Keywords

Corporate Governance Standards, Board Structure, Code of Best Practice, Financial Crisis, Corporate Scandals, Market Manipulation, Internal Audit.

JEL Classification

G00, G3, G30

Introduction

After corporate scandals happening during and after global monetary and financial crises, it is necessary to re-evaluate code of corporate governance. In reality, many nations re-issue their principles of corporate governance as guidelines for their market and companies. This paper selects an easy-reading writing style, and it finds out that there is still some academic words need to be explained in further.

The organization of paper contents is organized as following. As our previous series of paper, Research literature and theories are covered in the first two sessions. Next, it followed by introduction of our research methodology in session 3. Continuously, session four covers our familiar four groups of empirical findings. And our conclusion and policy suggestion is covered in the fifth session. Before last, there are exhibit session which covers some summary of this paper’s analysis and comparison. And lastly, a glossary note is provided with information for reference and because of reducing repeating terminology.

Research Literature Review

There are many and controversial opinions on corporate governance theories and practices. For example, Jensen & Meckling (1976); Masiulevi?ius, & Lakis (2018) Soegiono et al. (2019) presented their conceptual agency theory on the separation of ownership and management. Belgian Code 2009 stated that corporate governance is a set of rules and behaviours which determine how companies are managed and controlled.

Besides, Thailand 2006 Code defines CG as a set of structures and processes of the relationship b.t a firm’s board of directors, its MGT and its shareholders to boost the firm’s competitiveness, growth and long-term shareholder value with taking into account the interests of other stakeholders. Malaysian Code on CG 2012 (Bellouma, 2012) defines CG as the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value. Additionally, Campa & Donnelly (2013) found out that during the financial crisis, bank defaults are strongly influenced by a bank’s ownership structure. Generally, CG refers to the set of systems, processes and structures in which the company is governed. Because there are not many researches and surveys done in Western European region on CG, next, what is the limited comparative standardized set of so-called comparative Western European corporate governance standards?

Theory of Manipulation

Market manipulation covers errors in interfering the market operation and creates false information on price or market for a financial commodity such as stock.

Aggarwal & Wu (2003) suggested a strong role for government regulation to discourage manipulation while encouraging greater competition for information. And more illiquid stocks are more likely to be manipulated and manipulation increases stock volatility. Dallas (2011) presented from Istanbul stock exchange, small firms, firms with less free float rate and a higher leverage ratio are more prone to stock price manipulation (Allen & Gale, 1992).

Theory of Corporate Governance and Financial Crisis

In 2008 (Niu, 2008), OECD also stated that the financial crisis revealed severe shortcomings in corporate governance. Winter (2011) pointed that after the governance crisis 2001-2003 and the regulatory response through the Sarbanes Oxley Act and the European CG codes, the financial crisis has revealed persistent governance problems in financial institutions relating to executives, non-executives and shareholders. Also, Essen et al. (2013) found out that effective governance mechanisms enhance the ability of firms to absorb a stock market crisis. Guota et all (2013) pointed that there is the lack of significant impact of corporate governance quality on performance. And well governed firms do not outperform poorly governed firms. Hence, we can see, there exist various views on corporate governance and its importance.

Research Methodology

Firstly, we analyse and compare corporate governance principles in each of two (2) different groups including: 1) Group 1 – Limited Western European CG representative standards including Belgian Code 2009 and The Netherlands Corporate Governance Principles; and 2) Group 2 - Relatively good corporate governance group including Italian Code and Austrian CG principles;

Secondly, we also use, but not limited to, international standards of corporate governance such as: ICGN and OECD Corporate Governance Principles and Enhancing Banking CG Code 1999 which have many modifications in corporate governance principles after the crisis period. Then, we propose what so-called limited comparative Western European corporate governance principles which are aiming to create a basic background for relevant corporations interesting in different aspects of corporate governance subjects and functions as the recommendation to relevant countries’ government and other relevant organizations for public policy and necessary evaluation. Last but not least, for a summary of our standards, see Exhibit and the below Table 1 and 2 in relevant sessions.

Empirical Findings

Findings on corporate governance issues after financial crisis, corporate scandals and market manipulation

Some certain popular issues including: the roles and duties of CEO and senior management. Also, we can find out another corporate governance (CG) issue. It is, the lack of descriptions of an effective risk management system.

