The History And Development Of Corporate Governance

Published Date: 02 Nov 2017

Investment & Portfolio

Borja Gómez Tejera - 10284001

abstract

The aim of this report is to discuss the history and development of good Corporate Governance.

Discuss the history and development of corporate governance

According to the famous Australian banker, James Wolfensohn, "the governance of corporations is now as important in the world economy as the government of countries". At what time this happened and what were the causes?

"Corporate governance" first came into use in the 1970s in the US. In 25 years time it had become subject of debate worldwide Given the fact that "Corporate governance" has been with us since the use of corporate form created the possibility of conflict between owner and manager. It becomes necessary to begin with an overview on the historical origin of corporations.

The British East India Company was one of the first companies in the early 1600. It was a joint-stock company, oriented towards favouring trade privileges in India. 125 shareholders, and a capital of £72,000 composed the company. In those days, ownership was divided among a few individuals that were also active members of the company’s board of directors. Companies were built for specific purposes and partnership was the main form to organize jointly owned business firms. In those days, transfer of ownership was limited, as there were no organized markets, and therefore shares were only transferred to friends or relatives.

For the next 200 years, corporations in general were small institutions with specific purposes such as transportation. In those days, corporations were not allowed to make political contributions, and could not own any stock in other companies.

Industrialisation meant a huge impact on the development of bigger and more complex projects. Between 1890 and 1910, corporations were transformed from state-controlled organisations to unlimited private organisations protected under limited responsibility. This situation was followed by the huge waves of capital demand from multinational corporations. Such demand gave birth to what we know today as the stock exchange, which works as a bridge between entrepreneurs and investors. As a consequence, credible and well functioning capital markets were required for the development of a sustainable private enterprise sector. Markets for the exchange of shares opened in New York and some European capital cities. Liberalization of Capital Markets encouraged concerns on "Corporate Governance".

In 1961 the Organisation for Economic Co-operation and Development was created, with the aim of achieving the highest sustainable growth and contribute to a sound economic and world trade expansion. The federal Securities and Exchange Commission (S.E.C.) brought corporate governance on to the official US reform agenda in the mid-1970s, due to the corporate scandals represented, according to a 1976 S.E.C. report, "frustration of the system of corporate accountability". Consequently, concerns about managerial and corporate accountability arised, making necessary for markets to have a robust framework of corporate governance rules and regulations that provided investors with confidence in the system and entrepreneurs with the incentives to develop their businesses. By this time, the prospect of rigorous government supervision and control over corporate governance had become the biggest challenge facing private enterprises. In 1976, "The OECD Principles in Corporate Governance" were defined and shaped under these ideas:

Ensuring the Basis for an Effective Corporate Governance Framework

Rights of Shareholders and Key Ownership Functions

The Equitable Treatment of Shareholders

The Role of Stakeholders in Corporate Governance

Disclosure and Transparency

The Responsibilities of the Board.

At the end of the 20th century, corporate governance was in everyone’s lips, the U.S. was doing well and their corporate governance system appeared to be the dessired one. Suddenly A sharp stock market decline precipitated, due to the "dot.com" bubble burst. Scandals, where major U.S. public companies such as Enron and WorldCom were involved, destroyed what was the U.S. transparent model of corporate governance. Since then, corporate governance became an issue of worldwide debate.

To sum up, the growth of corporations and their new financing tools changed the way organizations were structured and managed into more complex institutions. Thus, the gap ownership/control stressed and a consecutive number of scandals, related to the abuse of power and control, encouraged the concern on the way corporations were managed and the need to regulate their practices. Today, good corporate governance should be directed towards achieving the shareholders interests by implementing the correct framework and practices.

What characteristics of good corporate governance are the and how are they contributing factors in enhancing the value of the firm?

