Corporate Governance Diagnostic ToolkitFor Listed CompaniesIntroduction1–What isCorporate Governance?Corporate governance”provides a mechanism by which companies are directed and controlled1“. It involvesregulatory and market mechanisms, and the roles and relationships between a company’s management, its board,its shareholders andotherstakeholders, and the goals for which the corporation is governed.In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders,tradecreditors, suppliers, customers and communities affected by the corporation’s activities. Internalstakeholders are theboard of directors,executives, and other employees.Much of the interest in corporate governance is concerned with resolving the conflicts of interests betweenstakeholders. Ways of preventing these conflicts of interests include the processes, customs, policies, laws, andinstitutions which have impact on the way a company is controlled. An important theme of corporate governanceis the nature and extent ofaccountabilityof people in thebusiness.Arelated but separate thread of discussions focuses on the impact of a corporate governance system oneconomicefficiency, with a strong emphasis on shareholders’ welfare. In large firms where there is a separation ofownership and management and no effectively controlling shareholder, theprincipal–agent issuearises betweenupper–management (the “agent”) which may have very different interests, and by definition considerably moreinformation, than shareholders (the “principals”).The danger arises that rather than overseeing management on behalf of shareholders, the board of directors maybecome insulated from shareholders and beholden to management. This aspect is particularly present in theongoing public debates on corporate governance and developmentsin regulatory policy.Withtherecurrence of corporate scandals and financial crises during the past decade, there has been renewedinterest in the corporate governance practices of modern corporations. This interest isparticularly in relation toaccountability and shareholder protection. The high–profile collapses of a number of large corporations during thecrisis period 2007–2008, and losses incurred by investors have created significant confidence gaps. Unfortunatelymost of these corporate scandals involved accounting fraud—which is essentially the breach of shareholder rightsprotection and the lack of transparency, which make the two essential pillars of corporate governance.2–Why rate Corporate governance?There is a global trend where Corporate Governance ratings are increasingly sought out by investors. Due to thefrequent recurrences of corporate governance scandals,corporate governanceratings have become widelyexpected by investment management and creditratings institutions.In this regard, CG ratings are now an important element intheestablishment of credit ratings. CG ratings helpprovide the investors with an indicator as an aggregate measure of investment risk.As a result good ratings helpcompanies gain better access to capital and credit markets. In addition, it increases corporate visibility in theinvestment community, and finally, CG ratings help improve regulatory policy making decisions, by providing abenchmark.3–Assumptions and Purposeof the Scoring/Rating Toolkit:Corporate Governance Rating restson the assumption that “What gets measured, gets done.”Application ofcorporate governance ratingswill thus assist corporate leaders as a reference or a benchmark as apolicymanagementtoolthat willfacilitateimplementation of goodcorporate governance policy goals.TheDiagnostic Corporate GovernanceToolkitis based onthe OECD Principles of Corporate Governance. It will1OECD Principles of Corporate Governance. 2004and 2015.Page3of8serve tohelp improve:?Implementation of good corporategovernance inallcompanies?Financialtransparency anddisclosureif applied appropriately?Access tocapital andcreditmarketswhen diagnostic is utilized properly?Corporatevisibility in the Investmentcommunityif findings are used to implement better governance?Regulatorybodies policydevelopment and implementationCG Ratings are expected to motivate the individual companies to use the tool as a way to voluntarycompliance ofcorporate governance regulations and help build a better business case for CGin the following areasby:?Drivingvoluntarycompliance withhigher thanminimumstandards?Guidinginternalimprovements incorporategovernance?Improvingcorporateperformance andefficiency4–Survey DesignThe design of this toolkitandsurveyisfocused on the OECD Principles of Corporate Governance of 2004as themain benchmark.We hope tocreate increased awareness and capacity among the participants of the survey tohelp corporate leaders and regulators establish implementation of a uniform best practice corporate governanceat the listed companies.This tool will assist Carey Business School MBA students taking the course on Corporate Governance with a toolthat helps build hands on experience in the corporate governance assessment of a company.5–Making effective use of the toolkit:Essentially, this toolkitis designed tobe used as aself–assessmenttoolby leading member of the boardsuch as thechairman of the board,orseniorexecutive management,the CEO, or the corporate secretaryatacompany.Forthe purposes of this course, we ask each student toperformthis assessment as partof the course work.6–Accuracy of Questionnaire: Objective,QuantifiableandScorableWe think that corporate governance rating measures should be objective, easily quantifiable andscorable.Eachcorporate governance rating measure should be drafted as a definitive (Yes/No) question or statement, reflectingtheeffective securities legislation, while also paying attention to the ‘best practice’ as derived from the voluntary‘comply or explain’ components of theSOX legislation orthe OECD principles of Corporate Governance.As the questions (or affirmative statements) are drafted objectively based on thesecurities legislationthe practiceeither exists or is implemented or it is not implemented.As such, only ‘yes’ answers arescored and awarded a weighted or un–weighted value in the Toolkit.‘No’ answersare not scored. Each one of the “no” responses will subsequently require further explanation in the listed issuer’sannual report under revised disclosure directives.The ‘no‘ responses will help users see the areas that need improvement in their corporate governance practices.For each ‘no’ response to a question, the CG Toolkit provides a brief diagnostic recommendation on actions to betaken as a reference.As noted previously, several cycles may be required to see changes and improvements in CG rating responses. EarlyCG rating results should also be expected to produce low compliance scores, however, improvements will beregistered quickly over subsequent cycles as issuers discover what best practices may be easily introduced to yieldan improved score and ranking.The instructor will distribute a corporate governance rating survey instrument (CG Rating Survey) to all students at the beginning of the session. The survey instrument was prepared by the instructor for the purpose of corporate governance rating of listed companies and it is currently in use in a number of locations.Each student will be assigned (by the instructor) one publicly traded company (preferably an S&P 500 firm)at the beginning of the session. This is the company the student will analyze and assess the corporate governance compliance and identify any weaknesses.You will conduct research on recent corporate governance related articles about the S&P 500 companyyou have been assigned.These sources may include the corporate web site, the US SEC EDGAR web site, the NYSE, or the Wall Street Journal or other business periodicals (FT, Fortune, Forbes, Bloomberg, CNBC, etc.).Guidance for how to accomplish this project:• The final project will be submitted via Blackboard by each individual student.The goal of this assignment is to conduct a corporate governance scoring survey. You will provide corporate governance assessment of a listed company based on the results of the survey prepared on the basis of the OECD principles of corporate governance.The learning objective of this exercise is to understand how the CG Principles are operationalized.Students will write a corporate governance assessment paper and provide recommendations. Papers will be individual.This paper is worth 20 points towards the final grade.Details of the deliverable (The Report) follows:The Report: (20 points) Thecorporate governance scoring, rating and assessment paper may be structured as the following:a. Executive Summary/Introduction: (1-2 pages) Using the data you have collected from the company website and other publicly available information, prepare the executive summary that should clearly state the objectives, background and the main findings of your corporate governance assessment paper on the selected company.(2 points)b. Company Background (Maximum 1 page): Prepare a brief, one page maximum review of the company background, important issues reported in its US SEC filings, and other information you have collected. You may provide the following information in an attached exhibit, with proper references provided(3 points)i. The company organization, its values, vision, mission, products (keep it very short);ii. Corporate financial information, revenues, capitalization, stock price, ROE, ROI, PE ratio, Book/Market ratio, its management team and corporate governance practices. Using a table in the appendix, discuss some of the highlights. (prepare a short table of information and attach it to the end in an appendix);iii. Do not simply copy and paste from company web site. Summarize the information.iv. Make sure you provide references properly. Provide the list of references at the end of the report.c. The CG Survey Results: (2-3 pages) Using the 100-question CG survey instrument you will be provided by the instructor, determine your survey findings and calculate the CG score. Using the guidance in the provided survey instrument, rank this company (from 1-5) based on your survey score. A suggested structure is (7 points):i. Using the CG Scoring Survey tool you are provided, process the 100 questions and summarize the findings of the scoring survey. You may provide charts as exhibits at the end to provide this information.ii. Explain why some of the survey questions may or may not be applicable, if there are any.iii. Next, discuss your CG Scoring findings. Provide the table from the survey Excel spread sheet results. (DO NOT INCLUDE THE COMPLETED EXCEL SPREADSHEET SURVEY WITH YOUR REPORT)iv. Next, discuss specifically the corporate governance Strengths, Weaknesses, Opportunities and Threats (SWOT), and how some of the observations you have made relate to pertinent topics covered in the course.Do not simply copy the data as found in the corporate web site. For any such information, paraphrase and write it in your own words. If you use any corporate web site information, or other sources, then show references.v. Try to be concise. Avoid using the language from any web site. Please summarize in your own words.d. Findings and conclusions: (2-3 pages) Using the findings and the results of your survey, discuss the SWOT and the available corporate governance mechanisms that are relevant to the chosen firm and the advantages and disadvantages of those mechanisms. While discussing your findings, try to bring