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That informa- are run, the conditions necessary for their success and tion must be written so that it’s easy to understand and the challenges and issues that confront them. Specifi- relevant to your audience’s interests.� cally, journalists who value good corporate governance Partnering with the International Center for Journalists practices will earn their peers’ respect and build trusted (ICFJ) in the production of this Guide draws on its exten- working relationships with the companies they cover. sive experience with journalists around the world, par- Since the launch of the Media Training Program in 2007, ticularly in difficult markets. While the Forum has offered the Global Corporate Governance Forum has conducted its expertise in corporate governance, ICFJ has ensured various training workshops for journalists in the Middle that the Guide is suitably tailored to the requirements of East, Africa, South Asia, Latin America, Central Asia, and a business reporter wanting to learn about key elements East Asia, most of them in partnership with Thomson of corporate governance and what makes an interesting Reuters Foundation and Agence France-Presse. story. They not only understand what a journalist needs but also how this should be conveyed through our training During these training events, we found many examples programs. ICFJ offers extensive resources and expertise of business journalists reporting on corporate gover- far beyond what is provided in this Guide. nance practices without necessarily being aware of it. The Forum’s work with the media constitutes an important This Guide builds on the Forum’s and IFC’s experience in part of the efforts to raise awareness of the issues and providing training for business reporters, and its work in advance good corporate governance practices in emerg- producing internationally acknowledged corporate gover- ing markets and developing countries. This effort is being nance capacity-building tools and knowledge materials. made in cooperation with IFC, a member of the World It covers important topics on corporate governance and Bank Group. provides examples and case studies on investigative jour- nalism based on contributions from experienced journal- Our program’s objective is to draw on journalists’ unique ists and drawing on our own observations. ability to disseminate information on corporate gover- nance to the business community and the wider public, While the Guide is not intended to be a definitive resource and for journalists to make readers aware of company on corporate governance, it does set out some very use- activities in ways that can have a significant impact not ful principles for business reporters in emerging markets only on their shareholders but on society. Through their and developing countries. The section “About the Guide� investigations and insight, journalists can show what explains its use, purpose and function. happens when companies are poorly governed. Journal- As is the case with all of the Forum’s work, the Guide’s ists can also illustrate how companies that abide by best production involved extensive collaboration with many practice not only perform better but are more resilient in a people and organizations. Their commitment to this effort difficult economy. is gratefully appreciated in the “Acknowledgements� sec- In addition, more probing, more insightful business tion. reporting differentiates one news outlet from another and draws in the more sophisticated and informed business audience seeking information and news that is well pre- Philip Armstrong sented, thoughtful and constructive. Head, Global Corporate Governance Forum “If you’re ignoring corporate governance in your coverage of companies, you are only giving your readers part of the story,� advises Cristina Sevillano del Aguila of Stake- holders Magazine (Peru). “For investors, too, they need Our program’s objective is to draw on journalists’ unique ability to disseminate information on corporate governance to the business community and the wider public, and for journalists to make readers aware of company activities in ways that can have a significant impact not only on their shareholders but on society. WHO’S RUNNING THE COMPANY? 3 ACKNOWLEDGEMENTS Who’s Running the Company? A Guide to Reporting on Corporate Governance was accomplished thanks to the ef- forts and active participation of many around the world. The Global Corporate Governance Forum especially would like to thank Margie Freaney, main writer, and the following colleagues, peer reviewers, members of the Forum’s Private Sector Advisory Group, and the International Center for Journalists (ICFJ) for their contributions to the media Guide (by alphabetic order): Amira El SaeedAgag, Operations Officer, Edmond Mjekiqi, Strategy Analyst, IFC Advisory Services MENA IFC Environment, Social and Governance Department EGYPT USA Simone Azevedo, Founding Editor, Peter Montagnon, Sr. Investment Adviser, Capital Aberto Financial Reporting Council BRAZIL LONDON Tamal Bandyopadhyay, Deputy Managing Director, Sharon Moshavi, Vice President, New Initiatives, Mint International Center for Journalists INDIA USA Vanessa Bauza, Communications Officer, Anne Molyneux IFC Environment, Social and Governance Department CS International USA AUSTRALIA/UNITED KINGDOM Mahwesh Bilal Khan, Associate Operations Officer, Kiril Nejkov, Operations Officer, Corporate Governance, IFC - Advisory Services Middle East and North Africa IFC-Advisory Services Europe and Central Asia PAKISTAN MACEDONIA Caroline Bright, Global Product Leader, Adesinaola Odugbemi Corporate Governance External Affairs Department IFC Sustainable Business Advisory USA World Bank USA Johanna Carrillo, Senior Program Director, International Center for Journalists John Plender, Lead Writer, USA The Financial Times LONDON Corina Cepoi, Director, Chisinau School of Advanced Journalism Marjorie Pavia, Program Officer, MOLDOVA IFC Global Corporate Governance Forum USA Eric Chinje, Director, Strategic Communications Mo Ibrahim Foundation Loty Salazar, Knowledge Management Officer, UNITED KINGDOM IFC Sustainable Business Advisory USA Juan Carlos Fernandez, Sr. Operations Officer, IFC Sustainable Business Advisory – East Asia and Pacific James D. Spellman VIETNAM Strategic Communications LLC USA Craig Hammer, Media & Governance Specialist, World Bank Institute Eugene Spiro, Sr. Projects Officer, USA IFC Global Corporate Governance Forum USA Robert Holloway, Director, Agence France Press (AFP) Foundation Alexey Volynets, Associate KM Officer, FRANCE IFC Global Corporate Governance Forum USA Isimkah Ibuakah, Legal Adviser, Nigeria Corporate Governance Banking Program – IFC Sustainable Designer: Wendy Kelly Business Advisory Sub-Saharan Africa WLK Design Group Inc. NIGERIA USA Sonja Matanovic, Communications Director, International Center for Journalists USA 4 WHO’S RUNNING THE COMPANY? ABOUT THE GUIDE This Guide is designed for reporters and editors who n Shareholders are not only the ultimate stakeholders already have some experience covering business and in public companies, but they often are an excel- finance. The goal is to help journalists develop stories that lent source for story ideas. (Chapter 3, All about examine how a company is governed, and spot events shareholders) that may have serious consequences for the company’s n Understanding how companies are structured survival, shareholders and stakeholders. helps journalists figure out how the board and Topics include the media’s role as a watchdog, how the management interact and why family-owned and board of directors functions, what constitutes good prac- state-owned enterprises (SOEs), may not always tice, what financial reports reveal, what role shareholders operate in the best interests of shareholders and play and how to track down and use information shed- the public. (Chapter 4, Inside family-owned and ding light on a company’s inner workings. state-owned enterprises) Journalists will learn how to recognize “red flags,� or n Regulatory disclosures can be a rich source of warning signs, that indicate whether a company may be exclusive stories for journalists who know where to violating laws and rules. Tips on reporting and writing look and how to interpret what they see. (Chapter guide reporters in developing clear, balanced, fair and 5, Toeing the line: regulations and disclosure) convincing stories. n Reading financial statements and annual reports Three recurring features in the Guide help reporters ap- — especially the fine print — often leads to journal- ply “lessons learned� to their own “beats,� or coverage istic scoops. (Chapter 