GOOD GOVERNANCE AND SOCIAL RESPONSIBILITY DEFINITION OF GOOD GOVERNANCE Governance refers to the process of decision making and

the process by which decisions are implemented. The term governance can be applied to corporate, international, national, local governance of the interaction between other sectors of society. DEFINITION OF SOCIAL RESPONSIBILITY It is an obligation to act in a manner that will benefit the society at large. CORPORATE GOVERNANCE A system by which business corporations are directed and controlled. (according to OECD Organization for Economic Cooperation Development) OECD PRINCIPLES OF CORPORATE GOVERNANCE COVERS 5 AREAS: 1. Ensuring the basis for an effective corporate governance framework The corporate governance should be effective, transparent and in accordance with the rule of law, clearly defining the responsibilities among different supervisory, regulatory and enforcement authorities. 2. Rights of shareholders 3. The equitable treatment of shareholders Equal treatment for all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. 4. The role of stakeholders in corporate governance The corporate governance framework should recognize the rights of stakeholders of the corporation and encourage active co-operation in creating wealth, jobs and sustainability of a financially sound enterprises.

Stakeholders of a corporation/MNEs 1. employees 2. creditors 3. suppliers 4. customers 5. government 5. Disclosure and Transparency The corporate governance framework should ensure that timely and accurate disclosure should be made on all materials matters regarding the corporation, including the financial statements, performance, ownership and governance of the company. RELATIONSHIP OF CORPORATIONS AND STAKEHOLDERS 6. The Responsibilities of the Board Corporate governance framework should ensure the strategic of the company, the monitoring of management by the board and the boards accountability to the company and the shareholders. CORPORATE GOVERNANCE STRUCTURES 1. The Board of Directors 2. Officers and Management 3. Equity Markets 4. Debt Markets 5. Auditors and Legal Advisors 6. Regulators MULTINATIONAL CORPORATION - is an enterprise that manages production and delivers goods in more than one country. - any corporation that is registered and operating simultaneously in more than one country, usually with its headquarters in a single country.

DIFFERENCES BETWEEN MNCs and DOMESTIC FIRMS 1. MNCs have to deal with more demanding and more diverse global shareholders who want to seek greater disclosure and more transparent explanations for major decisions. 2. Domestic firms have only one board and one executive team MNCs have several boards or executive teams at different level. 3. MNCs face various corporate governance standards institutionalized by different countries in which they invest and operate. COMPARATIVE CORPORATE GOVERNANCE REGIME REGIME BASIS/ CHARACTERISTICS MARKET BASED Efficient equity market; dispersed ownership FAMILY BASED Management and ownership is combined; majority and minority shareholders

EXAMPLES United States, United Kingdom, Canada, Australia Hong Kong, Indonesia, Malaysia, Singapore, Taiwan, France

REGIME BASIS/CHARACTERISTICS BANK BASED Government influence in bank lending; lack of transparency; family owned GOVERNMENT AFFILIATED State ownership of enterprise; lack of transparency; no minority influence EXAMPLES Korea, Germany, China, Russia PARENT SUBSIDIARY CORPORATE GOVERNANCE IN MNCs Parent Level or 1st tier governance influences 2nd tier through: - Ownership holding - Organizational coordination - Corporate support - Performance Monitoring Subsidiary or 2nd tier governance in turn channels back to 1st tier corporate governance through : - Advice provision - Governance sharing - Information reporting - Directorate expansion Link between parent and subsidiary is generally manifested in ownership participation where in the parent board is often has the utmost and final authority to approve large investment overseas, whether joint ventures or acquisition Linked through information sharing. For instance, subsidiary board may inform parent board of behaviours of subsidiary executives and may advise parent board how to improve ethical behaviors of overseas employees. Hence, subsidiary board and the parent board , to some extent shares an MNCs total corporate governance with parent board.