Findings on ways of manipulation during corporate scandals

Several Manipulation Techniques found out during corporate scandals involve, but not limited to:

The manipulation techniques in the income statement

In Waste Management Scandal (1998), a Houston publicly traded waste management firm, there is a report of $1.7 b in fake income.

The manipulation techniques in both the income statement and balance sheet

In the case of Refco financial service company, based in New York, entered the crisis and Chapter 11 in 2005 (Khwaja & Mian, 2005) when its CEO had concealed $430 b in bad debts.

The manipulation techniques relevant to international accounting practice code

In the scandal case of Global Crossing Ltd., a telecommunication firm, there is a failure in using international accounting standards (GAAP) in making financial reports. The company did not fairly present financial statements.

Other manipulation techniques net belong to above classifications

In some scandals, there is management manipulation which causes the loss of investments. In the case of Worldcom, a telecomm scandal, directors have used false accounting methods to manipulate stock prices after falling.

Actions on Preventing or Controlling Negative Manipulation

Among necessary actions to control negative market manipulation are, but not limited to, the mechanism of the board and its committees aiming to increase effectiveness and transparency with investors. Accounting and financial reporting process are also taken into account.

Findings on Construction of Comparative Western European Corporate Governance Standards

These findings will be shown in a detailed analysis of a model indicated in the later sessions.

Limited Western European Corporate Governance Standards Analysis (Group 1)

The Belgium code of corporate governance 2009

The Belgian Code 2009 has been modified from its first version in 2004. Among its advantages are, but not limited to, CG charter and CG statement. CG statement of the annual report covers a description of operation of committees, whereas CG charter includes direct or indirect relationship of the firm and major shareholders. Generally speaking, The Code focuses on Board, Committees and disclosure of remuneration policy of executive managers mentioned in the CG statement (Exhibit 1).

The Netherlands corporate governance principles

The Netherlands Best practices 2006 cover some major CG matters such as board roles and risk management. Different from other European Codes, one of its distinctions is clarifying roles of supervisory board (SB). For example, SB should meet regularly and retain effective control over the firm. For more information, please see Exhibit 2. However, it would be better to mention guidelines of CEO roles.

Comparison between the Belgian and the Netherlands Corporate Governance Principles

A lot of information on roles of Board is in the Belgian Code 2009. For example, it pointed Board ensures the integrity and timely disclosure of the firm F.S. But it would be better to give guidelines for a compliance officer (Exhibit 1). On the other hand, the Netherlands Code stated roles of SB in ensuring appropriate plans and policies for the firm. Besides, it also oversees business performance.

Relative Good Corporate governance group analysis (Group 2)

After the financial crisis 1997-1998, Good Corporate Governance Principles were issued in 2006 in Thailand, based on valuable information from listed firms and after Code of best practices for Audit Committee and Directors issued in 1999.

Italian 2002 corporate governance standards analysis

Good recommendations involved the description of IC system. For example, the firm appoints a person who run the IC system and report to IC committee, MD, board of auditors. Besides, it makes a sound point to suggest that IC committee reports to BD every 6 months on the adequacy of the IC system (Arniati et al., 2019; Tarasova et al., 2018).

A minor point might be noted here is that it does not describe well roles of compliance officer, please refer to the Exhibit 3.

In summary, the 2002 Code and supported documents paid well attention to Board and IC committee.

Austrian code of corporate governance standards analysis

In the 2012 Code, we recognized it pays attention to Supervisory Board roles. For example, the SB needs at least 3 members. And it also mentions disclosure of fixed and variable remuneration for each individual of MGT board and SB.

And among its advantages is that it mentions general information on GM published on website. Please refer to Exhibit 4.

On the other hand, it has a disadvantage as it does not describe well CEO roles.

Comparison between the Italian and Austrian Corporate Governance Principles

First of all, there is a focus in the 2012 Austrian CG Code setting itself a benchmark for corporations. Moreover, it states roles of SB and criteria for SB members such as professional experience and independence.

Besides, the Italian Code of Good Corporate Governance 2006 pointed Board is in charge of examining transactions with significant impacts on profits, assets and liabilities. It also makes good points of the board role in verifying controls to monitor performance of the firm.

The 1^st Establishment of So-Called Relatively Good Corporate Governance Standards

This following Table 2 is built with the summary of above Commonwealth CG standards.

