determination on what is right for each listed company is for the company itself to find in visible radiation of its fortunes. Each board of managers must find how its company should be governed.

Corporate administration and international convergence codifications

Hong Kong ranks as the highest on the Corporate Governance in Asia, followed by Singapore, India, Taiwan and Japan. In certain extent, this reflected the floaty economic and market environment of Hong Kong with less force per unit area on corporate administration. The successes of Hong Kong are determined by several factors. Its regulation of jurisprudence that provides a model of robust regulative model that promotes orderly and efficient markets, efficient fiscal substructure, and talent pool of professionals, enterprising concern community, and the presence of market participants from around the universe. With these, companies can distinguish and place themselves to be more attractive to investors that would go more careful and know aparting with their financess in an unsure economic environment. Investors would look to companies that show possible to sit through the tough economic times and increase the value of the company and portion monetary value. Investors are attracted to markets that provide the investing chances they are looking for. Investors will perpetrate their money to companies that provide good corporate administration so they will perpetrate their investings to markets that provide important Numberss of investing chances with good corporate administration.

The experience of the market convulsion in recent old ages besides offers some utile penetrations on how governance went incorrect. Basically, “ corporate ” is something that belongs to a corporate and “ administration ” is the act or mode of regulating. So, corporate administration is merely the mode of regulating a corporation. For a more formal definition, we can mention to the Principles of Corporate Governance established by the Organization for Economic Cooperation and Development ( OECD ) which was established in 1961, the OECD is an international organisation composed of the industrialised market economic system states, every bit good as some developing states, and provides a forum in which to set up and co-ordinate policies. This rule were updated and republished in 2004, it represent the first enterprise by an intergovernmental organisation to develop the nucleus elements of a good corporate government. The OECD Principles are intended to help OECD and non-OECD authoritiess in their attempts to measure and better the legal, institutional and regulative model for corporate administration in their states and to supply counsel and suggestions for stock exchanges, investors, corporations, and other parties that have a function in the procedure of developing good corporate administration. The rule was focus on publicly-traded companies, both fiscal and non-financial. However, to the extent that they are deemed applicable, they might besides be a utile tool for bettering corporate administration in non-traded companies, e.g. privately-held and state-owned endeavors.

Board of managers

Disclosure and transparence

Corporate must supply adequate, accurate and timely information to stockholders and the public sing fiscal public presentation, liabilities, ownership and corporate administration issue. This is critical if investors are to be able to do informed judgements on the hazard and wagess of any investing ( OECD 1998 )

Directors pay

The board of managers ever by and large determines their ain wage without effectual proctor. They can make up one’s mind to pay their ain compensation in surplus of their public presentation. So revelation of their wage is of import in effectual corporate administration. So that minority stockholder can utilize this information to take make up one’s mind their investing on the company and this information is besides an of import for establishment investors. HKEX requires listed companies to disclosure manager ‘s wage on one-year study which must disclosure information on compensation of the top executives. In add-on, it would be more thankful for senior direction to organize an independent wage commission with non executive board members to do wage determinations.

Non-executive independent manager

Independent manager is playing an progressively significant function in the process of corporate administration. But how independent are independent way? Mark Mobius President of Templeton Emerging Markets Fund and one of the talkers at the round table said that non-executive managers are frequently non every bit independent as they should be. Many people believe that the construct of independent non-executive manager for bettering a company ‘s corporate administration system is merely a myth. The advantages of holding non-executive managers in a company are overridden due to the undermentioned grounds: –

Harmonizing to Higgs ‘ definition a non-executive manager is considered independent when the board determines that the manager is independent in character and judgement and there are no relationships or fortunes which could impact, or look to impact, the manager ‘s judgement. To province merely the look independent managers has been defined to intend managers who apart from having manager ‘s wage, do non hold any other stuff monetary relation or minutess with the company, its boosters, its direction or its subordinates, which in the judgement of the board may impact independency of judgement of managers.