Firstly, I would like to clarify what I understand for corporate governance and why it is so important to implement it in a correct way. It is the system through which organizations are directed and controlled. The need of this system arises, when ownership and control differed so much that organizations became an uncontrollable nexus of contractual agreements. It is to say that what is good corporate governance for an organization does not necessarily be good for other. Therefore, good corporate governance is about ensuring that the needs and interests of all of an organisation's stakeholders are taken into account in a balanced and transparent manner.

There is a business behind every corporation, and the objective of every business is to create value for the company through assuming some risks. What I mean is that corporate governance does not ensure success, as strategic factors play a more important role in determining the eventual success or failure of an organisation. Besides the risk, every business has two things in common, one is the manager (CEO) and the other is the owner. Conflicts arise when the owner’s expectative do not fit the manager’s results.

This is the simple structured of the everyday corporation, where the owner is the manager of the company’s assets. There are few corporate governance problems in this situation.

Owner = CEO

Other corporations show a much more complex structure, where governance and management are separated but connected through the CEO. He is the only person in both groups and takes care of the owner’s assets by implementing good management decisions that will affect the, directly the value of the firm.

Owner

Board of directors

CEO

Executives

Employee

Systems and structures can provide an environment conductive to good corporate governance practices, but at the end of the day it is the acts of the people charged with relevant responsibilities that will determine what are the objectives to achieve. Todays CEOs hold a huge responsibility and it is the result of their managerial practices what will determine whether the shareholders get dividends or not. But in the end, CEOs management depends on how these practices are implemented by executives and employees. However, good corporate governance is not just a matter of having the right policies and procedures in place. It is necessary to create a culture on corporate governance and social responsibility to encourage its correct use.

How have the companies that you selected for your FIN 2003G individual project developed and promoted corporate governance within their organizations?

As it was mentioned in my last year’s project, PRISA S.A. came alive when Jesus Polanco gave birth to the actual leading publishing house in Spain in 1958, Santillana. Five days after General Franco’s death Prisa launched its first newspaper, El Pais, through which they could start with their social activity. Fighting for democracy, with Jose Luis Cebrián as the current CEO of the company. In 1985 the Radio Group "Cadena SER" becomes one more asset of Prisa’s infrastructure. By the end of the 20th century, when Canal+ first emitted, Prisa had already achieved their presence on Radio, Newspaper and TV, getting a leading position in the Media Market. In year 2000, after their success in the different targeted areas, Prisa went public into de Stock Market. Consequently, concerns on corporate governance issues arise. Measures had to be taken to make the mechanism more transparent and to promote communication between the company and its shareholders, particularly institutional investors.

The Board of Directors was restructured and reoriented towards the general function of supervision. Therefore, a reasonable number of independent directors were integrated into the Board of Directors, who were recognized prestige executives and significant shareholders. In the composition of the Board of Directors, the external constitute a majority over the executive Directors and the proportion of proprietary and independent directors takes into account the relationship between the capitals represented. Thus, there is a majority of external directors on the Board, taking into consideration the ownership structure of the company and the capital represented on the Board. Then, in order to increase the efficiency of the company, Prisa provided that the Board of Directors is comprised of a minimum of 3 and a maximum of 17 members, corresponding to the Board the appointment and the determination of their number. Currently, 15 directors integrate the Board: one executive director, seven counsellors, six independent directors and one external director. The General Meeting is set as the supreme sovereign organ and social agreements are mandatory for all shareholders. The criteria followed by this board considers the compliance to social objects, the defence of the viability of the company go long-term development of its real value and safeguarding the identity and professional principles of their publishing and media group communication.

It was a lot of effort put into increasing the influence of the Secretary of the Board, strengthening its independence and stability and highlighting their role to ensure the formal and material legality of the Board's actions. Within this, The Board of Directors of the Company has constituted an Audit and Compliance Committee and the Nomination and Remuneration Committee, both composed solely of four external directors each. It is the Audit and Compliance Committee the body that, once a year, evaluates the efficiency and compliance with the rules and procedures governing the Company. Thus, involvement of the Board in the selection and election of its members follows a formal and transparent procedure. It was also included in their regulations, the obligation of directors to resign in circumstances that may adversely affect the operation of the Council or the image and reputation of the Company.