The 1^st Establishment of So-Called Limited Comparative Western European Corporate Governance Standards

Comparison of corporate governance standards between group 1 and 2

Before we come to set up a set of general limited standards of corporate governance, we need to review the standards combined in the previous two (2) groups: The advantages of Group 1 consist of, but not limited to, the roles of AC in reviewing the relevance of accounting standards used by firm (Tables 1 and 2). On the contrary, the relative Good Corporate Governance Group standards states well and focus on the role of Supervisory board (SB). For example, it also mentions w/o SB approval, MGT board member cannot run a business (see 2012 Austrian Code). Last but not least, Italian Code presents the role of GM as the meeting to provide shareholders with information while complying with the procedure relating pricesensitive information.

Table 1: A So-Called Limited Western European Cg Representative Standards
Subjects or parties	Main quality factors	Sub quality factors
Audit committee	AC discuss significant financial reporting issues with EA and executive MGT; meet at least 4 times a year; twice a year meet IA and EA to discuss weakness of IC;	New AC members provided with IC, RM, operational, financial, accounting and auditing information;
CEO and The Chair	Consider positive and negative aspects if board considered the former CEO as chairman;	Chairman consults with CEO setting board meeting agenda;
Corporate Secretary	Ensure good information flow within board, committee, executive MGT and NEDs;	Advise board on all governance matters; regularly report to board;
Compliance officer	A compliance committee installed, or a high level compliance officer appointed;	Can be company lawyer;
Board of Directors	No individual or group dominate board’s decision making; organizing meetings using internet, video or telephone;	Ensure accuracy and completeness of CG charter and CG statement;
Independent director	Independency of judgement and objectivity in making board decisions;	Not an executive member of board;
Supervisory board to the Management	SB ensures individuals involved in daily MGT are of professional, integrity and social and moral;	SB ensures MGT take follow-up actions on supervisory recommendations;
Supervisory to the Board of Directors	Meet regularly and retain effective control over the firm	Committee of SB comprises a majority of unrelated supervisory directors; the engagement of an outside adviser;
Internal control	A framework of IC set by executive MGT approved by board;	Main risks identified and managed;
Internal audit	AC review IA work program;	AC recommends appointment/removal head of IA
External audit	Examine with AC safety measures taken to decrease risks;	Comment on the true and fair view of the firm assets and liabilities, financial positions; report AC key matters of FS;
Disclosure and transparency	SB ensures timely and accurate disclosure;	Executive MGT prepare firm disclosure of F.S;
Shareholders	Controlling shareholders can appoint representatives to the board; Board ensures its obligations to shareholders are met;	Controlling shareholders can appoint representatives to the board;
The corporation as a whole entity	Has CG code with provisions and guidelines on how the firm implements the provisions of the code;	CG charter on firm website and CG statement on annual report;

Table 2: A Relatively Good Corporate Governance Standards
Subjects or parties	Main quality factors	Sub quality factors
Audit committee	Monitor the work of the auditor; audit any consolidated F.S;	Set up by SB; monitor the preparation of accounting procedures;
CEO and The Chair	Included in Board; board delegates powers to chairman;	MD identify main risks;
Corporate Secretary	N/A (for further research and implementation)	N/A (for further research and implementation)
Compliance officer	N/A (for further research and implementation)	N/A (for further research and implementation)
Board of Directors (MGT board)	Take appropriate measures to secure compliance with laws; chairperson of MGT board discuss chairperson of SB about strategy and RM;	Fundamental decisions on goals or strategy reached by all MGT board;
Independent director	Involved in board discussion, join in committee such as IC committee;	Member of executive committee;
Supervisory board to the Management	Acts by SB;	Board supervise general performance of the firm;
Supervisory to the Board of Directors	Develop internal rules of procedures for its work, establishing committees; chairperson of SB prepare meetings of SB;	Provide support to MGT board in governing the enterprise; appoint members of MGT board;
Internal control	AC monitor the effectiveness of the company-wide IC system;	IC committee made up of a majority of independent directors, access with EA the appropriateness of accounting standards adopted;
Internal audit	Once a year, report on audit plan;	Can be conducted by a separate staff unit;
External audit	IC committee, together with EA, access the accounting standard appropriateness;	AC exchange views with EA at meeting w/o presence of MGT board members;
Disclosure and transparency	MD ensure the correct handling of confidential information;	SB mandate disclosed in CG report
Shareholders	All directors attend GM;	Board report to shareholders at GM;
The corporation as a whole entity	The firm has a CG report which mentions the composition and working procedure of MGT board;	MGT board report to SB once a year measures to fight corruption at firm;

A so-Called Limited Comparative Western European Corporate Governance Set of Standards

Based on the above analysis, we consider building comparative standards for a comparative Western European Corporate Governance system (Table 3).