6, Finding the story behind areas: the numbers) Reporter’s Notebook: Advice from successful n Developing sources is a key element for reporters business journalists covering companies. So is dealing with resistance Story Toolbox: How and where to find story ideas and pressure from company executives and public What Do You Know? Applying the Guide’s lessons relations directors. (Chapter 7, Writing and report- ing tips) Each chapter helps journalists acquire the knowledge Each chapter ends with a section on Sources, which lists and skills needed to recognize potential stories in the background resources pertinent to that chapter’s topics. companies they cover, dig out the essential facts, inter- At the end of the Guide, a Selected Resources section pret their findings and write clear, compelling stories: provides useful websites and recommended reading on corporate governance. The Glossary defines terminology n What corporate governance is, and how it can lead used in covering companies and corporate governance to stories. (Chapter 1, What’s good governance, topics. and why should journalists care?) n How understanding the role that the board and its Notes: All figures are in U.S. dollars. committees play can lead to stories that competi- The terms “company,� “corporation� and “enterprise� are used interchangeably to refer to a business entity. tors miss. (Chapter 2, The all-important board of directors) WHO’S RUNNING THE COMPANY? 5 CONTENTS 9 CHAPTER 1 What’s good governance, and why should journalists care? 17 CHAPTER 2 The all-important board of directors 25 CHAPTER 3 All about shareholders 33 CHAPTER 4 Inside family-owned and state-owned enterprises 41 CHAPTER 5 Toeing the line: regulations and disclosure 49 CHAPTER 6 Finding the story behind the numbers 55 CHAPTER 7 Writing and reporting tips 63 SELECTED RESOURCES 68 GLOSSARY CHAPTER 1 What’s good governance, and why should journalists care? “Poor corporate governance has ruined companies, resulted in directors being sent to jail, destroyed a global accounting firm and threatened companies and governments.� — The Economist (Essentials for Board Directors) Good journalists can sniff a good story even in the most Corporate governance stories essentially are about peo- innocuous press release. But the phrase “corporate gov- ple: shareholders who want to change company policies; ernance� doesn’t set off any alarm bells. However, these struggles between directors — who are charged with words will: fraud, theft, waste, incompetence, double- setting the company’s strategy and policy — and manag- dealing, nepotism, abuse of power, embezzlement, ers, who might have different ideas. Transparency and conflict of interest, favoritism, corruption. accountability play a large role in such stories, along with actions by regulators, stock exchanges, shareholders and These terms light a fire under journalists, because they stakeholders. Journalists have a role in transparency by may lead to exclusive, groundbreaking stories that are the highlighting significant noncompliance. Without transpar- essence of good journalism. ency, the system cannot work well.  Not all corporate governance stories are about scandals, “Corporate governance is about shining a light through however. They can be about heroes and visionaries, about the whole organization,� says Roshaneh Zafar, managing brilliant ideas and charismatic leaders, about men and director/CEO of Kashf Microfinance Bank Ltd. in Pakistan. women who build great fortunes by giving the world new products and services that improve lives. Governance, at its heart, provides the direction for a com- For a short description of corporate pany or state-owned enterprise (SOE). Guidelines, stan- governance, see “Improving Business dards and best practices established worldwide define Behavior: Why We Need Corporate Governance,� what constitutes good governance, and a savvy business from the Organization for Economic Cooperation journalist quickly learns the difference between good gov- and Development (OECD): http://bit.ly/J11k9R ernance and bad. Both can lead to great stories. In this Guide, you will learn what constitutes good and bad governance; how to spot red flags; and where to Many journalists already report on corporate governance find information about what company leaders are doing. without realizing it. Stories about changes in leadership or You will find stories written by international reporters and new acquisitions are about corporate governance — even tips and techniques for making stories clearer and more if the words are never mentioned. compelling for the audience. Journalists’ primary interest is in the stories they can Corporate governance describes the structures and unearth by digging into a company’s strategy, oversight procedures to direct and control companies, and the and transparency. But good governance does have a processes used by the board of directors to monitor and wider impact, documented by research, because it: supervise management in discharging the board’s ac- n Encourages investment countability to shareholders for the running of the com- n Enhances investor confidence/interest, which pany and the performance of its operations. WHO’S RUNNING THE COMPANY? 9 CHAPTER 1 What’s good governance, and why should journalists care? lowers a company’s cost of borrowing money or and how their actions connect to their company duties. raising capital n Boosts companies’ competitiveness These questions can result in stories that serve an ex- tremely varied audience, which includes consumers, n Better equips companies to survive economic investors, taxpayers, business leaders, directors, regula- crises tors, policymakers and customers. n Makes corruption less likely n Ensures fairness to shareholders Learning to recognize whether directors are acting in the n Forms part of the overall checks and balances shareholders’ best interests and the company’s long-term on big business that ultimately benefit society interests is the reporters’ first step in digging below the surface of the companies they cover. Directors and man- Research shows that growth is particularly strong for agers who don’t follow accepted practices, when others those industries most dependent on external finance. The do, should be asked why. (See Chapter 2 for more details quality of corporate governance can also affect firms’ be- on how boards direct strategy and protect shareholder havior in times of economic shocks. Well-governed com- interests, and more on how boards and management panies have less volatile share prices in times of crisis. interact.) For an overview on the influence of good Defining and recognizing good governance governance, see “Focus 10: Corporate But what constitutes good governance? More than 70 Governance and Development�: countries now have codes or guidelines that spell out the http://bit.ly/M2shli principles that directors and managers should follow to achieve governance goals. These usually are not mandat- ed by law, and are designed to encourage voluntary com- pliance. The codes lead to definitions of “best practices,� Good corporate governance can help family-owned or which aim to define specific policies and procedures that -controlled companies survive succession battles that foster good governance. doom most such companies, says Joseph Fan, a finance professor and co-director of the Institute of Economics Companies that deviate significantly from the codes’ rec- and Finance at the Chinese University of Hong Kong ommendations deserve special scrutiny, and may produce (http://bit.ly/M2txF7). good investigative stories. Highlighting such noncompli- ance is one of the ways that media can focus attention on companies that may even be operating illegally. How journalists act as watchdogs Exposing practices that lead to widespread shareholder losses and potentially affect the economy is part of the Compare other countries’ governance media’s role as watchdog. It’s the journalist’s job to pay codes with that of your own country: attention to companies’ leadership and ask whether di- http://bit.ly/IttIHR rectors and management are making the right decisions, Learning to recognize whether directors are acting in the shareholders’ best interests and the company’s long-term interests is the reporters’ first step in digging below the surface of the companies they cover. 