Some other measures are taken in order to gain transparency. The Internal Audit Governance Committee of the Company provides detailed information about the shareholding of his counsellors in the share capital of the company, the positions held in the Company, as well as the positions they hold in other companies with the same, similar or complementary to the activity that constitutes the corporate purpose of society and its Group. They also provide the IAGC with information about the overall remuneration of directors and transactions of which they are part. The company will provide markets with all relevant information, and immediately prior to its publication in any other medium. This information is also disseminated in their website. Also, quarterly, semi-annual and annual available to markets, once reviewed by the Audit Committee and approved by the Board of Directors.

Regarding legal restrictions on exercising voting rights and restrictions on acquisition or transfer of shares in the share capital. There are no restrictions on the voting rights corresponding to the shares of Class A. But the convertible shares of Class B have no rights of vote, in accordance with Articles 6 and 8 of the Bylaws. There are no special restrictions on the acquisition or transfer of shares. Legal regime applies to the shares represented by book entries.

The Group follows a strict risk policy, which monitors the most significant risks that could affect their business units. To do this, a Risk Map is used as a tool for graphical representation of the risks inherent to the Group, which is used to identify and assess the risks that affect the development of the activities of the various business units comprising the Group. The parameters evaluated in each risk to define its location in the Risk Map are the impact and likelihood of happening. Identifying these risks and operational processes are managed by the Internal Audit Department of the Group, which periodically reports the results of its work to the Audit Committee. As control systems to assess, mitigate or reduce the risks of the Company and its group.

In the end, I will name some of the practices implemented by Prisa and what the notorious consequence meant for its stakeholders. Due to the crisis they went through in 2008, consequence of the death of his funder and the difficult economic environment, Ignacio Polanco decides to appoint Jesus Cebrian as Executive Chairman of the company, as he was considered to be better qualified for the post. Since then, Ignacio Polanco remained President of the company and the ambitious plans of Mr.Jesus began. He was interested in becoming the leading Media Company in Spanish language. For it, a lot of risky operations were undertaken and a huge debt increase, followed. As a consequence, shares went down from its peak 17,6€ in April 2007 to just 0.95 euros in March 3th, 2009. This impacted negatively on the ambitious operations of the company and meant another huge increase of their debt, forcing the cessation of payments to investors worldwide and damaging their image.

(Figure obtained from Yahoo finance)

If the situation was not bad enough, the political relations of the company are also damaged for the loss of Mr.Jesus. Jose Luis Rodriguez Zapatero did not support Prisa, which was known for its affiliation to the left. Zapatero thought that it was not a good idea "to have all the eggs in the same basket" and decided to create a new controllable Media Group called, "Gestora de Inversiones Audiovisuales La Sexta". This caused a negative impact on political and advertising interests of the company in a Market, which was not big enough for allowing a new competitor.

Consequently, Prisa is pushed to make riskier investments, with the objective of solving their debt problems. The most recent try of reducing their D/E ratio was in 2010, bringing 900million to the company. As it is explained in their "Corporate Governance Report of 2011", Prisa concluded an Agreement ("Business Combination Agreement" or BCA) with the American society Liberty Acquisitions Holdings Corp. This Agreement meant certain actions, specifically two capital increases, with consequent change in the shareholding structure of the Company and the internal rules of the same. As it appears in a Report presented to the CNMV by Prisa, the alterations are the following:

"The ownership structure of PRISA, upon the exercise of the conversion rights of the holders of the Class B shares into Class A shares and issuing new shares for Class A minimum dividend payment is payable: (a) 651 054 490 ordinary shares of class a, € 0.10 par value each, numbered consecutively from 1 to 651 054 490, and (b) 340 268 409 convertible non-voting shares, Class B, 0.10 € par value each, numbered consecutively from 1 to 340 268 409. The PRISA capital upon the exercise of the conversion rights is € 99,132,289.90."