in academic literature and/or provide practical evidence to support your argument. Expand the discussion on the theory(ies) behind the main CG issues that are identified. Your recommendations should have three to five specific points the company board could do to improve a situation you have determined in the company. The conclusions (1-2 pages) should summarize the main findings and discuss their implications for the particular firm, investors, regulators and the economy. (5 points)e. Attachments: Include references, charts figures and/or tables to support your report. (3 points)f. The Final Paper: Altogether your paper written in MEMO style should not exceed maximum of 6-8 pages, excluding appendices. No limit on the number of appendices you provide.COMPANY NAME Cameron International CorporationCOMPANY CODE XXXNo. Actionable recommendations1 The company charter should be amended to include company policy in each of the areas including shareholder rights to registration, monitoring, participation in the decision making process at the GSM, electing board members, and access to all information and the list of participants in the GSM.2 The Company should establish a registry to function as a database that includes the names of all shareholders. The company must register shareholders and shareholder representatives before the GSM so as to verify the quorum. Shareholders who had filed written voting instructions were received two days prior to the GSM should be automatically registered. In most cases the responsibility to register the participants is held by the Voting Committee. Participant registration may be carried out by the authorized committee or the person specified by the charter, the by-laws or other internal corporate documents. The corporate secretary could also be responsible for the registration database, under the supervision of the Chairman of BOD.3 The Company could facilitate this process by first establishing a shareholder registry system by which all important ownership data is included. Second, per the charter, the company could adopt BOD policies where record date is fixed so as to determine whether the shareholders are entitled to participate at the GSM. BOD must ensure the owners of common and preferred shares of a company have the right to sell their shares at any time and at any price, without the consent of, or any pre-emptive right on the part of, the company and other shareholders.4 The BOD must ensure that the charter and by-laws specify the procedures that the company and shareholders must follow for the distribution of information and documents.5 In order to achieve full impact from the GSM, the company should conduct GSM processes and procedures efficiently by starting and ending on time. The company should avoid marathon GSM sessions that will overwhelm participants. The BOD Chairman should prevent occurrence of any organizational challenges during the discussions by carefully selecting the number of agenda items to be discussed and avoid including too many items that are complex and may be contentious. The overriding principle to conduct a successful GSM should be to facilitate effective participation of all shareholders in the decision-making process.6 Company must develop relevant articles in the charter to clearly provide that shareholders can participate in the decision-making of the company through their right to vote during the GSM. BOD should ensure that these rules should clearly show that shareholders can control the long-term direction of the company by electing members of the Board of Directors and by deciding on important matters that fall within the authority of the GSM. The charter must also provide that the right to vote can be exercised personally or by proxy. A proxy holder is authorized to act on behalf of the shareholder and to make any decision the shareholder could have made during the GSM. Except for limitations provided by legislation, any individual can serve as a proxy as long as this person is given an appropriate written or electronic proxy.7 The Company should adopt policies whereby the chairman of the GSM invites shareholders to vote based upon “one votes share — one vote” principle, except for cumulative voting. Shareholders should have the right to vote on all agenda items from the moment the GSM is opened until the moment it is closed. Voting results should not be announced during the GSM. When the charter, by-laws, or a decision of the GSM require voting results to be announced during the GSM, all shareholders have the right to vote on all agenda items from the moment the GSM is opened until the counting of votes begins. The policy should allow for when BOD members are elected with cumulative voting, shareholders may cast all his/her votes for one candidate or for several candidates.8 “In order to protect the rights of all shareholders, the BOD must have a good understanding of the financial needs of the company and different techniques of corporate finance. The duty of care for BOD requires that when increasing charter capital, the BOD must be careful not to dilute the ownership of shareholders when deciding to restrict or preclude pre-emptive rights of shareholders. The default rule in increasing the charter capital is to understand shareholders have pre-emptive rights to protect them from dilution.”9 The GSM should be used to inform shareholders about company activities, achievements, and plans, and to involve shareholders in important decisions. For a minority shareholder, the GSM is often the only chance to obtain detailed information about the company’s operations, and to meet management and directors. The overriding principle for organizing the GSM is that it should be conducted in such a manner so as to facilitate effective shareholder participation and decision-making.10 After the completion of proper procedures, all shareholders of record must be notified of the GSM not less than 30 days and not more than 60 days prior to the annual GSM; and not less than 15 days and not more than 30 days prior to the extraordinary GSM. Sending notification of the GSM to all shareholders at least 30 days in advance allows sufficient time for everyone to prepare for the GSM and to contact other shareholders if necessary.11 The BOD should use GSM to inform shareholders about company activities, achievements, plans, and to involve shareholders in important decisions. For a minority shareholder, the GSM is often the only chance to obtain detailed information about the company’s operations, and to meet management and directors.12 Shareholders must be notified of the Annual GSM by either conventional mail with a delivery receipt or electronic mail if shareholders have requested in writing to be notified by electronic mail. On the other hand, instead of serving notice to each shareholder individually by conventional or electronic mail, a public joint stock company [if so provided by its charter] may announce the GSM by publishing the notice of general meeting continuously on the company website or by simultaneously publishing the notice in a nationally distributed daily newspaper. Electronic dissemination is a simple and cost-effective method of allowing broad public access. Therefore the GSM notice could also be published on the company web-site, following the mailings of the notice to shareholders. The GSM announcement should contain sufficient information to enable shareholders to participate and explain how they will participate in the GSM.13 Global CG best practices strongly recommend the following information to be included in the GSM announcement: (1) Full name and location of the company; (2) Date, place, and time of the GSM; (3) Record date of the GSM; (4) Agenda; (5) Information about place and time where shareholders can inform themselves and take materials for the meeting [if the GSM is publicly announced]; (6) Procedures for receiving background information; (7) The time when participant registration begins; (8) The place where registration will take place; (9) The authorized company official to whom shareholders may report violations of the registration procedure; (10) Mailing address and identity of the authorized company official to whom shareholders could send written voting instructions.14 Shareholders ought to be ensured that they maintain the right to add new items at the close the GSM onto the agenda for the next GSM.15 At the opening of the GSM the Chairman of the GSM should present the agenda to the participants. In addition, the GSM Chairman should explain the rules of order as specified either in the charter and by-laws or in a decision of the GSM. Per request of the GSM Chairman, the Voting Commission should explain the voting procedures. The invited experts should comment on agenda items before the shareholders vote. The GSM Chairman should also ask invited experts to explain agenda items to shareholders. The presence of the above mentioned experts is very important for the Annual GSM, because of the nature of decisions it has to adopt. It is good practice that: (1) Shareholders have the opportunity to question members of the internal supervisory body and the External Auditor; (2) Shareholders receive clear answers to questions; (3) Questions from shareholders should be answered immediately, or a written response should be given as soon as possible after the GSM; (4) The GSM should be conducted so that all shareholders have an opportunity to make balanced and informed decisions on all agenda items; (5) The External Auditor, the General Director, and members of the Board of Directors, the Audit Committee, the Compensation Committee, the Nomination Committee and members of the Executive Board are present at the GSM, or their absence explained by the GSM Chairman; (6) Key officers of the company, including the chairmen of committees within the Board of Directors, should speak at the GSM; (7) GSM chairman should set aside some time for presentations by shareholders; and (8) The Chairman of the GSM should maintain order or comply with procedural requirements.16 The Company must prepare the GSM minutes within 15 days of its closure. The GSM Chairman is responsible for properly and accurately reflecting all discussions and decisions taken at the GSM in the minutes. The GSM Chairman, two appointed shareholders (verifiers of the minutes) and the GSM Secretary must sign the minutes of the meeting.17 Drafting the agenda is the first step in preparing for the Annual GSM. The agenda provides guidance and structure for the annual GSM and lists issues that must be addressed. Only the items properly included in the agenda in conformity with the Law on Companies may be discussed and decisions reached at the general meetings. In the period preceding the decision to conduct the Annual GSM, the BOD should review all the proposals made by shareholders to include specific items on the agenda. Within the corporate governance framework, understanding and cooperation between the BOD and the shareholders is crucial. It would be good practice to notify shareholders about rejected agenda items. This will not prevent the shareholders to exercise their legal rights to include items on the agenda following the decision to hold the GSM.18 The BOD should determine a dividend policy that addresses all the primary issues regarding this policy. Most importantly, the BOD should properly consider whether using net profits for dividend