LECTURE 1: CORPORATE GOVERNANCE Role of Financial Reporting · Increased globalisation of f i nancial and product markets have raised the interest of both market participants and regulators in the quality of f i nancial reporting worldwide. 1. Could greater transparency in f i nancial statement information produce more accurate stock valuations? 2. Could more transparent f i nancial statements reduce the risk of misappropriation by insiders? 3. Could more transparent f i nancial statements of f i nancial services f irms (for example, banks) improve lending and credit evaluation decisions and contain the risks of a banking crisis? · Market participants seek high-quality f i nancial information because it mitigates information asymmetry between the management of the f i rm and outside investors. · Reduced information asymmetry has desirable effects on f irms' cost of capital and the volatility of security prices. . These benef its motivate regulators around the world to strive for high quality accounting standards . The quality of reported f i nancial information, however, is inf I uenced not simply by the quality of accounting standards, but also by other institutional factors that af fect the demand for and the supply of f i nancial information. The salient institutional factors are: - The nature of corporate governance - The type of legal system, and the existence and enforcement of laws governing investor protection Linking It Together Internal and External Corporate Governance Mechanisms High quality standards Corporate governance system High quality financial reporting Legal system & investor protections Corporate Governance · Interest in CG has increased due to highly publicised cases of corporate misconduct and concerns over the management of corporations. · A good corporate governance system ensures that the corporation sets appropriate objectives and then puts systems and structures in place to ensure that these objectives are met. Also provides the means for other (in or out) to control and monitor the activities of the corporation and its managers. Corporate Governance Def i nitions · 'Corporate governance is the system by which companies are directed and controlled' - Cadbury Report • 'At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations' - HIH Royal Commission report Determining Corporate Governance · Corporate Governance - Legal System - Investor Protections - Corporate Ownership Model (All linked) . These determine the CG which is also inf I uenced by beliefs about who's benef it the company exists for Elements of Corporate Governance · Controlling and directing the directors (and senior management) (ensure that key managers make appropriate decisions that they cannot and do not act in their own interests to benef it themselves against the interest of other stakeholders (especially shareholders) · Transparency and accountability (ensure that the stakeholders are suf f i ciently informed about the activities of the company and to allow managers to meet their accountability obligations)
· Shareholders (ability to protect their own interests by participating