Corporate Governance

What Is Corporate Governance

Corporate Governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community Corporate governance is intended to increase the accountability of your company and to avoid massive disasters before they occur.

The public image of a corporation will quite accurately reflect the culture of that organization. It follows, then, that good corporate governance has to be from inside of the organization since this in turn will be reflected in the culture. So an organization whose internal functions are healthy will naturally look so from an external perspective.

Principles of Corporate Governance

These Principles of Corporate Governance have been adopted by the Board of Directors to assist the Board in the exercise of its responsibilities. These principles, along with the Company’s Memorandum and Articles of Association and the charters of the Board committees, provide the overall framework for the governance of the Company and are not intended to limit, enlarge or change in any way the responsibilities of the directors as determined by applicable law and such Memorandum and Articles of Association and charters.

These principles are reviewed by the Board periodically and may be amended from time to time by the Board on the recommendation of the Nominating and Corporate Governance Committee

1. Role and Composition of the Board of Directors

The business and affairs of the Company shall be managed under the direction of the Board of Directors. The Board of Directors may, by resolution, delegate its authority to Company management or to committees of the Board of Directors, subject to the Company's Articles of Association, applicable laws, rules or listing standards. The Board of Directors responsibilities include risk oversight evaluation of the Company’s strategic direction, overseeing and engaging in succession planning for the Company’s senior management, and attention to matters affecting the Company’s corporate governance and shareholder relations.

2. Board Size.

The Board of Directors sometimes reviews the number of director positions with the plan of keeping the  Board of Directors small enough to promote substantive discussions in which each director can actively participate, and large enough to offer a diversity of backgrounds and expertise. The Company’s Articles of Association currently provide that the Board shall have not less than three or more than fifteen directors.

3. Independent Director

Independent directors shall always constitute a majority of the Board of Directors and there shall be no more than two directors who are then employed by the Company serving on the board at any time. The Board of Directors makes an affirmative determination regarding the independence of each director annually, based upon the recommendation of the Committee, and monitors its fulfillment with the requirements and other applicable standards including enhanced independence requirements issued by applicable regulators and advisory services for director independence on an ongoing basis. Each independent director is expected to notify the president of the Committee, as soon as possible, in the event that his or her personal circumstances change in a manner that may affect the Board’s evaluation of such director’s independence.

4. Board Leadership.

The Board of Directors does not have a firm policy as to whether the position of the Chairman and the position of the Chief Executive Officer (“CEO”) should be separate and intends to preserve the freedom to decide what is in the best interest of the Company at any point in time. However, the Board strongly endorses the concept of having one of the independent directors serve in a position of leadership for the rest of the non-management directors. If at any time the CEO and Chairman roles are combined or if the Chairman is not otherwise an independent director, the Board annually will elect a lead independent director (“Lead Independent Director”) and such director shall also serve as Chair of the Committee. Although elected annually, the Lead Independent Director is generally expected to serve for five years. If the Chairman is an independent director, then the duties of the Lead Independent Director described herein shall be a part of the duties of the Chairman.

5. Relationship with shareholders

The Company recognizes the importance of transparency and accountability in disclosures of the Group’s business activities to its shareholders and investors. The Board has maintained an effective communications policy that enables both the Board and Management to communicate effectively with its shareholders, investors and even the public

6. Accountability and Audit

1)         Internal Control and Risk Management. The Board acknowledges its responsibility for establishing a sound system of internal control to safeguard shareholders’ investments and Group’s assets, and to provide assurance on the reliability of the financial statements. In addition, equal priority is given to internal control of its business management and operational techniques. While the internal control system is devised to cater for particular needs of the Group as well as risk management, such controls by their nature can only provide reasonable assurance but not absolute assurance against material miss-statement or loss. Establishment of the Risk Management Policy is to identify, evaluate and manage the Group’s corporate risk profile and develop contingency plans to mitigate any possible adverse effects on the Group.

2)         Financial Reporting In presenting the annual financial statements and quarterly announcements of its results, the Board of Directors has ensured that the financial statements represent a true and fair assessment of the Company’s and Group’s financial position.

3)         Relationship with Auditors the internal auditor and the external auditor were invited to attend all the Audit Committee meetings. The Company maintains a transparent relationship with the auditors in seeking their professional advice and towards ensuring compliance with the accounting standards.