payout versus re-investing these profits is in the long term best interests of the company and protects the shareholders rights at once. Further, the BOD should properly communicate its dividend policy to shareholders and potential investors. The company must explain the reasons for any departures from the announced dividend policy. Finally, the BOD should ensure that company’s dividend policy information and dividend history is disclosed in a timely manner.19 The BOD should ensure that preferred and common shareholders are treated equitably when distributing dividends and how the company calculates its dividends. The BOD should recognize that shareholders have a right to share in the profits of the company. Shareholders have two options to share in the wealth generated by a company. The first is by capital gains generated when the market value of shares increases relative to the previous period, and the second is by receiving dividend payments. Dividend payments are an important shareholder right. Dividend payout means the company pays out cash to shareholders. This may decrease the company’s level of cash and assets needed to service debt on a timely basis. Dividends are also viewed relative to preserving creditor rights. To protect creditor rights, companies legislation imposes certain limitations on the types and payment of dividends. Dividends can only be paid out of the net profits of the company. Besides the profits from previous fiscal year, the net profits of the company include other undistributed profits as well. Dividends on preferred shares can be paid out of funds that are specifically established for that purpose. A company must make the recommendations of the BOD available to all its shareholders regarding the dividend policy, including the amount of proposed dividends on all types of shares and the procedure for the payment of such dividends. A company is also required to provide a report on its dividend payment record in its annual report.20 “Shareholders have the right to demand that the company redeem all or a part of their shares if they voted against or abstained from voting on issues such as (1) Amendments to the company charter affecting minority shareholders’ rights; (2) Reorganization of the company as a result of mergers or split-ups; (3) Reorganization of the company that results in a change or the transformation of its legal form; (4) Arrangements involving the acquisition or disposal of high-value assets; (5) Any other decision of the company that alters the rights of the shareholder. In order to exercise their redemption rights, shareholders must be informed about the right to demand the redemption of their shares. The BOD must determine and announce the redemption price the shareholders will receive if they demand redemption; and the procedure for exercising redemption rights.”21 The market for corporate control, together with the product, labor, and capital markets, is a distinct feature of a market economy. Generally, markets for corporate control represent the historical development of a distinct fourth type of market, in which the trading of corporate equity occurs on a very large scale and gives the power to control these corporations. Takeovers are a key mechanism in the dynamic allocation of corporate control where they allow the removal of inefficient managers against their will, and exploit synergies between firms. The threat of a takeover affects the behavior of those in control by disciplining them to act in the best interests of the company. A functioning takeover market is widely considered an important component of an effective governance system. The issue of regulating takeovers has become increasingly important. Many countries have adopted directives on takeover bids. These directives attempt to apply takeover rules to listed companies and separately deals with voluntary (tender offer) and mandatory bids. Tender offer is a public offer to acquire shares of the company leading to a change of control. The specific rules that deal with the disclosure and terms of such bids are clearly stipulated in the securities markets legislation.22 The list of related parties covers key company officers in positions of control. This definition will include the CEO, vice presidents, chief accountants, and directors of representative offices and branches. Companies wishing to follow good corporate governance practices may consequently wish to expand the list of potentially related parties in their charter. The OECD Principles of Corporate Governance provides a general definition of related parties that includes entities under common control, significant shareholders including members of their families and business associates, and key management personnel. International Accounting Standards (IAS) provides a more detailed definition and thus parties are considered to be related if one party has the ability to control the other party or to exercise significant influence or joint control over the other party in making financial and operating decisions. Actions of these parties must be disclosed to the public in the company web site and in the annual report.23 It is important that shareholders are informed about company ownership structures to understand their rights, roles and responsibilities in governing the company and to influence its policy. Executives and directors must be fully aware of the personal and corporate repercussions of false or incomplete disclosure and thus executives and directors act accordingly to ensure good disclosure. The company should announce its ownership structure to the markets and steps must be taken to ensure that the company’s financial position is communicated in a transparent, clear and fair way to all the shareholders. Depending on the size of ownership, shareholders have varying degrees of influence over decision-making in a company. Securities legislation on companies provides greater rights to shareholders with larger holdings. Clearly, it is vital to know who is in a position to make or influence decisions within a company. For this reason, full information on the amount of the issued capital, increases and decreases in the capital, the rights attached to shares of different types and classes, and the number of shareholders is crucial. Shareholders with large stakes have the opportunity to exercise control over decision-making in a company.24 The Company must have a disclosure policy in which the policy fully expresses the company’s commitment to transparency, and that the disclosure policy is easily available to market participants and other interested parties, most preferably in company charter and/or bylaws. The company must fully comply with its legal disclosure obligations with the proper systems in place to ensure that full and timely disclosure of material information occurs. The company must ensure that all investors receive information at the same time, by not giving special information access to a privileged few individual or institutional investors. The company must have a policy on insider trading and it must enforce this policy, through systems that are in place to manage the flow of insider and other sensitive information. The company must show appreciation to be making voluntary disclosures to the markets is in its own interest25 Information on indirect ownership, related parties, and related party transactions should be fully disclosed, specifically in the annual reports, quarterly reports, material events reports, and other notifications to regulators or creditors. For instance, shareholder agreements and voting caps can also affect control. Shareholder voting agreements typically oblige parties to vote as a block and may give first-refusal rights for the purchase of shares to another shareholder. Shareholder agreements can cover many issues including which candidates to nominate for the BOD or the selection of the Chairman. Shareholder agreements are clearly of material interest to shareholders. While difficult to detect, companies should make reasonable efforts to obtain information about the existence of shareholder agreements and to disclose such information to all shareholders. In principle, parties to shareholder agreements should voluntarily disclose this information themselves.26 “Companies should be clear on what truly constitutes confidential information and should not interpret the broad definitions provided by law so widely as to withhold relevant information from investors. In order to guide practices with respect to commercially sensitive information, companies are well advised to develop written policies and procedures, and define what should be considered confidential in internal documents. Companies can consider personal data confidential information, and forbid the collection, storage, usage, and dissemination of private information without the person’s consent, unless otherwise provided by a court decision. Disclosure should be easily and broadly available to the public, provided on a regular and timely basis, correct, complete, consistent, relevant, and well documented.”27 Impediments to voting should be discussed clearly and certain provisions must be provided in the charter or in the by-laws of the company. It would be very useful to develop procedures for using preemptive rights by shareholders, as well as the restriction or withdrawal of these rights. In addition, the solutions that will support the company’s efforts to facilitate removal of voting impediments include delineating the way joint shareowners exercise their rights, how shareholders can give their proxies via electronic means, the rules on facilitating cross-border voting for international shareholders, and finally limiting the payment of interim dividends28 Shareholders may attend the GSM in person or in compliance with the law grant “power of attorney” to a representative, also called “proxy”, who attends the GSM on behalf of the shareholder. Shareholders may also participate in the GSM by sending completed voting ballots to the company if allowed by the company by-law. In the case of a listed company, a shareholder can give proxy to a person from an approved proxy statement that includes instructions to vote, if allowed in the charter or the by-laws. Voting is based upon the principle of “one voting share — one vote,” except for cumulative voting. It is best practice that shareholders whose written voting instructions were received at least two days prior to the GSM should be automatically registered to vote. As a measure to ensure shareholder participation in the GSM, the registration procedure should be described in detail in the internal documents of the company and in the GSM notification. A voting committee or the corporate secretary may be authorized to register shareholders on the same day as the GSM. Shareholders may only vote upon the completion and verification of registration and announcement if a quorum is present for the GSM.29 In the case of a take-over or a merger situation, the bidding company must be required to make a bid so as to protect the minority shareholders of the target company. This is referred to as a “mandatory bid.” The majority shareholder must acquire shares of the remaining shareholders upon their request. This is known as “Compulsory Acquisition of Shares from Minority Shareholders (Sell out right)”. Especially in the case of listed companies, protection of minority