Functions of impendent managers

In theory, independent managers should suit into the overall construction of corporate administration, and are necessary to guarantee effectual, balanced boards. The board is the most important instrument of corporate administration. The non-executive managers should lend to and constructively dispute development of company scheme. They should besides size up direction public presentation, fulfill them that fiscal information is accurate and guarantee that robust hazard direction is in topographic point, meet at least one time a twelvemonth without the president or executive managers. Besides, there should be a statement in the one-year study stating whether such meetings have taken topographic point. They should besides fix to go to AGMs and discourse issues associating to their functions, as particularly presidents of commissions. At the same clip they should hold a greater exposure to major stockholders, peculiarly the senior independent manager. To guarantee the effectivity of the board as the inadvertence organic structure, they managers should supervise what the direction does, in response to any recent dirts of revelations and audits, size and range of present twenty-four hours endeavor and complexness of operations.

Lack of independency

The independent non-executive manager can better the company ‘s corporate administration system is fundamentally relied on his nature of “ independency ” . But in pattern, the independent non-executive manager may non really independency. Although there have demand that the independent non-executive manager of the company must non be or hold been connected to a manager, the main executive or significant stockholders, the managers would wish to choose whose would co-operate with them as the independent non-executive manager.

Even though they can non choose the affiliated individual, e.g. their relations or concern spouses as the independent not-executive managers, they can happen their friends or person who has the same position ( e.g. selling scheme ) with them as the independent non-executive manager, alternatively of happening some who are truly independent and helpful in doing the right determination. It would be easy to state that they are non connected with each other. It is particularly easy to happen in instance the managers are besides the significant stockholders, because the significant stockholders ( as the same clip the managers of the company ) have the vote right in naming the non-executive managers, merely like the household – based companies in Hong Kong.

If the independent non executive manager being appointed is non ‘independent ‘ plenty, they may non be able to protect the involvements of all stockholders. They may merely hold with the managers and the significant stockholders and may non be able to supply independent and nonsubjective judgement and advice to the board of manager. For illustration, the independent non-executive manager are normally the members of the audit commission, if they are non independent plenty, they may non be able to supply nonsubjective sentiment or reappraisal on the fiscal coverage procedure, internal controls and the audit map. Furthermore, they may besides take portion in finding the managers ‘ wage, if they are connected with the managers, they may accept to the unreasonable high managers ‘ wage without any enquiry.

Audit commission

Stricter regulations for the audit commission and the independency of the board will assist forestall fiscal dirts and guarantee a better monitoring, but we are tempted to inquire whether the independency of the board as a whole entity is sufficient to work out all the jobs. When the managers sitting on the board are Renaissance mans, even if they are wholly independent and miss the proficient fiscal cognition needed to understand the complicated studies and operations presented to them, they could unconsciously vote for declarations that do non needfully increase stockholders ‘ wealth.

The fiscal cognition demand applies merely to the audit commission members, which will surely take to improved monitoring of the house ‘s accounting statements but non needfully to a board that takes optimum determinations from a stockholder position. We think that fiscal cognition should non be sole to the managers sitting on the audit commission. Listed company manual requires all members of the audit commission to be financially knowing or to go it in a sensible period of clip ; and the definition of financially knowing is left to the discretion of the board of managers. Even if a financially knowing audit commission is sufficient to vouch an effectual monitoring from the board. Audit commission must hold accounting or related fiscal direction expertness, as the company ‘s board interprets such making in its concern judgement ” . Unfortunately, the clip devouring facet of informations aggregation oblige us to restrict our treatment merely to the demands refering the audit commission. They are sing jobs other than accounting dirts which are supposed to be prevented by the ordinance on the audit commission.