10 WHO’S RUNNING THE COMPANY? For example: Most codes call for a board to have several independent directors. “Independent� essentially means For more on the Satyam case, see: a person who is free of material relations with the com- http://reut.rs/Icj4hL pany’s management or others involved with the company. http://scr.bi/IA3vm7 Unclouded by conflicts of interest, such a director can http://bit.ly/HEcrLX make decisions based on the potential benefits for the company and its shareholders. A board stacked with friends or relatives of the top managers is less likely to act as a check and balance in Anticipating risk serving shareholders’ interests. One best practice cited in corporate governance codes requires corporate leadership to anticipate and manage Companies worldwide often have dominant shareholders risks the company might face. Companies take risks to who are members of the same family. This is particularly generate returns. The board is responsible for ensuring common in emerging markets. Often, the family domi- that all business risks are identified, evaluated, disclosed nates the board and management, perhaps exerting influ- and managed. ence through special shares that control voting power, even though the family may own only a small percentage The obligation to manage risk became a key issue after of total shares. the 2011 earthquake and tsunami in Japan that ravaged the Fukushima Dai-Ichi nuclear station, creating a public Also common in emerging markets are enterprises that health crisis. are either owned by the state or essentially controlled by the state through the make-up of the board and manage- Why, critics and journalists asked, did directors of the ment. This can lead to decisions being made for political Tokyo Electric Power Company Inc. (TEPCO), the pub- reasons rather than for the benefit of shareholders. licly traded Japanese energy company, fail to prepare adequately for risks that had been previously identified? Why weren’t there any independent board members or a risk committee? Why weren’t there appropriate policies to Governance issues drive major stories identify the risks and the steps for mitigating those risks Family-owned companies are the bedrock of any suc- should a nuclear mishap occur? cessful economy. Examples include Ford Motor Co. in the United States, Tata Group in India and Sabanci Holding in “TEPCO … couldn’t have predicted that the tsunami would Turkey. But family-owned companies also may have seri- hit, but it could have been better prepared for such an ous corporate governance lapses. event to take place,� research analyst Nathanial Parish Flannery wrote, noting that outside experts had warned At India’s Satyam Computer Systems Ltd., for example, that the nuclear facility was at risk of being damaged even family members attempted to divert assets into two other by a mid-sized tsunami. family-owned companies. But these criticisms and questions mostly came after the As the Times of India reported, “The Satyam scandal fact. came to light on January 7, 2009, with a confession from the company’s founder B Ramalinga Raju that he had Among tools that journalists can use to assess companies been cooking the firm’s books for several years.� In his are corporate governance scorecards, which try to help letter to the board revealing the fraud, Raju states that, companies judge how well they comply with good gover- “What started as a marginal gap between actual operat- nance principles and practices. In many countries, these ing profits and ones reflected in the books of accounts scorecards are issued annually, and provide ideas for continued to grow over the years. It has attained unman- stories. ageable proportions....� Later, he describes the process as “like riding a tiger, not knowing how to get off without For example, a corporate governance scorecard for being eaten.� Vietnam in 2011, released by the World Bank’s private arm, the International Finance Corporation (IFC), urged It was later determined that Satyam had violated several improvement in protecting shareholders’ rights and laws that protect shareholders, and that are designed to treatment. The scorecard studied corporate governance prevent and penalize efforts to divert company assets practices at the 100 largest companies listed on the Hanoi from shareholders to the benefit of the perpetrators. and Ho Chi Minh City exchanges. WHO’S RUNNING THE COMPANY? 11 CHAPTER 1 What’s good governance, and why should journalists care? The Indian and foreign press followed closely the ques- See a story on the scorecard at: tion of who would replace the 75-year-old Ratan Tata, http://bit.ly/HEcwiH chairman of Tata Group, the country’s largest global And a link to the scorecard itself: conglomerate. The question of succession affects not only http://bit.ly/I73s2j the company itself, with its huge impact on the national economy, but 100 Tata subsidiaries that are themselves major drivers of jobs and the economy worldwide. Codes and scorecards provide a handy checklist for jour- Once the decision was announced, in November 2011, it nalists to determine whether companies they cover follow set off many speculative stories about the strengths and generally accepted best practices in their countries. weaknesses of the new leader — Cyrus Mistry, son of Tata’s largest individual shareholder. (See Story Toolbox in this chapter for story ideas based on codes and scorecards.) Often corporate governance stories are full of intrigue, such as the feud between the Ambanis, two Indian broth- ers whose dispute over how to divide their late father’s Reliance business empire threatened to endanger the Effects of governance failures country’s economy. When a company suffers a major governance failure, whether it’s due to an ethical or accounting violation, faulty risk management and oversight or ineffective board decision-making, the effects can be far-reaching. See an example of a story about the The share price can fall sharply, affecting shareholders Ambani brothers at: http://tgr.ph/I73Ail and sometimes even the industry sector in which the company operates. The company might ultimately fail, leading to job losses and other harmful consequences for the region where it operates. Know where to look and what to ask To report on stories such as the Ambani brothers’ feud, In some extreme cases such as government bailouts, journalists must know how to recognize signs of change taxpayers can be left repaying the costs. The government within a company and what questions to ask. This re- bailout of Bank of Moscow in 2011 — reputedly because quires intimate familiarity with good corporate governance of questionable loans — cost $14 billion, equivalent to 1 practices and how directors and management in specific percent of Russia’s economic output. companies operate. The stories are often full of interesting personalities. Re- Companies not listed on a stock market — especially porters may find themselves writing about highly secretive family-owned enterprises (FOEs) — are often highly se- and powerful business families or former state ministers cretive, and many state-owned companies (SOEs) might who run their countries’ largest corporations. In these not keep or release reliable information. When writing stories, the issue of succession — who will take over the about these more secretive enterprises, reporters need to reins — is critically important. develop sources inside and outside the company. Remem- Social networking sites, such as Facebook and LinkedIn, may provide unexpected insight, especially through employees’ eyes. Blogs, including those by company critics, are another useful tool. 12 WHO’S RUNNING THE COMPANY? How do journalists acquire that kind of savvy, short of For expert tips on how business journal- returning to the university for an advanced accounting ists can use LinkedIn to find contacts and degree? research company officials, see: It sometimes takes an expert to spot trouble, and that’s http://bit.ly/IA4ymd why journalists need to develop good sources at all levels. It was a hedge fund manager who alerted several journal- ists from prominent foreign publications that managers ber that employees, suppliers, competitors and distribu- of the Russian energy company Gazprom were shifting tors often have insights into companies. corporate assets to entities controlled by friends and rela- Social networking sites, such as Facebook and LinkedIn, tives. Eventually, the company’s chief executive resigned may provide unexpected insight, especially through and Gazprom instituted other reforms. employees’ eyes. Blogs, including those by company critics, are another useful tool. In both cases, journalists must verify all unofficial information and also be aware of personal agendas and grudges that some employees and bloggers might have. STORY TOOLBOX Story idea: How do the companies you cover match up Knowing how to read and analyze financial statements with the good governance codes established in your and other company