interest is of paramount importance.30 Shareholders most commonly exercise their governance rights through the GSM. The GSM is the highest governing body of a company. Shareholders express their right to participate in decision making at the GSM by approval of annual reports and financial statements, the election and dismissal of directors, the payment of dividends and distribution of company profits, reorganization, major corporate transactions, and the appointment of the external auditor. The GSM also provides shareholders once a year with the opportunity to discuss these and other important matters, meet in person with their directors and managers, ask questions, and determine the future of the company. Prior to the GSM, the BOD should review all the proposals made by shareholders to include specific items on the agenda. Mutual understanding and cooperation between the BOD and shareholders is very important in the corporate governance framework. Following the above process, all shareholders of record must be notified of the GSM not less than 30 days and not more than 60 days prior to the Annual GSM. In the case of Extraordinary GSM, not less than 15 days and not more than 30 days prior to the meeting. It is good practice that notification of the GSM allows sufficient time for all shareholders to prepare and allows sufficient time for shareholders to contact other shareholders. BOD must provide adequate and timely announcement of the GSM with the agenda and all relevant information to shareholders, and see to it that the agenda is not changed prior to the GSM. The company should properly inform all shareholders of the GSM on its website.31 The corporate governance framework should acknowledge that the interests of the corporation are served by recognizing the interests of stakeholders and their contribution to the long-term success of the corporation. It is in the interest of the company to stimulate productive co-operation with the stakeholders, establish a governance framework that will acknowledge the existence of these interests, and recognize their importance for the long-term success of the company. The competitiveness and ultimate success of a corporation is the result of teamwork among a range of resource providers including investors, employees, creditors, and suppliers. The company should recognize that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies.32 It has been shown that a participatory mechanism benefits companies directly through readiness of employees to invest in specific skills. An employee representation mechanism includes representation on the boards, work councils, Employee Stock Ownership Plans (ESOPs), or profit sharing programs. Employee participation is a good way to incentivize employees as a right, however with the caveat that they must take on risks as a responsibility for ownership. ESOPs are a good way to ensure a systematic employee ownership program is available as part of the pension program next to other pension programs.33 Most companies with a long term business perspective professionalize HR activities with an internal operating manual and personnel management policy that is transparently available to all employees. The company should establish a governance framework that will acknowledge the existence of the interests of employees in the company’s success and recognize their importance for the long-term sustainability of the company.34 Companies need to choose specific initiatives so as to maintain license to operate; enhance corporate reputation or brand recognition; improve market access for their products and services; increase employee motivation; avoid reputation damage from activists’ attacks; and finally enhance relations with communities and or regulators in addition to maintaining strong relations with shareholders and investors.35 An effective insolvency framework is crucial for shareholders and creditors. Improving corporate governance will also mean that members of the BOD will need to play a prominent role in the governance of the company by revealing timely information about the company condition to its creditors and all relevant stakeholders.36 Customer satisfaction is of paramount importance in order to maintain or increase the market share of any business entity. The company must focus on this issue when defining its corporate objectives and values section, and must certainly make a point about customer satisfaction in its vision or mission statement.37 Good corporate governance practices entail the interests of not only shareholders in the company, but groups other than shareholders who have a stake in the functioning of the firm. These interested parties are made up of large and diverse groups who seek some benefit from the optimum performance and governance of the firm. Stakeholders have different goals and seek different benefits from the firm. Workers seek job security, the community at large wants a solid economic base so that jobs are created and investments are attracted to the community, while the tax authority wants to collect taxes, just like shareholders or investors demand dividends as a result of the activities of the company. The company must balance between these different interests. Thus, in fact, this larger group of stakeholders actually control the firm in their own specific ways, and none has any better right to have its voice heard than another. In this regard, the company must follow a specific policy to provide all relevant information and full disclosure to the public as much as the shareholders.38 The Company should clearly provide written rules in its by-laws about the opportunity for all employees, customers, and other stakeholders all have their say in how the firm markets its products. Allowing the opportunity to have a say in how a firm should be run will mandate that a well organized firm will take all stakeholder groups into account in formulating basic policies.39 Recognizing the role of suppliers and business partners towards the long-term success of the company serves the high interests of the company. The company must consider this requirement within a holistic framework in its corporate governance policy.40 The competitiveness and sustainable success of the company is the result of the coordinated efforts and contributions of a range of resources, such as the investors, employees, creditors, suppliers, government, etc. Thus, the company must make it a point to recognize the contributions of each stakeholder in the community towards their long term success. Corporate social responsibility must be regarded as an enlightened self interest for all for profit entities, not to mention not-for-profit organizations as well.41 The company must have a written disclosure policy that fully expresses the company’s commitment to transparency and make the disclosure policy easily available to market participants and other interested parties. In addition, the BOD should ensure whether the company fully complies with its legal disclosure obligations and the systems are in place to ensure that full and timely disclosure of material information occurs. The BOD must ensure that executives and directors act accordingly to ensure full disclosure and that they are fully aware of the personal and corporate repercussions of false or incomplete disclosure . BOD should make sure that the company’s ownership structure is transparent. If not in place, the company should take steps to ensure that the company’s financial position is communicated clearly to the markets. The BOD must establish that the disclosure is made in a fair and equitable manner to all investors, both individual and institutional. Disclosure must be voluntary, not just simple compliance with the legal and regulatory requirements.42 Independent external auditors also play an important role, providing assurance to the markets, as does an active and interested media that questions company strategies and communications. A competent and vigilant BOD is crucial in this sense. It is broadly accepted that even the best disclosure system cannot thwart individuals who are intent upon abusing the company and its shareholders. The listed company must thus ensure its shareholders and would be investors of its accountability by establishing an external independent auditor. Having an external auditor’s report with conclusions enables the independent external auditor to express an opinion on whether or not the company’s financial statements are reliably prepared in accordance with an identified financial reporting framework such as the International Financial Reporting Standards (IFRS). This provides shareholders, managers, employees, and market participants with an independent opinion about the company’s financial position and should attest to the accuracy of the statements. If a listed company plans to access international capital markets or, simply, to improve upon the quality of financial reporting, they should prepare financial statements according to the IFRS. The company should follow a policy of periodically rotating its independent auditors; disclose how the external auditor selection process is implemented; to whom the external auditor reports; and whether the external auditor participates in the Annual GSM and answer all questions posed by shareholders.43 As an expression of accountability and responsibility, it is a good practice for the CEO to include a statement of endorsement to the audited financial statements.44 The BOD should pay attention to disclosing transparent ownership structure and appropriate financial reporting so as to assure investors providing debt capital who seek good corporate governance practices as a key criterion in their investment decision-making process. The implementation of a good corporate governance system will ultimately result in the company paying lower interest rates and receiving longer maturity on loans and credits.45 The BOD should develop a written policy or incorporate into by-laws provisions that commit the company to provide full disclosure: (1) Provided to all shareholders on a regular and timely basis; (2) Easily and broadly available; (3) Correct and complete; and (4) Consistent, relevant, and well documented.46 It is best practice to fully disclose all information on indirect ownership related parties party transactions, main creditors and large customers, in the annual report, quarterly reports, material events report, and other notifications to regulators or creditors.47 The BOD should disclose company compensation policy for members of the board and key executives. Information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board must be disclosed. Shareholders should be provided with a clear and comprehensive overview of the company’s compensation policy. Disclosure of information on the compensation policy allows shareholders and investors to assess the main parameters and rationale for the different components of the compensation package as well as the linkage between compensation and performance. Once the BOD develops policy, the compensation committee, composed entirely of independent directors, should determine the level of compensation for directors and SEM. The company should disclose the compensation of each director, either on an individual basis or in the aggregate, in its annual report. It is easier to implement the disclosure policy when all Board members receive the same