The importance of Corporate Governance

There are several definitions for corporate governance. However, for me the most suitable definition to describe Corporate Governance is "a set of rules, regulations and structures which is to achieve best performance by implementing suitable effective methods in order to achieve the corporate objectives". In other words, corporate governance refers to internal disciplines of systems, which control the relationships among 'key players' or entities that are very important in the performance of the organization. Moreover, it supports the organization's sustainability on the long term and establishes responsibility and accountability.

The guidelines of corporate governance aim to achieve greater transparency, fairness and hold executive management of the organization accountable to shareholders. In doing so, corporate governance plays a very important role in protecting shareholders and, in the meantime, it can be considered the interest of the organization at large without jeopardized to employees' rights. Even though executive management should have reasonable level of power to run the business, corporate governance ensures that such powers are set to practical dimensions in order to minimize misuse of authority to serve objectives not necessarily in the best interest of the shareholders.

Therefore, it provides a framework for maximizing profits, promoting investment opportunities and eventually creating more jobs. In general, corporate governance highlights two major principles:

• Oversight and control over the executive management's performance and strategic directions.

• Accountability of the executive management to the shareholders.

For that reason the principles of corporate governance apply on those who assume the final responsibility for success or failure of the organization. On the other hand, it is very important to understand that the proper implementation of good corporate governance does not necessarily guarantee success of the organization. Meanwhile, a bad corporate governance practice is surely a common condition causing failure in many organizations. Furthermore is an investors are willing to pay additional premium over stock prices for companies known to implement very good corporate governance practices as opposed to other companies which may have same level of profitability but characterized with inefficient management or a record of poor governance practices.

The good governance practices could help companies to grow or attract additional investors as alternative to raising capital. Sound governance practices lead to improved internal control systems, which results in more accountability and higher profitability. The latter is attributed to enhanced controls, which minimize the likelihood for fraud losses. Corporate governance framework ensures that shareholders are freed from executive and administrative duties. As a result, conflicts among business owners who assume management roles in the organization would be reduced to a greater extent particularly in organizations owned by few numbers of shareholders where the distinction between ownership and management capacity is blurred. The real challenge is absence of good corporate governance practices in such organizations. Consequently, it would be difficult to access sources of finance from banks or investors.  This is mainly due to lack of awareness about what corporate governance is about and its relationship with corporate performance and objectives. Besides, the widespread fallacy that implementing corporate governance entails high costs coupled with doubts that such costs would not generate the envisaged benefits to the organization. The biggest challenge to most of organization is about how far they can cope with the external business conditions and internal problems, which threaten their ability to survive. Absence of planning and forward thinking insufficient leadership and management skills at senior management level Lack of future business plans for growth and new investment plans Problems with cash flows Inability to innovate, present ideas for business development and cope with ever changing business environment and economic conditions Inadequate access to technical assistance. If we consider the main reasons why companies fail, we may conclude that implementing corporate governance contributes to a far extent to support chances these companies to perform well, grow and adopt better process for decision making. For family owned businesses, corporate governance improves management efficiency, limits internal conflicts and helps in making transition of ownership to heirs a smooth process.

The importance of ethics in the market, the Company and Regulation

While law enforcement can help to improve the conduct and impose severe penalties to those found guilty, values, ethics and morals is in fact to avoid greed and materialism significant in the business community. Thus the approach in raising awareness of corporate governance in order to create a good shall be based on a multidisciplinary approach ("multidisciplinary approach") that market discipline, self-discipline and regulatory discipline.

Market discipline

Capital formation process depends on investor confidence over the integrity and fairness of the capital market and also to the way a market works. If the investors feel their rights are not protected, they will refrain from participating in the market. With the discipline of the market, companies would have an incentive to do business with honest and efficient. Therefore, the market valuation of a company's performance should be reflected in its stock price, and credit standards. Companies that fail the test will have difficulties to generate new capital.

However, price indicators and the credit downgrade is only one aspect of market discipline. It should be supported by action activist shareholders. Particularly institutional investors have the ability, even the responsibility, to ensure that management is responsible for failure to properly manage and administer.