Linked through information reporting and feedback. If parent board wants to know how corporate executives are doing with respect to ethical behaviors and global leadership, the subsidiary managers are the perfect channel to get information and feedback for parent board. Subsidiary board advising agent of parent or 1st tier such as changes and development of the host country. In turn parent board may advice subsidiary board of the activities in the MNCs so that the latter know better about MNCs overall global strategy. WHY CORPORATE GOVERNANCE VARIES AMONG NATIONS? CULTURE LEGAL POLITICAL SYSTEM CATEGORY OF CORPORATE GOVERNANCE INSIDER DOMINATED Companies are owned and controlled by a small number of major shareholders.These maybe members of the founding families or small group of shareholders such as lending banks or the government. Also referred to as relationship based systems because of the closed relationship prevalent between the companies and their dominant shareholders OUTSIDER DOMINATED SYSTEM Refers to the systems of finance and corporate governance where most large firms are controlled by their managers but owned by outside shareholders such as financial institutions or individual shareholders. ANGLO SAXON SYSTEM Focuses on the separation of ownership from control Characterized by unitary or one board that consists of directors in top management positions in the company and outside directors who are not company employees Directors with management positions are usually referred to as insiders or executive directors Directors not members of the management are known as non-executive or outside directors Anglo Saxon views corporation as a nexus of contract

Some deficiencies of the Anglo Saxon System Board duality wherein CEOs are also board chairman is common. Insider trading are still frequent Corporate transparency is not always present Outsider directors and auditors are not always independent nor professionally or ethically competent CORPORATE GOVERNANCE IN CONTINENTAL EUROPE Most corporate governance in Continental Europe (mainly Germany, Austria, Italy and Netherlands and to some extent France) have adopted a 2-tier board. Two tier board comprises the supervisory and the management boards Corporate governance of Anglo Saxon Countries and Continental Europe Anglo Saxon Ownership Concentration -Low ownership concentration Shareholder Identity - US and UK, most of the shares are in the hands of agents of financial institution rather than private persons. Liquidity of the Market - Many companies are listed and publicly traded. This means many companies have little personal contact with their shareholders.

Mutual Shareholdings Presence of anti-trust law and arms length rule between parent and daughter companies have limited ownership structure. Ownership structure is transparent

Continental Europe Ownership Concentration - high ownership concentration Shareholder Identity Sharp contrast with Germany, France and Italy where private companies, financial institutions and private persons hold most of the shares. Private persons and companies act directly and do not use agents to manage their affairs. Liquidity of the Market - Fewer companies are publicly traded. Because more companies are private, there exists strong (personal) relationship between company and its shareholders. In most cases, these two functions are not separated. Mutual Shareholdings Companies hold large stakes in other companies (related) and shareholdings also moves in the opposite direction Ownership structure is not transparent due to the no. of mutual shareholdings and limited extent of information disclosure. Corporate Governance in US Corporate governance of US was patterned under the Anglo Saxon System It is an Outsider Dominated System Category of corporate governance. Several scandals happened in US for the past years, some of which are: ENRON scandal - Enron is an energy company collapse in 2001 due to allegations of accounting fraud. Worldcom - a telecommunications company - fraud activities began in 1999 to 2002 - use shady accounting methods to mark its declining financial condition by falsely declaring a financial growth and profitability to increase the Worldcoms price of stocks.

Sarbanes Oxley Act of 2002 (SOX) - a US federal law enacted on July 30, 2002 which set new or enhanced standard for all US public company board, management and accounting firms - The bill was enacted as a reaction to a number of major corporate accounting scandals in US. Sponsors of SOX 1. 2. US Senator Paul Sarbanes US Representative Michael G. Oxley

Corporate governance in Japan Characterized by a long term, cooperative relationships among managers, major shareholders and business partners Japanese corporate governance is largely characterized by the keiretsu system and the main bank system Keiretsu Member companies owned small portions of the share in each others companies, centered on a core bank This system helps protect the company managements from stock market fluctuations and takeover attempts.

Main Bank System Banks is often one of the largest shareholders in a Japanese firm. Japanese firms enjoyed less pressure from the capital market due to: 1. intermediate finance via banks 2. stable shareholding among a group of firms 3. interlocking directorate practices

Family Centered Corporate Governance in Asia Family centered relationship model in corporate governance is even more evident in countries or regions where ethnic Chinese play a dominant role in local economies Insider Dominated is the system category of corporate governance in Family centered countries in Asia. Transition economy - an economy that is changing from centrally planned economy to a free market - decisions on investment and production are formulated by a central authority, usually a government agency. Corporate Governance in Transition Economies Corporate governance in transition economies is relatively weak because of: 1. lack of transparency 2. limited protection of property rights 3. underdeveloped institutions (e.g. independent auditing, accounting law, arbitration services) 4. poor enforcement of laws, rules and verdicts 5. lack of independence in banks loan decisions 6. distorted stock market