fees with a simple statement in the annual report.48 Securities legislation defines what information cannot be treated as confidential. The public disclosure of pending legal proceedings involving the company is a good corporate governance practice and suits the business ethics principles and provides reasonable doubt of the existence of corruption. If the information is deemed a business secret of a company, its publication will be deemed lawful if its purpose is to protect public interests. Exceptionally, when due to regulations governing the securities market public disclosure is mandatory, then departure from this obligation is possible in the material events report.49 International practice suggests that listed companies should disclose all material financial and non-financial information via the internet. Corporate websites are easily accessible to the public at low cost, and can be an exceptionally powerful means of communication. World wide web is fast becoming a generally accepted channel for official disclosure. Web-based disclosure is supported byUS SEC and by most regulatory agencies worldwide. The company should place the following information on the company’s website: (1)The company’s charter and amendments; (2) Information on the company’s development strategy; (3) Business reports with financial reports; (4) Prospectuses; (5) External auditor’s reports; (6) Information on material events; (7) Information regarding the GSM; and (8) Important decisions by the Board of Directors.50 Company should ensure a well managed and periodically updated website that provides crucial disclosure items on the website. It is good corporate governance practice for companies to place their annual and financial reports, and governance information (such as information on Board of Directors members and key executives) on their websites. The better websites have special sections devoted to corporate governance and include contact addresses and telephone numbers for inquiries.51 Financial statements are the most important document for shareholders and potential investors to understand the financial position of the company. In this respect, companies with a larger number of shareholders should publish their financial statements in at least two newspapers distributed in the entire territory of the country. In principle, these newspapers should be accessible to the majority of the company’s shareholders. The best way to accomplish this would be through the website posting. The disclosure of information posted on company websites should include: (1) Financial statements for the last three years; (2) Financial ratios for the last three years; (3) Internal corporate documents; (4) Structure, authorities, and composition of the governing bodies; (5) List of affiliated persons for the last year; (6) Annual and quarterly reports for the last three years; (7) Material information and decisions of the GSM for the last three years; (8) Information on corporate securities; and (9) Corporate news ticker.52 The Company should provide full disclosure and access to relevant information to investors and shareholders about BOD members and key executives to evaluate their experience and qualifications. Educational background, current occupation, and professional experience of directors and senior executives should be disclosed and readily accessible to interested parties. It is also important that shareholders and investors should have information about any existing or potential conflicts of interest that may affect the independence and decision-making capacity of the BOD. Shareholders should also be able to assess whether or not BOD members dedicate sufficient time to their duties and properly carry out their responsibilities. Accordingly, companies should disclose all other positions held by BOD members or executive directors in other companies domestic and foreign as well as the meeting attendance records.53 The company is also encouraged to use existing channels of communication, such as the internet and the print media so as to ensure that related parties properly disclose their interest in transactions while abstaining from participating in discussing and voting on such transactions. The BOD should ensure that all legal requirements for the approval of related party transactions are followed, and clearly set the rules about the role independent directors play in related party transactions. Finally, the BOD should take adequate measures to disclose information on related party transactions and related parties.54 The Company must have an internal audit committee as an important part of the BOD accountability and responsibility functions. Having an internal audit committee will assure the public that the company is committed to implementing effective internal control mechanisms to ensure accuracy, timeliness, relevance and materiality of all financial and non-financial information. The BOD must determine the relationship between the Internal Audit Committee and External Auditor where their roles and responsibilities are well defined to avoid overlap and conflict. The BOD should also determine whether the Internal Audit Committee fulfills its function and duties properly. Further, the BOD should make sure that the Internal Audit Committee report on any misstatements or other violations to the GSM, when found. The BOD should clearly define which corporate authority the Internal Auditor should be reporting to: the management, the Board of Directors or to the GSM? Any barriers that could discourage the Internal Auditor from reporting problems to the company, especially to the BOD but also at the GSM should be eliminated.55 The Audit Committee must consist of members who are independent, able, and willing to do the job properly and effectively. The Chairman of the Audit Committee must have the requisite professional and human relations skills, while the members of the Internal Audit Committee should have a public reputation as financial experts.56 The BOD must ensure that the Audit Committee meet often enough to perform its duties effectively, and that they adequately respond to the shareholders issues on a timely basis while placing the necessary and appropriate issues on the agenda.57 The Company should make sure that all meetings of the internal committee take place without the presence of SEM or the Chairman of the BOD.58 The BOD should establish a rule to rotate external auditors every two years.59 The BOD should ensure that the Independent External Auditor examines a company’s financial and accounting records as well as supporting documents in all material respects. Shareholders depend upon the External Auditor to express an independent opinion that the financial statements of an enterprise are reliable.60 The BOD must emphasize a policy of an independent audit conducted by a publicly recognized and internationally qualified accounting firm so as to enhance the company’s credibility, and accordingly, its prospects for attracting investment. The BOD must be cognizant of the three key points about the independent audit: (1) Management remains responsible for preparing and presenting the company’s financial statements; (2) The External Auditor is responsible for forming and expressing an opinion on the financial statements prepared by management; and (3) The audit of the financial statements does not relieve management of any of its responsibilities. The objective of an audit should be to enable the international qualified External Auditor to express an independent opinion on whether or not the financial statements of the company are prepared in accordance with an identified financial reporting framework in all material aspects, and whether they are reliable. An external audit gives shareholders, managers, employees, and market participants an independent opinion about the company’s financial position and, if performed properly, should attest to the accuracy of the statements.61 A modern company should have three sets of corporate documents: (1) Charter; (2) By-Laws; (3) Other codes and documents. In this regard, the Chairman of the BOD should ascertain whether the company has a valid charter, one with provisions on the protection of shareholder rights, equitable treatment of all shareholders, division of authority among the governing bodies, and information disclosure. It is also important to know how the charter compares to by-laws, and whether the charter and by-laws merely copy the exact language of legislation. The company charter must be freely available to interested parties and accessible on the internet. The company should also adopt by-laws and whether these by-laws were approved by the BOD or the GSM. It is good corporate governance practice to adopt by-laws, even if it is not a legal obligation of the company. The company may also consider adopting its own corporate governance code in conjunction with the securuits legislation. The CG code should touch upon the principles of fairness, responsibility, transparency, and accountability. The CG code should provide recommendations on the relationship between the corporate bodies, notably the interaction between the BOD and other committees. Having company-level corporate governance codes and ethics codes are also important general company documents because they allow the company to make its governance structure more transparent, and demonstrate the company’s commitment to good corporate governance and good business practices.62 The Chairman must be delegated sufficient and appropriate powers in order to allow him to perform his duties appropriately. This issue also hinges upon his personal and professional qualifications. The successful BOD Chairman should have an outstanding professional reputation and should be recognized for the highest level of integrity, be committed to seeking the best interests of the company, and be well respected and trusted by shareholders and the other directors. Companies should define the authority of the Chairman, as well as that of the SEM, in as much detail as possible in the by-laws or other internal documents to seek clear separation between the two functions to ensure independence of the Chairman.63 Securities legislation clearly requires a minimum of 9 members on the BOD, with 3 independent directors for all listed joint stock companies. Corporate governance best practices will suggest that the size of the BOD ought to be a function of whether the company should choose a BOD size that will enable it to: (1) Hold productive and constructive discussions; (2) Make prompt and rational decisions; and (3) Efficiently organize the work of its committees, if these are established.64 Companies should choose a size for BOD that will enable it to hold productive and constructive discussions; make prompt and rational decisions; and efficiently organize the work of its committees if these are established. Corporate legislation supports that BOD for all listed firms must consist of a minimum of 9 members, with one third of them to be independent (3 independent members by law). The BOD should establish a nomination and compensation committee to identify qualified candidates for board membership. The company should choose the 3 qualified independent director candidates from the nominees. All directors should possess the necessary skills and experience to contribute to the BOD. International practice distinguish between