documents and regulators’ reports country? Stay on top of any changes in the corporate can often lead to stories, even if senior management governance code, which could be a story in itself. refuses requests for interviews. A Wall Street Journal reporter, Jonathan Weil, spent two A story also might examine how companies in your coun- months studying the subtleties of accounting for energy try compare with their neighbors in the region when it derivatives, consulting with accounting and derivatives comes to compliance with good governance practices. experts and examining the U.S. Securities and Exchange Take just one issue: transparency and disclosure. (SEC) filings of Enron Corp., before writing a story in Check the company on these items: September 2000 that questioned the credibility of the n Does it have an external auditor? Is the external company’s stated earnings. auditor a recognized national or international audit- His article did not attract much attention at the time. But ing firm? Any conflicts of interest? some media analysts eventually credited Weil as the first n Do directors disclose their buying and selling to shine a light on the fraudulent accounting practices of company shares? Do they do so in a timely that led to the company’s implosion and criminal convic- manner? tions of its top executives in perhaps the greatest corpo- n How much information does the company disclose rate scandal in U.S. history. about directors’ backgrounds, expertise and other board affiliations? From this information, are there any conflicts of interest? Are board directors inde- Skepticism, hard work, good pendent? sources pay off Enron’s fraud had been going on for several years before n How extensive is the company’s disclosure on journalists caught even a whiff of it, as Michael J. Borden compensation for management and for directors? noted in a study of the role of financial journalists. Is this consistent with other companies’ practices? When journalists did catch on to what Enron was up to, n Are non-executive directors compensated? If not, Borden notes, it was because of “skepticism, hard work, what is their motivation for serving on the board? ability to analyze accounting reports, and cooperation n What do companies reveal about their strategy and with analysts and other experts.� Having the know-how to their foreseeable risks? do that kind of rigorous reporting, he says, makes jour- For an example of a story on this topic, see: nalists the catalysts that set off legislative and regulatory http://bit.ly/IjIFaY reactions that lead to reforms. WHO’S RUNNING THE COMPANY? 13 CHAPTER 1 Good governance, What’s good and why Governance and Whyshould Should Journalists journalists Care? care? Making the complicated understandable ‘‘ “The problem with governance stories is that they are The problem with governance stories is that they are convoluted and compli- cated. If they weren’t so convoluted, shareholders would do something….� — Alexander Dyck, professor of finance and business economics at the University of Toronto Journalists and other critics later asked whether Satyam’s auditors were sufficiently independent and expert, and convoluted and complicated. If they weren’t so convo- questioned why auditors did not notice the red flags, luted, shareholders would do something…. There’s an which included millions in missing cash. incentive for the parties engaged in the company to hide Just a year before it was awash in scandal, Satyam won a and confuse what’s going on,� according to Alexander Golden Peacock Award for excellence in corporate gover- Dyck, professor of finance and business economics at nance from the World Council for Corporate Governance. the University of Toronto, who has researched the impact The Council later rescinded the award and complained of news stories on companies. that the company had failed to disclose material facts. That’s why it’s vitally important for business reporters But Business Week reporter Beverly Behan wrote that the writing about complicated accounting maneuvers to avoid Satyam board was clearly flouting good governance prac- jargon and present facts in a user-friendly way. Explaining tices. Journalists could have learned by examining the and defining terms, avoiding insider terminology and writ- composition of the board that it lacked financial expertise, ing clearly help attract readers and viewers to stories they was only barely independent and failed to meet indepen- might otherwise skip as too dense. dently of management — all counter to good governance practices. Get out in front of the story As the Satyam case demonstrated, impressive business Stories about greed and corruption have dominated awards and glossy annual reports are no guarantee that business coverage in the last decade. But in many cases, companies are operating legally and ethically. journalists have been forced into follow-up mode once a One of the most sensational business corruption cases company has already imploded. continues to unfold in Croatia, as of this writing. Manag- That was the case with the Satyam story, where the dis- ers and board members of the respected food company covery of massive accounting fraud led to the company’s Podravka have been embroiled for three years, since collapse, which was not covered until after the fact. 2009, in charges that certain members colluded to use company money to illegally attempt to take over the PricewaterhouseCoopers, the external auditor, approved company by buying its shares and investing in another Satyam’s inflated balance sheet figures for several years. company. REPORTER’S NOTEBOOK “If you know how to read financial statements, it goes a long way to helping any reporter or anybody else not to have to rely on official publications from the people running these companies or the regulators who protect them.� — Jonathan Weil, former Wall Street Journal reporter who wrote first Enron story, now Bloomberg news columnist. Source: Audit Interview, Ryan Chittum, Columbia Journalism Review 14 WHO’S RUNNING THE COMPANY? Investigative reporting, though, is different. It requires enterprise and ingenuity on the part of the reporter, who is exploring uncharted territory and making new discoveries and connections... ? In what press reports called one of the largest cases in Croatian judicial history, seven former company execu- tives and their business partners were charged with WHAT DO YOU KNOW? defrauding Podravka of at least 54 million euros, and as the case expanded, the country’s former deputy prime Quick Quiz minister was forced to resign over charges that he, too, 1. Why should a board have independent was connected with the scheme. directors? Podravka replaced its management and supervisory A. They can take over for executives if boards, but in March 2012, the case continued to make necessary. headlines. B. They are able to make decisions free of conflict of interest Writing about such company practices before the fact, C. They do not hold large share positions in rather than dissecting the causes after a meltdown, is the company the difference between explanatory reporting — or what some call “archeological� reporting — and investigative 2. Who has primary responsibility for risk reporting. Explanatory reporting reconstructs how and management in a company? why an event occurred. That kind of journalism can be A. The CEO valuable and instructive. It often follows revelations from B. Board of directors regulators or court trials. C. Shareholders Investigative reporting, though, is different. It requires en- terprise and ingenuity on the part of the reporter, who is 3. Scorecards are useful ways to: exploring uncharted territory and making new discoveries A. Determine whether companies are follow- and connections, not covering ground already traveled by ing good corporate governance practices someone else. B. Figure out which companies’ shares are As more business journalists become adept at covering likely to go up companies’ inner workings, and probe more deeply, they C. Find out which directors serve on multiple may recognize and report on irregularities before they boards explode into scandals. (For websites of organizations that provide training, information and support for investigative Answers: 1. B, 2. B, 3. A reporting, see Chapter 7.) n WHO’S RUNNING THE COMPANY? 