Table 3: The Comparative Western European Corporate Governance Standards
Subjects or parties	Main quality factors	Sub quality factors
Audit committee	AC discuss significant financial reporting issues with EA and executive MGT; meet at least 4 times a year; twice a year meet IA and EA to discuss weakness of IC;	Monitor the work of the auditor; audit any consolidated F.S;
Nominating committee	Professional qualification and a balanced composition of expert knowledge;	Assist board on nomination and planning of CEO; majority comprises independent NEDs;
Numeration or Compensation Committee	Remuneration of MGT board based on work scope, duty and personal performance;	Meet at least twice a year;
CEO and The Chair	Consider positive and negative aspects if board considered the former CEO as chairman;	The Chair call the board meeting, set agenda; coordinate activities of BD; ensure all directors make a knowledgeable contribution to board discussion;
CFO	AC decides when CFO, CEO attend meeting;	N/A (for further research and implementation)
Corporate Secretary	Board describes roles and tasks of secretary;	Ensure good information flow within board, committee, executive MGT and NEDs;
Compliance officer	A compliance committee installed, or a high level compliance officer appointed;	N/A (for further research and implementation)
Board of Directors or Management Board	Check the adequacy of organizational and administrative structures set by MD;	No individual or group dominate board’s decision making; organizing meetings using internet, video or telephone;
Independent director	Involved in board discussion, join in committee such as IC committee;	Independency of judgement and objectivity in making board decisions;
Supervisory board to the Management	SB ensures individuals involved in daily MGT are of professional, integrity and social and moral;	SB ensures MGT take follow-up actions on supervisory recommendations;
Supervisory to the Board of Directors	Internationality of members, gender, age structure;	Meet regularly and retain effective control over the firm
Internal control	Set an internal control committee; Processes to monitor the efficiency of firm operation;	A framework of IC set by executive MGT approved by board;
Internal audit	Can be conducted by a separate staff unit;	AC review IA work program; Once a year, report on audit plan;
External audit	IC committee, together with EA, access the accounting standard appropriateness;	Comment on the true and fair view of the firm assets and liabilities, financial positions; report AC key matters of FS;
Disclosure and transparency	MD ensure the correct handling of confidential information;	Executive MGT prepare firm disclosure of F.S;
Shareholders	All directors attend GM;	Controlling shareholders can appoint representatives to the board; Board ensures its obligations to shareholders are met;
Stakeholders	CG Code designed to increase transparency for all stakeholders;	MGT board responsible for communication tasks affecting firm image perceived by stakeholders;
Accountability	Firm prepare consolidated F.S in accordance with IFRS;	Executive MGT accountable to board for the discharge of its duties;
Leadership	Chairman responsible for leadership of board;	Board provides entrepreneur leadership; strong executive leadership;
Employee	Employee’s representatives have rights to receive information;	At GM, directors answer questions which do not prejudice firm, employee, shareholders;
3rd parties and conflicts of interests	Assess potential conflicts b.t interests of firm and of controlling shareholders;	Each board member avoid direct and indirect conflicts of interest;
The corporation as a whole entity	Fundamental decisions on goals or strategy reached by all MGT board;	CG charter on firm website and CG statement on annual report;
The Code	Help determines firm goals; one-tier board model; has principles, provisions and guidelines;	Ensure leadership, integrity and transparency in the decision making process;
(Note: source are based on corporate governance standards of group 1 and 2 and the appraisal of these standards)

Conclusion

To overcome weaknesses from CG during crises, The Belgian Code 2009 suggested Board roles are important and skills, experience and knowledge of new board candidate should be evaluated.

Besides, the Netherlands Code included guidelines for supervisory board (SB) including an orientation and education program for new members of SB.

In consideration of corporate governance issues analysed in the previous sessions, we proposed the main and sub quality factors in this paper a set of general comparative Western European corporate governance standards in a limited model with selected countries. Though limited, it has some implications for further research and proper recommendations to relevant government and organizations. And it also provides relevant academic and non-academic, lawyer and consultant, board and non-board people with minimum information for further researches.

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