different categories of directors according to the degree to which such directors are involved relative to the affairs of the company. The three categories are executive, non-executive, and independent directors. A listed company must have at least three independent members of the BOD. The concept of independent directors is a requirement under most US state practices and defines independent board membership.65 It is recommended that the company elect an individual with “full dispositive capacity” as a director. A director as member of the BOD should have the capacity to acquire and exercise civil rights by their actions, be able to create civil law obligations, and fulfill these rights and obligations. A company is a legal entity and as such cannot be a director. An individual who happens to be the representative of a legal entity can be elected to the BOD only if he/she will serve a specified term as director. The representative of a legal entity is likely to serve only the interests of the company he is representing and could be rotated at will by the legal entity with an ownership interest in the company. The individual real person elected to the BOD may only serve in his capacity as a director in recognition of his fiduciary duties to the company and must act in the interest of the company on whose Board of Directors he is serving.66 In order to avoid any conflicts of interest, the chairman of BOD cannot simultaneously hold any senior management positions with the company. If necessary, this may only be considered as an interim step until a suitable SME is appointed.67 : Similar to the above, the BOD Chairman should not hold a dual position as the Chairman and the CEO. The Chairman of BOD facilitates decision-making on agenda items; encourages open discussions on issues in a friendly and constructive atmosphere; provides the members of BOD with an opportunity to express their points of view on matters being discussed; and guides the BOD toward a consensus. The SEM runs the day to day operations of the business, which is essentially the implementation of the strategy determined by the BOD. While performing his duties, the Chairman should act with conviction and at all times keep the best interests of the company in mind. The by-laws or other internal documents should emphasize upon the Chairman the responsibility to motivate directors to freely express their opinions on agenda items and other issues; openly discuss opinions of directors; and initiate the drafting of the BOD decisions. These responsibilities interfere with the duties of a CEO.68 Companies can maintain their vitality and ability to adapt to new challenges by changing the composition of their BOD. Non-executive directors may indeed lose some of their (independent) edge if they remain on a Board too long. A company may wish to impose term-limits, either for the entire BOD or a certain percentage, to keep its members focused. Either way, reappointment should not be automatic, but a conscious decision by the shareholder(s) and the director concerned. In some countries a director’s mandate may not exceed six years unless the GSM decides to renew this mandate, and directors older than 70 years may not exceed one-third of board membership. It is recommended that directors’ mandates should not exceed four years and the number of directors over 65 years should not exceed one-third of the board membership. The duration of a director’s term of office stipulated in the by-laws, should not exceed a maximum of four years, in order to enable shareholders to rule upon their appointment with sufficient frequency.69 The existing US legislation is largely silent in providing qualifications of BOD directors. For an independent director (or in all directors), the BOD should seek personal qualities that include strong leadership skills, integrity, accountability, maturity, and strong work ethic. As a professional, the independent director should be expected to possess competencies and experience in a given industry relevant to the line of business which the company operates in; acute business judgment; and special skills, such as finance, accounting; risk management and internal control; and strategic management. Persons with these skills and abilities are in great demand and will ensure the success of a BOD and its relevant committees, which mainly include the audit committee, nominations and appointments committee, compensation committee, corporate governance committee, ethics committee, and the like. As a best practice, every committee serving under the BOD should have at least three members. The members of the committees do not have to be members of the BOD. In every committee, at least one member has to be a member of the BOD and at least one member has to satisfy the conditions for an independent director. The BOD will appoint one member as Chairman of the Committee. Other parties, most notably managers, may be invited to present or elaborate on particular issues, but have observer status only meaning they are precluded from conferring or deciding on particular issues.70 The responsibilities of the internal audit committee include: submitting a proposal for the BOD to consider appointment, reappointment or removal and other matters regarding the external auditor; providing oversight and monitoring the application of the accounting standards in the preparation of financial reports; evaluating accuracy and completeness of financial information prior to disclosure; evaluating the independence of the external auditor; and performing any other task connected with the audit function that are assigned by the BOD. The BOD should develop a written policy about the specific responsibilities of the internal audit committee in the charter of the company.71 The majority of the Internal Audit Committee members should be independent non-executive directors. One of them should be appointed as Chairman of the Committee. The Chairman of the BOD should not chair the Audit Committee. At least one member of the Internal Audit Committee needs to be an expert for accounting and finance.72 The BOD should make sure that the majority of the Audit Committee members are independent non-executive directors. One of them should be appointed as Chairman of the Committee. The Chairman of the BOD should not chair the Internal Audit Committee. At least one member of the Internal Audit Committee needs to be an expert for accounting and finance.73 The Internal Audit Committee must present reports to the shareholders at each annual GSM, as well as at ad-hoc GSM, if so requested by the general meeting. The Audit report will include information regarding accounting practices, reports and financial reporting practices of the company and its connected companies; corporate compliance legal and regulatory frameworks; qualifications, independence and capabilities of independent auditors of the company; and contracts concluded between the company and members of the company BOD, as well as with related persons. All members of the internal supervisory body should sign the report and provide explanation to shareholders about any member who has not signed or refuses to sign the report, and why that member might be unwilling to provide an explanation for such refusal. Members of the internal audit committee in attendance at GSM should provide shareholders the opportunity to ask questions and discuss results of the audit.74 The duties of the nomination committee are very specific to the election and on-boarding of directors to the BOD and committees. In this regard, the nomination committee should submit proposed nominees for election to BOD membership. In addition, this committee should provide advice on appointment of BOD members; define director qualifications; evaluate the draft of appointment procedures for BOD memberships. The nomination committee should periodically (at least twice a year) assess the size and composition of the BOD, conditions for the appointment and make recommendations with regard to any changes which will be presented to the shareholders at the next GSM. Finally the nomination committee should perform any other task connected with the company’s human resource policy as part of the BOD competences. The majority of the nomination committee members should be independent, non-executive directors. One of them should be appointed as committee chairman. The nomination committee members must be knowledgeable about the basic principles of business ethics, companies legislation, finance and management.75 It is best practice to make use of the capacity of BOD members to have significant inputs in the selection and the compensation of executive management and other board members as in the nominations committee. An important responsibility is to determine a competitive salary structure that is suitable to the company’s needs. The compensation committee will serve this purpose. The duties of the compensation committee should include drafting proposals to the BOD for the compensation of key personnel. In addition, the compensation committee could provide crucial advice on compensations policy to be followed with respect to the individual members of BOD and External Auditor, provide advice on BOD compensation policies thus far implemented on the structure and the amount of fixed compensation. The compensation committee should meet at least twice a year, perform assessments of the size and structure of the Board, as well as External Auditor, and make recommendations about changes in such policy to be presented to the shareholders at the next GSM. The majority of the compensation Committee members should be independent, non-executive directors. One of them should be appointed as Chairman of the Committee. The Compensation committee members need to have professional and moral integrity and they should be knowledgeable about the basic principles of economy, finance and labor law.76 The compensation committee should meet at least twice a year, perform assessments of the size and structure of the Board, as well as External Auditor, and make recommendations about changes in such policy to be presented to the shareholders at the next GSM.77 : The majority of the Committee members should be independent, non-executive directors. One of them should be appointed as Chairman of the Committee. The committee members need to have professional and moral integrity and they should be knowledgeable about the basic principles of economy, finance and labor law.78 The BOD members are elected each year by the GSM and installed to their new duties by the company’s legal department led by the Corporate Secretary. The Corporate Secretary as a legal representative of the company has the authority to determine the terms of contracts with directors, including their compensation. The BOD is empowered to approve the conditions of the contract between the company and members of the BOD. Following the approval, the Corporate Secretary will sign the contract with each member of the BOD. The contract with the Corporate Secretary must be counter signed by the Chairman of BOD.79 The SOX Legislation and OECD best practices recommends that at least once a year, the Board of Directors submits to the GSM an evaluation report on the Board’s performance, the activities of Committees and every member of the BOD. The evaluation report about the Chairman’s work will be made by the non-executive directors. Another