15 CHAPTER 1 What’s good governance, and why should journalists care? SOURCES Chapter 1 Editor’s note: The following sources were consulted in the preparation of Chapter 1. Most of the websites are accessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS Manoj Shivanna, “The Satyam Fiasco, a Corporate Gover- Beverly Behan, “Governance Lessons from India’s Satyam,� nance Disaster,� case study, Monash University, 2010. Bloomberg BusinessWeek, Jan. 16, 2009. http://bit.ly/I74BHa http://buswk.co/HMu6Po “Good News About Bad Press: For Corporate Governance, Catherine Belton and Neil Buckley, “Russia’s Banks: Collat- Humiliation Pays Off,� 2007, Knowledge@Wharton, 2007. eral Damage,� Financial Times, Sept. 22, 2011. http://bit.ly/IGn8Nh http://on.ft.com/INw0Pe “South Korea’s Samsung President Resigns Over Corruption Michael J. Borden, “The Role of Financial Journalists in Scandal,� April 4, 2008. http://bit.ly/I74R8T Corporate Governance,� research paper, Cleveland-Marshall College of Law, Cleveland State University, October 2006. “Lee Returns to Chairman’s Role After Pardon,� Financial http://bit.ly/ItvWXD Times, March 24, 2010. http://on.ft.com/IGnfZf Ryan Chittum, “Audit Interview: Jonathan Weil,� Columbia Journalism Review, Nov. 14, 2008. http://bit.ly/Itw6OL BOOKS AND STUDIES Anya Schiffrin, editor, “Bad News (How America’s Business Nathanial Parish Flannery, “Did Management Problems at Press Missed the Story of the Century),� The New Press, New TEPCO Cause Japan’s $15B Radiation Leak?� Forbes, May York, 2011. 27, 2011. http://onforb.es/HEdjA5 Rebecca Smith and John R. Emshwiller, “24 Days (How Two James Fontanella-Khan, “Tata Succession Hands Over Wall Street Journal Reporters Uncovered the Lies That De- Daunting Task,� Financial Times, Nov. 24, 2011. stroyed Faith in Corporate America),� HarperBusiness, 2004. http://on.ft.com/HB37I6 Bob Tricker, “Essentials for Board Directors,� The Economist Joe Leahy, “Tata Searches for an Heir,� Financial Times, in association with Profile Books Ltd., Bloomberg Press, Sept. 5, 2011. http://on.ft.com/HDG9AZ United States and Canada, 2009. Dean Nelson, “Feud Between Reliance’s Ambani Brothers “Japan in Focus: Why Risk Management Matters,� The GMI Threatens Indian Economy,� The Telegraph, Aug. 27, 2009. Blog, June 28, 2011. http://bit.ly/HEtslE http://tgr.ph/I73Ail “Improving Business Behavior: Why We Need Corporate Melissa Preddy, “Track Executive Shifts to Spot Local Cor- Governance,� (speech following adoption of the review of porate Governance Stories,� Donald W. Reynolds National 2004 revision of OECD principles of corporate governance), Center for Business Journalism, Businessjournalism.org,� Organization for Economic Cooperation and Development. Jan. 21, 2011. http://bit.ly/IGmvTM http://bit.ly/J11k9R Scott Sherman, “Enron, Uncovering the Uncovered Story,� Website aggregating corporate governance codes world- Columbia Journalism Review, March/April 2002. wide. http://bit.ly/IttIHR 16 WHO’S RUNNING THE COMPANY? CHAPTER 2 The all-important board of directors The board of directors, the highest governing authority Journalists covering boards need to understand the defini- within a company, offers a fertile source of stories. tions used to describe directors and the boards them- selves. Often, however, journalists’ scrutiny seems to come only when problems arise, such as when a company becomes An executive director is also an executive of the company, embroiled in accounting scandals, or when its CEO is such as a CEO or CFO. A non-executive director is not forced to resign. part of management and is valued for external perspec- tives and unique expertise. But the board’s unique power and its role in charting the company’s activities make it worthy of continued attention. “Non-executive� directors should meet in private regularly, without the presence of “executive� directors, according The board’s responsibilities broadly are to protect the to governance experts. company’s interests and the shareholders’ assets and ensure a return on their investment. All strategic deci- sions either originate with the board or must be approved The independent director by the board. More specifically, the board hires and fires the top executives; monitors company performance; ap- Definitions of what “independent� means vary, but proves financial statements; decides executive compen- usually require the person to be free of financial, family sation and benefits; assesses and plans for potential risk and employment ties, or any other meaningful relation and makes other major decisions, including whether to with the company, its directors and employees. approve mergers or acquisitions. Other criteria include: Above all, the board sets the tone for the entire company, n Not a recent employee ensuring that it acts ethically, legally and responsibly. n No recent material business relationship with the company n No recent or current compensation from the For a list of board duties, see OECD company, other than director’s fee, share op- Principles of Corporate Governance, tions, performance-related pay or pension “The Responsibilities of the Board,� n No close family ties with any of the company’s page 24: http://bit.ly/HArlwY advisers, directors or senior employees n No cross-directorships or significant links with other directors through involvement in other Types of boards and directors companies or bodies To prevent the concentration of power and information n Not a significant shareholder in one or a few individuals, boards are advised to have a balance of executive and non-executive directors, some n Not a long-term member of whom are independent (see definition). Experts differ Source: “Corporate Governance Board Leadership over the number of independent directors a board should Training Resources,� Global Corporate Governance Forum, have, but it is generally accepted that one-third to one- International Finance Corporation, World Bank Group. half of a board’s directors should be independent. WHO’S RUNNING THE COMPANY? 17 CHAPTER 2 The all-important board of directors ness strategy. It may also include a COO (chief operating One-Tier Model Two-Tier Model officer), CFO (chief financial officer) and CIO (chief infor- mation officer), in addition to other top management roles, depending on the industry. Ownership GM GM level For definitions of each role within a cor- poration, see “The Basics of Corporate Steering and Supervisory Board Structure,� on Investopedia, a financial monitoring level education website that commissions spe- Board cialists in various financial fields to write Chair Management explanatory articles on topics of interest to Board Executive investors, and describes itself as an unbi- CEO level ased investing resource: http://bit.ly/HG44Qj In many countries, boards must have a specific propor- tion of independent directors. Power struggles and internal changes, such as the promo- tion, demotion or departure of an heir apparent, signify Boards of directors can be either one-tier or two-tier. shifts in a company’s hierarchy and future direction. n A one-tier, or unitary, board delegates day-to-day Changes in the board, including director resignations and business to the CEO, management team, or appointments, may signal important changes, too. That’s executive committee, and is composed of both why journalists should pay close attention to any such executive and non-executive members. This moves, which nearly always deserve a story. This means structure is most often found in countries with a going well beyond the company press release, which common law tradition, such as the United States, may not clearly spell out the real reasons for personnel the United Kingdom and Commonwealth changes. countries. When boards have close connections to management, n A two-tier, or dual, board divides supervisory and and few independent directors, corporate governance management duties into two separate bodies. advocates see the potential for problems. In some of The supervisory board oversees the management these cases, CEOs become dominant and the board may board, which handles day-to-day operations. This rubber-stamp management activities and proposals. A structure is common in countries with civil law survey in 2011 by J.P. Morgan’s Depositary Receipts (DR) traditions, primarily in Germany, but also in some business found this problem was acute in Latin America, companies in France and in many Eastern Euro- where boards have a low level of independence. pean countries. “…Concentrated leadership can lead to increased risk Tip for journalists: In a two-tier system, do tensions exposure,� wrote Nathaniel Parish Flannery, research exist between the two boards? These conflicts may lead analyst, in a posting about the J.P. Morgan survey for to news stories exploring a company’s ability to perform GovernanceMetrics International (GMI), which provides well. analysis and data on more than 20,000 companies world- wide to sovereign wealth funds, institutional investors and Board, management have different