Company discipline

Discipline of corporate governance also depends on ethics and integrity within the company, or in other words, self-discipline by management.

Good corporate governance ranging from the boardroom itself. It is important for a company to have a strong independent experts. Free in this context means independent of management and free from any business relationship that could affect a director when making a decision. Thus, the Code on Corporate Governance requires one third of the members of the board of directors is made up of independent directors. However, it should be noted that while integrity and honesty required at all levels in an organization, ultimately rests with the chief executive officer (CEO) who have played a role as a "role model" in the exhibit and convey the values ​​appropriate to the other.

The law provides that the directors acted honestly and diligently at all times in carrying out their duties.

Code of Corporate Governance, focuses attention on the need for the principal officers of listed companies accountable and transparent in carrying out their duties. This includes determining the integrity of the company's internal control systems and management information systems including compliance with the law.

However, it is important to remember that when we can enact legislation provides for the freedom of the board in terms how close they are and their relationship with the company, we cannot regulate the freedom of thought associated with them. For example, when independent directors are so closely with the company or chief executive but in a form that is not so obvious as to be associated with the definition of the law on the independence of directors, the directors cannot be considered independent. Thus, ethics plays an important role in providing guidance for the conduct of honest and correct.

2) Enron and World.com are examples of companies that collapsed due to mismanagement. Discuss the cause for its collapse that is related to Corporate Governance.

2.1)     ENRON

Enron was an American energy company based in Houston, Texas. Founded by Kenneth Lay in 1985 after a merger between Gas Natural and Inter Hounston North. After years of expanding business in domestic and international levels, Enron became involved with a debt worth billions of dollars. This is due to the accounting for transactions and complex contracts. All debts were hidden from the knowledge of shareholders through accounting fraud, illegal loans and partnerships with other companies that designed and is known as the Enron scandal. This scandal has raised many issues regarding accounting practices in the United States and a key factor to the existence of the law Sarbanes-Oxley.

Enron suffered severe losses as a result of incorrect accounting practices and a wrong arena of management. Because ownership gives full freedom to the management in handling financial matters, this allows the company to hide losses of knowledge owners and shareholders. On paper, Enron's financial statements are very pretty and look favorable. But the story behind it, is very surprising. Enron was a loss! Each time the arrival quarter, company executives have to do the alteration here and there to preparation of financial statements in order to create the illusion of billions of dollars to attract investors. To cover up all the losses.

Enron executives were forced to work in accordance with the internal financial information created by their own. Chief Financial Officer Andrew Fastow led the team to create a complex corporate web site where the company does not actually exist at all. The company subsequently carry out fake transactions with Enron Corporation aims to increase the company's money and hide losses incurred through its quarterly financial reports and looks like Enron free of debt. Andrew did all this in order to guarantee himself; his family and his friends, but his actions have sacrificed the company and the shareholders of Enron Corporation. But Andrew would not stop there. In fact, he was threatened and threatening many parties for the comfort. He has threatened to fire if its analysts acted boldly to disclose Enron's financial position negatively. On October 31, 2002, Andrew Fastow was indicted on 78 counts including fraud, money laundering and conspiracy illegally. He pleaded guilty to two counts and sentenced to prison for 10 years.

Among the main reasons for the collapse of Enron is due to the use of mark to market accounting practices. This accounting practice to record the estimated future profitability of any agreement on the current market value rather than the future value or historical value. This can be seen in the Natural Gas business Enron. At first, the company's accounting is quite clear in each period of time, the company also recorded the actual costs and actual revenue earned from each sale made. However, after the inclusion of Keith Jeffrey Skilling was appointed Chief Executive Officer of Enron Finance Corporation, he asked Enron to apply the mark to market accounting on the grounds that this accounting will reflect the real economic value. The accounting practices outlined when long-term contracts signed, income was estimated as the present value of non-value in the future.

With the discovery of this scandal, the Enron Corporation was dissolved and restructured in order to safeguard the interests of its creditors. In addition, the scandal also led to the existence of an Act called Sarbanes-Oxley Act. The act was named for US Senator Paul Sarbanes and US Representative Michael G. Oxley. Among the main acts are introduced all companies must have a majority 'independent directors' and corporate audit group should consist of members who are financially literate and one of whom must be an experienced person.