way to evaluate the BOD is to invite an outside consultant, corporate governance adviser, or a specialized corporate governance institute to independently assess the BOD and rate the company against other. This should be a confidential process. Rating agencies not only evaluate the BOD, but also evaluate other aspects of the company’s corporate governance system. There are advantages and disadvantages for undertaking the evaluation of BOD performance. The evaluation of the BOD and directors may provide important insights into the Board’s strengths and weaknesses.80 The information obtained as a result of the BOD performance evaluation can be used by the BOD to identify training needs for the BOD as a whole, as well as individual members. Corporate training events take on added importance with the recent development as a result of financial crises. Directors need to be kept up to date on changes to the legal and regulatory framework, as well as best practices. While director training is a strongly recommended, it will also provide an education policy for the BOD and its directors a key success factor in developing and supporting a competent, knowledgeable, and vigilant Board. The minimum hour and curriculum requirements for director training and education and certification are set by the SEC reglators.81 Directors may be compensated for their work. The amount of such compensation is determined by the GSM. The compensation policy for directors and the compensation for each director must be disclosed in detail in the annual financial statements of the company. Annual GSM agenda should explicitly include this item so that shareholders have an opportunity to debate over these matters. Director compensation is one of the contentious issues in corporate governance, and companies must follow a cautious and circumspect approach regarding director compensation. Excessive compensation plans are often perceived as an unjustified privilege of power—depending upon what is considered excessive. It is thus very important that director compensation is competitive, while at the same time within reasonable limits. An important distinction must be made between executive and non-executive directors. As a rule, executive directors should not receive additional fees for their participation on the BOD since their compensation packages allow for service on the BOD. Non-executive directors should be compensated. The most common form of compensation for non-executive directors is a cash fee. Independent directors can receive an annual fee which may be paid in the form of shares instead of cash. Their compensation package may include: a fee per meeting attendance; fees for service on committees; and fees for additional responsibilities, such as serving as the Chairman of the BOD or one of the committees. Directors can also be reimbursed for travel costs and other business expenses.82 The Company charter or by-laws should specify the qualifications of senior executive management. The SEM should generally satisfy such requirement as to enjoy the trust of shareholders, directors, other managers, and employees of the company; to have the ability to relate to the interests of all stakeholders and to make well-reasoned decisions; to possess the professional expertise, education and appropriate organizational skills; to have significant domestic and international business experience, knowledge of national economic, political, legal, and social issues, as well as trends and understanding of the market, products, and competitors at the national as well as international level; and to have the ability to translate knowledge and experience into practical solutions that can be applied to the company. A thorough background check on candidates should be conducted including any criminal or administrative offense record.83 The company should sign employment contracts with the SEM and BOD members. These contracts should include: (1) The starting date of the contract; (2) The rights and duties of the SEM; (3) The rights and duties of the company; (4) Compensation; (5) The term of the contract; (6) Sanctions that may be applied for failing to carry out the contract terms; (7) Benefits and other privileges; (8) Indemnification; (9) Confidentiality agreement in effect during the term of the contract and after the executive leaves the company; (10) Non-competition clauses during the service period and after the executive leaves the company; (11) Commitment to protect the interests of the company and its shareholders; (12) Grounds for early termination. Every contract with executives must be approved by the GSM. The compensation committee drafts a proposal for executive compensation.84 Periodic executive performance evaluations of the company are an important oversight tool for BOD. Performance evaluations can help create a system of constant performance management. The results of periodic evaluations can be a solid ground for defining measures for the work improvement among senior management performance. The charter or by-laws can stipulate that executive performance be evaluated by the BOD at least annually, if not more frequently. It would be useful for BOD to conduct evaluations on the executive performance through self-evaluation within the framework of the company’s HR performance evaluation and planning process.85 The OECD Principles of Corporate Governance provide that the BOD permanently supervise the performance of the executive directors. The second level of supervision is assigned to the supervisory bodies of the company.86 The BOD and SEM should develop a well-crafted strategic management, including a vision and mission statement and performance measurement system by which the company’s strategy can be implemented through a series of cause-and-effect linkages. The cause-effect relationships are determined if the company undertakes a method of developing a vision and mission statement in a holistic manner where all levels of the firm participate under the leadership and guidance of the BOD. The company employees, at all levels, must clearly understand the interrelationships between financial and non-financial indicators that include internal and external constituents of the organization and the lag and lead indicators which affect the success of a firm. If strategic management can be applied successfully, it will result in value creation for the firm’s shareholders and stakeholders and improve the firm’s productivity and competitiveness in the markets. In addition, successfully implemented strategic management will create a way for the firm to deepen the areas of strength in its operations, customer satisfaction, employee satisfaction, and improve financial results.87 The BOD must recognize that risk management helps promote business opportunities and competitive advantage for the company. In this regard, the BOD and SEM needs to develop a corporate culture that identifies the processes and tools for strategic opportunities and reduce uncertainty. The BOD should view risk comprehensively from both operational and strategic perspectives that helps reduce uncertainty about the business and promotes the exploitation of opportunities for the company. In addition, the BOD should develop the methods and processes used to manage those risks within the determined risk appetite [by the shareholders], and identify possible events or circumstances that can have influence on the company business as an enterprise. Finally, risk management should be recognized as the process that will provide reasonable assurance regarding the achievement of corporate objectives.88 The best measure of corporate performance is the stock price, as determined by the market. However, for the BOD, this has further implications. However, the BOD must establish a rationale for periodic performance evaluation. Pressures from the investment community and the general public have heightened concerns about how boards operate. Global competition and the potential for corporate acquisitions and restructuring have raised questions about the effectiveness of a number of corporations and their CEOs. Naturally, attention has turned to the board as the body of final oversight. Increasingly, there is pressure to heighten the accountability of the board has led to a greater focus on formal appraisal processes for boards and directors. Of late, performance measurement systems have become more sophisticated and popular at all levels of organizations globally. As a result, the company’s BOD as its most important body of oversight should also be subject to performance evaluation. Thus, adopting a formal board performance evaluation produces clear benefits for the companies we examined. The areas of major concern in a BOD performance evaluation include areas such as: (1) Board operations; (2) Teamwork; (3) Clarity about the role of directors and committees; (4) Accountability; (5) Directors’ participation and activity level at meetings; (6) Quality and composition of BOD; (7) Level of Communications; (8) Determining director concerns; (9) Early warning system against problems; and finally, (10) Long-term focus.89 Disclosure of insider information may substantially affect the market value of shares and all securities of a company. Therefore, the company ought to adopt policies whereby persons who have access to insider information may not use it to execute transactions, nor may they transfer insider information to a third party. Illegal use of insider information can damage shareholder interests and adversely affect the financial position and reputation of the company as well as securities markets overall. The company should have a written insider dealing policy in place, and vigorously enforce it. The internal auditors of the company should monitor whether directors, managers, and other officers comply with the law, regulation, and internal rules on insider dealing.90 A Code of Ethics (also referred to as a code of conduct, or ethics or responsibility statement) is a basic guide of conduct that imposes duties and responsibilities on a company’s officers and employees towards its stakeholders, including colleagues, customers and clients, business partners (e.g. suppliers), government, and society. A company may wish to adopt a Code of Ethics because it will enhance the company’s reputation/image; will improve risk and crisis management; develops a corporate culture and brings corporate values to the forefront; advances stakeholder communications; and above all prevents litigation and later headaches for the BOD and management. The code of ethics for a company should reflect its business culture, set of values, and ethically sensitive operational areas. A company’s Code of Ethics should go beyond simple rules and, instead, focus on core values. A company must identify and formulate its values before developing a company code of ethics. The company should seek buy-in from every part of its organizations structure so that the code goes beyond paper. The BOD must consider that developing a Code is a process as much as an outcome. By the time the Code of Ethics is submitted for the Board of Director’s approval, every employee should be familiar with the Code and have played a role in drafting it — a process that ensures buy-in and helps with its implementation. The company leadership must show the employees that ethics do matter to them and must seek demonstrable commitment