roles other clients. The board’s role and responsibilities differ from those of management. To cover a company effectively, journalists Among companies cited were those in Mexico owned by must figure out how authority is shared in the manage- billionaire Carlos Slim, the chairman and chief executive ment suite, and keep close track of changes among of telecommunications companies and other Mexican executives. The relationship between the board and man- firms through his Grupo Carso SAB. His vast family empire agement is equally important. controls more than 200 companies spanning industries including banking, telecoms, road-building and restau- The management team starts with the CEO, who runs the rants, according to newspaper accounts. day-to-day business of the company and sets its busi- 18 WHO’S RUNNING THE COMPANY? This is where directors play a key role, by thinking strategi- For more on Slim and his holdings, see: cally and ensuring that the shareholders’ best interests are http://tgr.ph/KEooiO represented by the board and that management is aligned with those interests. (See chart below.) Potential conflicts Examine the board’s composition, Journalists may come across the term “agency dilemma,� effectiveness used to describe the potential conflict between the share- The composition of boards of directors is one of the areas holders’ interests and those of the board. The board, targeted by good governance organizations such as GMI. persuaded by management, may be encouraged to seek The Corporate Library, which is part of GMI, developed a short-term gains at the expense of the shareholders’ checklist to help investors evaluate the independence and longer-term interests in the company. Shareholders may potential effectiveness of a board. These include: be reluctant to assume risks, and that reluctance can be construed by management to stifle growth or make the n Size of the board. There’s no magic number, but company less competitive. the average board size is 9 to 10 members. Boards Major Differences Between Direction and Management DIRECTORS MANAGERS Required to determine the future of the organization and protect its assets and More concerned with implementing board Decision-Making reputation. They also need to consider how decisions and policies. their decisions relate to stakeholders and the regulatory framework. They have the ultimate responsibility for the company’s long-term prosperity. Directors are normally required by law to apply skill and Duties, care in exercising their duty to the company Not usually bound by directional responsibilities. Responsibilities and are subject to fiduciary duties. They can be personally liable if they are in breach of their duties or act improperly. They can be held responsible sometimes for the company’s acts. Relationship with Shareholders can remove them from Appointed and dismissed usually by directors Shareholders office. In addition, a company’s directors are or management; they seldom have any legal accountable to the shareholders. requirement to be held to account. Provide the intrinsic leadership and direction at Day-to-day leadership is in the hands of the Leadership the top of the organization. CEO; managers act on the director’s behalf. Play a key role in determing the company’s Must carry out the ethos, taking direction from Ethics, Values values and ethical positions. the board. Related duties associated with the Company company’s administration can be delegated Administration Responsible for the company’s administration. to management, but this does not relieve the directors of their ultimate responsibility. In many countries, there are numerous statutory provisions that can create offenses of These statutory provisions do not usually Statutory Provisions affect managers. strict liability under which directors may face penalties if the company fails to comply. Source: Chris Pierce, “The Effective Director,� London: Kogan Page, 2003. WHO’S RUNNING THE COMPANY? 19 CHAPTER 2 The all-important board of directors that are too large may be unwieldy; boards that are Shareholders elect directors when they are proposed by too small may not be able to handle the workload. the board, usually at annual meetings. In Asia, companies commonly have controlling shareholders who can control n Number of independent outsiders on the board. A the nomination and election of board directors. majority is considered ideal by many observers. Term limits can vary by company and by country, but n The presence of executive, audit, compensation board terms generally last from one to three years. and nominating committees. Compensation and audit committees should be made up of indepen- dent directors. Some observers believe that the For an overview of the responsibilities of audit committee chairman should be a qualified or registered accounting practitioner — but again, boards and best practices, see: there is no universal agreement on this point. http://bit.ly/HDB765 n Limited directorships. A board member generally should serve on no more than three boards, and Check board diversity the boards should not have conflicting interests. Board members should have skills and experience that match the company’s needs. They also should have n Disclosure. Companies must disclose transactions enough clout to challenge top management or the chair- with executives, directors and other related parties man, if necessary. These challenges, sometimes leaked that might constitute a conflict of interest. by board members to journalists, make excellent stories that reveal a company’s inner workings. Common convention holds that directors should own enough shares in the company so that they have a vested In recent years, governance advocates and shareholder interest. On the other hand, corporate governance ad- activists have pressed to diversify boards, most notably vocates caution against directors who have such large by adding more women, and some countries have passed shareholdings and option grants that their judgment laws requiring it. could be impaired by the desire to see the share price rise through accounting maneuvers for a short-term gain. Advocates say that gender diversity leads to more variety in opinion, experiences, competencies and skills Directors should be paid adequately for their time on on boards. The advantages, they say, are balanced board business, and to compensate them for their exper- decisions, efficient oversight of financial management, tise and experience. enhanced accountability to shareholders and prudent risk management. “Independent� directors — outsiders with no connection to the company — should limit their shareholdings to less A 2012 report by GMI showed “incremental improvement� than 5 percent to maintain their independence, according in female representation on boards from the previous to corporate governance experts. The percentage varies year’s survey. The survey of 4,300 companies in 43 across countries; a new Companies Bill in India, expected countries found that women held 10.5 percent of the total to be enacted in 2012, proposes outside directors limit number of board seats, up from 10 percent the previous their share ownership to a 2-percent maximum. year. The percent of boards with no women at all fell just REPORTER’S NOTEBOOK Studies and reports by auditing and consulting These include: firms can provide ideas for stories. n Attracting independent directors n Opening up to private equity investment Moulishree Srivastava of LiveMint, the online n Thwarting fraud and managing risk business publication, used the expertise of a partner at Grant Thornton India as a jumping- Read the story: http://bit.ly/HArSyV off point for a story on corporate governance challenges facing Indian family businesses. 