One country of concern is whether the accounting house acts as both the independent hearer and direction adviser to the house they are scrutinizing. This may ensue in a struggle of involvement which places the unity of fiscal studies in uncertainty due to client force per unit area to pacify direction. The power of the corporate client to originate and end direction consulting services and, more basically, to choose and disregard accounting houses contradicts the construct of an independent hearer. Changes enacted in the United States in the signifier of the Sarbanes-Oxley Act prohibit accounting houses from supplying both scrutinizing and direction consulting services.

The Enron prostration is an illustration of misdirecting fiscal coverage. Enron concealed immense losingss by making semblances that a 3rd party was contractually obliged to pay the sum of any losingss. However, the 3rd party was an entity in which Enron had a significant economic interest. In treatments of accounting patterns with Arthur Anderson, the spouse in charge of scrutinizing, positions necessarily led to the client prevailing.

Family members

Management shareholdings Hong Kong has many family-controlled concerns

That is actively managed by the first or 2nd coevals of the household. By household control, that means the managers and their households have significant shareholdings and voting power. The traditional familial civilization that runs in Chinese blood agencies that household concerns are guarded closely. A benign revenue enhancement government – there is no capital additions revenue enhancement and comparatively low personal, estate and corporate revenue enhancements in Hong Kong – makes it easier for household lucks to be kept integral. The family-ownership characteristic extends to listed companies and many are bulk owned by an person or a household, and that single or household manages the house. The per centum portion ownership by enterprisers, managers and their households is much higher than for houses in industrialised states where old CEO wage research has been carried out. High portion ownership by managers brings about different types of bureau jobs than those present when ownership is widely dispersed. When managerial ownership is low, investors are concerned about directors fiddling their responsibilities. This job is alleviated when direction portion ownership is high. However, a different bureau job emerges when top directors own significant portion bets. Here, the bulk proprietors may expropriate assets off from the minority proprietors. One manner to expropriate assets is to pay highly high and indefensible compensation to the manager-owners. In malice of the expropriation of assets argument, we contend that managers who have significant shareholdings will be associated with lower direct compensation ; we use three statements to endorse our contention.

First, the demand for higher direct compensation is reduced when the managers have high shareholdings because they receive significant hard currency dividends from the portions owned. Unlike US, bulk of houses in Hong Kong pay hard currency dividends. Furthermore, Hong Kong ‘s popular media is really noticeable and affluent concern people are frequently the mark for inauspicious commentary. The revelation of top direction wage can pull a great trade of unwanted promotion, so managers with big portion retentions of course want to avoid unfavorable judgment.

Second, taking comparatively modest compensation gives managers a lever to cut down the pay demands of lower degree directors. Although antagonistic statements exist, viz. that managers with significant portion ownership may utilize their vote power to give themselves big and indefensible compensation, this is improbable to be the instance in Hong Kong where there be more elusive ways to expropriate minority stockholders ‘ wealth between the listed house in inquiry and the managers ‘ private houses.

Third, the board of managers is the major internal administration mechanism that oversees direction actions including the scene of top direction wage. As boards of managers typically include executive managers and the CEO, houses have to establish processs to guard against self-seeking behaviour. One such process is to name independent non-executive managers to the board to look after the involvements of outside stockholders. Non-executive managers are expected to discourage over-generous top direction wage and, farther, to advance the usage of public presentation related wage. Independent non-executive managers are motivated to take their duties earnestly, as they want to keep and even heighten their reputes. Additionally, of class, the managers have fiducial responsibilities to the stockholders. Research surveies have used the proportion of non-executive managers as a step of the strength of board monitoring of top direction wage. Effective monitoring by non-executive managers in Hong Kong is really of import as the executive managers frequently have significant vote power. As a contemplation of this concern, the Stock Exchange of Hong Kong is taking proactive stairss to heighten the standing and importance of non-executive managers in listed houses. Although non-executive managers are supposed to look after the involvements of stockholders, there are grounds to oppugn their effectivity. The chief concern, here, is the independency of the executive managers.