by senior management and directors in order to ensure the implementation of a Code of Ethics.91 The Board of Directors should have a working plan in addition to a schedule for meetings that includes the topics to be addressed. According to the global best practices, the BOD should meet at least four times a year and one of their meetings is to be held at least two months before the annual GSM. The BOD may, however, wish to hold meetings as often as deemed necessary. It would be best to (1) develop an annual calendar of meetings; (2) set an agenda of the meeting well in advance; (3) place important issues at the beginning of the agenda in order to conduct productive and efficient BOD meetings.92 The BOD meeting notice with necessary information and materials should be sent to directors sufficiently in advance of the meeting to enable each director to thoroughly review the information. Eight days is considered to be sufficient, unless the by-laws determine the shorter period for convening a Board of Directors meeting in urgent situations.93 Directors should only participate in voting when they are physically present at the meeting; unless prohibited by the charter or by-laws, participate by conference call or other means of communication; or, vote in absentia by submitting a written opinion. A director cannot delegate his right to vote at a BOD meeting to another person, not even to another director. When participating in BOD meetings, each director should listen and understand oral presentations and ask questions. This is particularly important for presentations or reports given by executives during BOD meetings, especially when these materials are presented in a complex or ambiguous manner. When presented with a particular issue that does not correspond to the director’s area of expertise, additional information in the form of studies, independent appraisals or opinions, and other documentation on the subject should be requested prior to the meeting.94 The Corporate Secretary should keep a healthy record of director attendance at BOD meetings. Ultimate responsibility in ensuring maximum attendance record at meetings lies with the Chairman of the BOD.95 The fundamental guidelines underlying the formation, operation, and enhancement of corporate governance at the company must provide shareholders with a real opportunity to exercise their rights in relation to the company. These rest upon the four values of corporate governance: (1) transparency; (2) responsibility; (3) accountability; and, (4) fair and equitable treatment of all shareholders with socially responsible manner. In this regard, corporate governance practices implemented by the company should provide for the equitable treatment of all shareholders. Shareholders should have access to effective recourse in the event of a violation of their rights. Corporate governance practice should provide for the direction and control over the executive bodies by the BOD, and for the BOD accountability to shareholders. Corporate governance practice should separate the functions of the chairman and the CEO. Finally, corporate governance practice should, in particular, provide for the full, timely, and accurate disclosure of all material information to all shareholders and investors within all applicable laws and regulations.96 The Company must develop a corporate culture of understanding where every member of the BOD has a right to accurate, complete, timely and clear information necessary to perform their duties. Directors should have access to the information including full and accurate responses to their inquiries from members of the executive bodies, and other company officers. The company should create a mechanism to ensure that directors are provided with information about the most important financial and business developments of the company, as well as other developments that may have an impact on shareholder interests or an impact on the general community where business is located. The by-laws or other internal documents should provide that the members of SEM, and heads of major divisions have the duty to promptly submit full and reliable information to the BOD. In reaching this goal there must be close co-operation between the non-executive members of the BOD, and the Corporate Secretary and the committees of the company. It is the Chairman’s responsibility to ensure that all members of the BOD are equally informed, and have access to the same information. The company’s internal documents should include the right of directors to demand information from the executive bodies.97 The BOD should have necessary resources to develop and maintain the knowledge and skills of its directors for effectively implementing corporate governance policies and providing leadership. This information must be publicly announced on the company reports and the web site. In order to improve their capacity and develop skills where deficiencies exist, the BOD members must attend certified training programs that are mainly designed on the basis of periodic performance evaluations of the BOD and individual directors. It is international best practice to conduct annual performance evaluations and to disclose the results of the evaluations in the annual report. In general, performance evaluations of the BOD could be conducted through self-evaluation and/or by outside consultants, professional corporate governance associations or corporate governance rating organizations. Alternatively a confidential BOD peer evaluation may be conducted by an external legal counsel or consultant.98 “Directors can participate in voting when they are physically present at the meeting, or participating in the meeting by conference call or other means or by absentee ballot after having presented a written opinion, if allowed by the company charter or by-laws. BOD decisions must be approved by a simple majority vote of present directors unless the charter or by-laws require the vote of greater number of directors for that decision. If the votes are equally divided, the vote of the Chairman will decide unless otherwise specified by the charter or the by-laws.”99 In order to develop a viable corporate governance policy and implement it successfully, the company BOD should create the position of Corporate Secretary. The corporate secretary position is a professional, senior position that will facilitate the business of the BOD and enhance its efficiency. The Corporate secretary’s job description, authority and practical experiences in implementing corporate policies and practices makes this position ideally suited to help the company and the BOD develop a system of corporate governance. The Corporate Secretary can play an important role in the development of the company’s governance policies and practices. This professional will also ensure compliance with the corporate governance policies for the company as well as performing periodic reviews of the corporate governance practices at the company.100 In developing an explicit and clearly stated plan to improve the company’s corporate governance policies and practices, the Corporate Secretary should lay the groundwork for reforms in this area under the guidance of the Chairman of the BOD. Perhaps more importantly, the corporate secretary can demonstrate the company’s commitment to corporate governance by monitoring compliance with these policies and informing the BOD of any breaches. The Corporate Secretary should be responsible for administrative and organizational matters with respect to preparing and conducting BOD meetings. While the decision to conduct a BOD meeting is made by the Chairman, the Corporate Secretary should be responsible for handling such matters as notifying all directors of BOD meetings; Sending voting ballots; Collecting completed ballots and absentee ballots; Ensuring compliance with the procedures for BOD meetings; and keeping the minutes and verbatim reports. Finally, by reviewing the company’s policies on a regular basis and by keeping abreast of the latest developments in corporate governance, changes in the legal and regulatory framework, and international best practices, the Corporate Secretary ensures that the company’s governance consistently maintains high standards and all are up-to-date.15.Security Models• Resources OverviewDuring Week 1, you will use a variety of resources, both required and optional, including selections from the course textbook. You will be reading chapter selections from the course textbook, Principles of Information Security: Texts and Cases by Dhillon. The Weekly Schedule (a navigation link under Week 1) outlines the resources you will need to complete the Discussion, Application Assignments, and the Group Project.This page contains the Learning Resources for this week. Be sure to scroll down the page to see all of this week’s assigned Learning Resources. To access select media resources, please use the media player below.________________________________________MediaVideo: Week 1 OverviewNote: The approximate length of this media piece is 19 minutes.This video provides an introduction to the week’s resources and assignments.Accessible player________________________________________ReadingCourse Text: Principles of Information Systems Security• Chapter 1, “Information Systems Security: Nature and Scope”Chapter 1 discusses the definition of IS security and identifies three security controls that are implemented by organizations to enhance their information security.________________________________________ReadingCourse Text: Principles of Information Systems Security• Chapter 2, “Security of Technical Systems in Organizations: An Introduction”Chapter 2 discusses vulnerabilities that exist in IS and provides three different methods of defense against them–encryption, software controls, and physical and hardware controls.________________________________________ReadingCourse Text: Principles of Information Systems Security• Chapter 3, “Models for Technical Specification of Information Systems Security”Chapter 3 discusses different data and integrity models used in IS security, including the Bell La Padula model, the Denning Information Flow model, the Biba model, and the Clark-Wilson model.________________________________________Web ResourceComputer Security Act of 1987Visit this Web site to read the report from the Computer Security Act of 1987. This Act was passed to improve the security and privacy of sensitive information in the computer systems of the federal US governmental agencies. It establishes minimum acceptable security practices for these systems. This Act has been superseded by the Federal Information Security Management Act (FISMA) of 2002.• ApplicationSecurity ModelsTo prepare for this Application Assignment, review the Bell La Padula Model, the Denning Information Flow Model, Rushby’s Model, the Biba Model, and the Clark-Wilson Model for security specification from Chapter 3, “Models for Technical Specification of Information Systems Security” of your course textbook, Principles of Information Security.Then, create a table in Microsoft Word differentiating each of the models based on the following topics:1. Name of the model2. Axioms of the model3. Level of access model4. Hierarchy of company model5. Whether the model deals with integrity or security (or both)The overall table should provide enough information so that the purpose of each model can be explained.