20 WHO’S RUNNING THE COMPANY? suggests reforms where needed. Boards may also establish an Executive Committee, which exer- STORY TOOLBOX cises the board’s power between meetings, and a Risk Committee, to anticipate and plan for poten- Story idea: Examine the structure of board commit- tial risks. tees for the companies that you cover. In the financial sector, it is increasingly common for n Does the board have all the recommended banking laws and regulations to prescribe that the board committees? establish certain committees and even spell out their n What kind of qualifications do committee composition and functions, particularly for risk manage- members have? ment. Companies may also appoint permanent or ad hoc n Do committee members have special committees on such matters as ethics, crisis management, expertise? (for example, members of the environmental policies, labor issues and technology. audit committee?) In special circumstances, a committee may be formed to n Are committee members independent? examine a potential conflict of interest or a possible ac- (see definition, this chapter.) quisition, when an independent opinion of non-interested board members is necessary. Certain committees, particularly audit, nomination, com- pensation and corporate governance, should comprise For more on gender diversity on boards, primarily independent directors, according to corporate see “Women on Boards: A Conversation governance best-practice guidelines. with Male Directors�: http://bit.ly/LEphFk Reviewing the composition of these committees may raise red flags. For example: slightly below 40 percent. For the first time ever, GMI said n Does the chairman tightly control all decision- its survey found that women held one in 10 board seats making? globally. n Do conflicts of interest exist? (For example, do any Audit Committee directors have separate business Dissecting board committees ties with the auditor? With major shareholders?) Boards set up committees to delegate activities, provide n Is board expertise adequate? (Does the Audit Com- detailed analysis on technical issues and make recom- mittee include members with financial and account- mendations, which the full board typically must approve. ing expertise?) The board retains full responsibility for the issues del- egated. Committees allow directors to focus on particular areas, including those in which they may have special expertise. Committees report back to the board and also For other red flags on board committees, filter management proposals so they become strategic see: http://bit.ly/HGJADd issues when presented to the board for decision. Of the many committees a board may set up, the princi- pal ones are: Learn to spot red flags n Audit — selects and oversees auditors’ work Once a company has imploded, the spotlight turns to the board and often illuminates what seem in retrospect to be n Compensation or Remuneration — recommends obvious problems. The board at India’s Satyam Computer how much the company should pay top manage- Systems Ltd. was stacked with insiders who were either ment in cash, shares and other incentives members of the controlling families, had close business n Nominating — seeks, evaluates and recommends or personal ties to the company’s leaders, or who had little qualified candidates for election or appointment to experience in the industry sector or financial expertise. the board of directors Problems may only come to light after a scandal has n Corporate Governance — reviews policies and erupted, but journalists can expose these problems in WHO’S RUNNING THE COMPANY? 21 CHAPTER 2 The all-important board of directors advance by diligent reporting. This means digging deeply But others disagree, saying that the split roles are not the into the background, experience, expertise and connec- best choice for many companies. In their view, one boss is tions of directors, executives and controlling sharehold- better because it avoids power struggles. ers. Check the directors’ board affiliations. Do any of More large companies are separating the roles, and most them serve on common boards and have relationships of the new legislation and corporate governance codes built on those connections? endorse separation, but it’s far from universally accepted Such digging can reveal unexpected — and newsworthy practice. — connections beneath the surface. The chairman/CEO combined role at Mexico’s Grupo “While ‘independent’ directors are usually independent Televisa S.A. was the target of criticism by GMI, which from the management of the company, many times these frequently spotlights company practices that violate good directors have significant connections either to other governance principles, often before journalists notice and board members or to significant shareholders,� says Dr. report on irregularities. Nasser Saidi, chief economist and executive of Hawka- Among GMI’s criticisms of Groupo Televisa: mah Institute for Corporate Governance in Dubai. n Televisa’s chairman and CEO, Azcarraga Jean, When independent directors resign from a board, journal- who inherited the company from his father, did not ists and investors take note. Such resignations are not appoint an independent chairman regular occurrences and may indicate deeper problems in the company. Resignations for “family� or “personal� n Only five members of the 20-member board reasons almost always deserve further digging by jour- appeared to be fully independent; several of them nalists. served on the boards of companies that do busi- ness with Televisa Two independent directors of China-based Automated Touchstone Machine Ltd. (ATM) resigned in September of n None of the non-executive members had significant 2007, saying they could no longer vouch for the compa- executive experience in television ny’s latest financial statements. The directors’ resignations n The board’s independence was “significantly af- had even more impact because one was the chairman fected� by the business relationships between indi- and the other a member of the audit committee at the vidual directors and between directors and Televisa Singapore Stock Exchange-listed company. GMI also criticized Televisa’s lack of independent board Such resignations became a regular occurrence at ATM committees and failure to appoint separate audit, com- before the exchange delisted the company in 2008. A similar alarm was sounded by a director of China Aviation Oil, also a Singapore-listed company, when she Among the questions that journalists might ask resigned in 2008 after two years, saying she no longer about the boards of companies they cover: could discharge her duties as an independent director n How long have directors served on the because of the board’s flouting of best practices. She board? also questioned the independence of certain other board n What is the length of a term for a director? members in a letter that she made public. n How many boards do directors serve on? What are their other interests in the company? Chairman and CEO: separate or n Do any of them serve together on other combined? boards? What kind of compensation do they The question of whether the roles of chairman and chief receive? executive officer should be separated is another issue n How many shares do directors have in the that deserves attention. company? According to proponents of the split roles, an indepen- n Have any directors sold shares recently? Is dent board chairman can better protect shareholder there a pattern? interests by leading the board while the CEO runs the n What is each director’s attendance record? business, eliminating many conflicts of interest. 22 WHO’S RUNNING THE COMPANY? pensation and corporate governance committees. The Use reports to pinpoint important issues chairman of Televisa’s audit and corporate practice com- Reports such as the CFA disclosure study can be gold mittee was an 80-year-old director who had transactions mines for journalists who want to do regular stories on cor- with the company, and the chairman and two other board porate governance. Research papers, surveys and blogs members were affiliated with Cablevision, which is owned also pinpoint potential conflicts or poor practices in corpo- by Televisa, GMI pointed out. rations, but often are ignored even by beat reporters who are covering the companies. Corporations are reviewed and rated on discipline, transparency, independence, ac- Be alert to compensation issues countability, responsibility and fairness. Board independence can be critical in the area of com- In reporting on the CFA disclosure study, for example, pensation, a hot-button issue for the last two decades in journalists could examine disclosures by the top com- developed markets. panies they cover and detail whether they comply with Sensational compensation scandals have been far more recommended best practices. Comparisons may also be prevalent in U.S. companies than in other parts of the made with other companies in the region or in the industry. world. But The Economist noted in 2008 that American- Annual surveys and scorecards by region are also useful style bonuses and incentives for top executives have be- to journalists searching for stories. The CLSA Asia Pacific come commonplace in many European companies, and Markets, an independent brokerage and investment group, the trend has only become more pronounced since then. ? Exchange-listed companies often disclose compensa- tion in proxy statements, the ballot sent to shareholders before the company’s annual meeting. Often this is the place where companies make disclosures about not only WHAT DO YOU KNOW? annual salaries for top executives, but also bonuses, ben- efits, share options and changes in retirement or separa- Quick Quiz tion agreements and pay. 1. What is the difference between an executive director and a non-executive Many stock exchanges in emerging markets do not require or enforce disclosure on executive compensa- director? tion, so journalists may find these numbers hard to find. A. The executive director heads a board A study by the CFA Institute Centre for Financial Market committee; the non-executive director Integrity, for example, found that compensation disclosure does not in Asian markets lagged behind international best prac- B. The executive director is also a member tice and needed improvement to protect investors. of management, while the non-execu- tive director is not “The current practice in Asia deprives share owners of C. There is no difference their right to know how much of the corporate funds they helped build are going to the individuals whom they have 2. Which characteristic would disqualify a entrusted to run the business,� the report says. “It also director from being independent? turns a blind eye on individual accountability.