By dismantling this case also, the question that arises is missing practice integrity in every employee of Enron Corporation. A fact that cannot be avoided employees at Enron Corporation is actually paid by the company that makes some stocks they are more eager to do anything unethical to raise the stock price, which is also equivalent to 'their money'. Why the stock is equivalent to 'their money'? This is because they are also shareholders in the company. If the stock price falls, they will also be impressed with it. Surely Enron scandal proves that money is very powerful effect on people. When greed and self-controlled, anything can be done if commensurate with the rates offered.

2.2) Worldcom

Worldcom at the time it was actually a large telecommunications company. With the number of employees reached 80,000, WorldCom provides long distance telephone services and has the largest Internet backbone networks. WorldCom originated from the merger Long Distance Discount Services, Inc. (LDDS) with Advantage Companies Inc. Bernard Ebbers who as founder LDDS was appointed as CEO of WorldCom.

In 2005, WorldCom declared bankruptcy after replacing its name to MCI Inc.

In early 2000 the communications company has begun to decline caused by the dot-com bubble. Revenue declined and more and more debt. Value stocks also continued to decline. Seeing these conditions as CEO Bernard Ebbers, Scott Sullivan as CFO and David Myers as senior auditor decided to take a step out a way to change the financial statements. There are two ways that they are following. First, they recorded 'line cost' as income, when in fact the expenditure. And secondly, they increase revenue with a fake account entries written as "account unallocated corporate earnings".

Cynthia Cooper was one of the depths at WorldCom auditor felt something was not perfect and he felt suspicious of reporting financially in situ. Increasingly apparent suspicions when he asked Sullivan CFO but the question that is not answered in fact he was told not to go in interfering in the affairs. At that time WorldCom has used the solemn of Arthur Andersen as an independent external auditor. As we know that Arthur Andersen was involved with the Enron scandal.

Cynthia along with some people friends  have made an investigation. They need a financial audit at night in secret so as not known superiors to seek the truth. But the team's struggle was not in vain. In May they managed to find a hole in their company's financial statements.

Cynthia then decided to contact the head of the audit committee of the discovery team. On June 20 held a meeting of the audit committee of the board of directors to listen to Cooper and Sullivan. At that meeting the CFO tried to explain the accounting strategy carried him and tried to get support from the council, but failed. On June 24, the audit committee asks Sullivan and Myers to resign before the board meeting the next day if you do not want to be dismissed.

Myers resigned. While Sullivan unwillingly resigned, so he’s getting fired. The next day a reality WorldCom announced their company's financial situation out. Finally the whole world to know that this company had falsified his income as much as 3.8 billion US dollars. WorldCom company then declared himself bankrupt. WorldCom bankruptcy was the largest bankruptcy in US history at the time the asset value amounted to 103.9 billion US dollars. Ebbers finally rewarded in prison for 25 years because it proved to be involved in fraudulent accounting reporting. And Sullivan was sentenced to five years in prison.

Conclusion

What happened to the two giants above is caused by corporate scandals and financial crises have much to shape and change our perspective on the management of the company and that investor protection.

Failure of giant companies in the United States have shown that there is a group of corporate leaders who are more selfish and ignore the values ​​and good business management in leading their respective companies. Majority shareholder who often hold top management positions tend to enrich themselves through various means so that some are willing to break the law and destroy the investors.

Ethics and Moral Above the Law and Corporate Governance

In addressing this issue, though regulators can ensure the development of a strong legal framework, it is undeniable that ethics and morality is the heart of accountability and responsibility. Ethics is a key issue in the capital market. Market and many market participants are exposed to abuses of law and decency pay the price very high.

 We have seen themselves such cases the failure of Enron and WorldCom fraud. That in fact most of this failure stems from weak corporate governance and violations of the law, in essence, he was taken by those involved in ethical failure.

Ethics and morality involves norms of behavior and the prevalence of self-administration. Thus, when regulators can develop a legal framework and strong institutions to enforce accountability and responsibility and ensure the practice of good corporate governance, they cannot formulate ethical and moral content.

A person who is ethical and law-abiding, there are differences. The law cannot identify all forms of ethics because ethical behavior not only requires one to avoid doing the wrong things but also doing the right thing.