� A. A member of the company’s management In emerging markets, under-compensation, or even the B. An expert in the company’s industry lack of any compensation for non-executive directors, is a C. An executive at another company more pressing issue. Some companies pay non-executive board members a small stipend for each meeting, in- 3. One of the following committees is most stead of the preferred annual retainer. Failing to compen- common for a board of directors. The sate non-executive directors adequately may lead them others are optional. Which one is most to seek several board positions to boost their personal common? income, possibly diluting their interest in each company A. Mergers and acquisitions and their sense of responsibility. B. Audit committee C. Ethics Answers: 1. B, 2. A, 3. B WHO’S RUNNING THE COMPANY? 23 CHAPTER 2 The all-important board of directors with the Asian Corporate Governance Association, publishes a yearly survey of corporate governance in For a summary of the results of the 2010 Asia that covers 580 Asia-listed companies in 11 survey, see: http://bit.ly/IESikf countries. n SOURCES Chapter 2 Editor’s note: The following sources were consulted in the preparation of Chapter 2. Most of the websites are acces- sible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS “The Basics of Corporate Structure,� Investopedia. Annalisa Barrett, senior research associate, “It All Comes http://bit.ly/HG44Qj Down to the People in the Boardroom,� The Future of Corporate Reform, The Corporate Library, 2009. “Executive Pay in Europe: Pay Attention,� The Economist, http://bit.ly/HGJADd June 12, 2008. http://econ.st/HGNnR5 Nathaniel Parish Flannery, research analyst at GMI, “Tele- “Report Finds Over 40 Percent of the World’s Largest Public novela: Ongoing Board Accountability Issues at Mexico’s Companies Have Zero Women on Their Boards,� The Corpo- Televisa,� Forbes, June 9, 2011. http://onforb.es/IOMgNe rate Library, March 14, 2011. http://bit.ly/KD5CI6 Nathaniel Parish Flannery, research analyst at Governance BOOKS AND STUDIES Metrics International (GMI), “New Survey Highlights Ongoing “Bridging Board Gaps,� Study Groups on Corporate Boards Corporate Governance Concerns in Latin America,� Sept. blue ribbon panel, Columbia Business School and the John 27, 2011. http://bit.ly/J7LCtC L. Weinberg Center for Corporate Governance at the Univer- sity of Delaware, 2011. http://bit.ly/JyJ9OM Kalpana Rashiwala, “Independent Directors at ATM Quit- ting,� The Business Times (Singapore), Sept. 17, 2007. Corporate Governance Documents, including board respon- http://bit.ly/IlMhcz sibilities and best practices, Corporate Directors Forum. http://bit.ly/HDB765 Aude Lagorce, “Notable Executive Pay Deals in Europe,� MarketWatch. May 14, 2009. http://on.mktw.net/IS6LeO Corporate Governance Watch 2010, annual survey, CLSA Asia Pacific Markets and Asian Corporate Governance As- Ric Marshall, chief analyst, “Director Flags: Highlighting sociation (ACGA). http://bit.ly/IESikf Shareholder Concerns,� The Corporate Library, 2010. Independent Non-Executive Directors (A Search for True In- Michelle Quah, “Asia Needs to Improve Executive Compen- dependence in Asia), Asia-Pacific Office of the CFA Institute sation Disclosure: Study,� The Business Times (Singapore), for Financial Market Integrity, 2010. http://scr.bi/HRt9Vo March 3, 2008. http://bit.ly/Iv2nDM “Women on Boards: A Conversation with Male Directors,� Moulishree Srivastava, “Family Businesses Face Governance Global Corporate Governance Forum, 2011. Challenges,� LiveMint, Sept. 21, 2011. http://bit.ly/HP6I3M http://bit.ly/LEphFk Pavan Kumar Vijay, “New Companies Bill Takes Ethics to a Newer Level,� DNA India, Dec. 30, 2011. http://bit.ly/I9jdFN 24 WHO’S RUNNING THE COMPANY? CHAPTER 3 All about shareholders Many shareholders rely on journalists to track what coal company affiliated with London-listed Bumi plc. The companies are doing, whether boards are acting respon- shareholder, Nat Rothschild, a banking heir who owns 11 sibly and whether their investments are being managed percent of Bumi, attacked PT Bumi Resources for giving carefully. loans to affiliated companies even while it was trying to refinance high-interest bearing debt. In recent years, however, shareholders themselves have become more vocal and more actively involved in a range He wrote a letter to company directors detailing his com- of issues. Regulators in various countries have given plaints, and provided a copy to a reporter at the Financial shareholders more clout by giving them the right to make Times. nominations to the board. The collapse of the U.S. subprime-lending markets in 2008 and the ensuing global financial crisis prompted To see how the Financial Times handled sharper scrutiny of whether directors are fulfilling their this story about this lone shareholder responsibilities to shareholders. A flood of lawsuits and a railing against a big company, see: deluge of media coverage followed. http://on.ft.com/IF2PvR Shareholder revolts are not always sparked by lone activists or institutional investors (insurance companies, Knowing who shareholders are can help journalists learn pension funds and investment trusts that purchase large what issues a company might confront. Reporters should stakes in companies). Family-dominated companies may examine a company’s “beneficial owners.� These owners confront such revolts, too. enjoy the benefits of ownership, even though the shares are held in another name, such as a mutual fund or invest- Macau casino mogul Stanley Ho had to cope with an in- ment trust. In emerging markets and developing countries, ternal family struggle over control of his empire, ultimately securities markets are typically in the early stages and giving up most of his stake to resolve disputes among his may lack registration procedures for share ownership, heirs. making it difficult to track down owners. The Ho family saga played out in lawsuits among fam- ily members. Journalists scrambled to stay on top of the latest filings to make sure they weren’t scooped by rivals. Some shareholders get shut out Lawsuits are often the way journalists discover share- Institutional investors took the lead in criticizing Rupert holder actions, but having good sources among institu- Murdoch’s News Corp. after the telephone voicemail hack- tional investors, regulators, analysts, board members and ing scandal that focused attention on the news conglomer- company insiders is equally important. ate’s ethics and its board’s stewardship in 2011. To attract attention to their criticisms, shareholders often The California Public Employees Retirement System give information to the media. Sometimes a single share- (Calpers), the largest U.S. public pension fund, withheld holder can set off alarm bells and prompt reporters to its votes for the reelection of Rupert Murdoch and sons examine what a company is doing. James and Lachlan to the News Corp. board of direc- That’s what happened when a shareholder challenged tors, motivating other institutional investors to take action. the loan activities of PT Bumi Resources, the Indonesian In early March 2012, Murdoch’s son James resigned as WHO’S RUNNING THE COMPANY? 25 CHAPTER 3 All about shareholders executive chairman of News International amid mounting In India, the government has been taking steps to pre- shareholder pressures. vent corporations from stepping on small shareholders. Under the proposed new Companies Bill, expected to As many columnists pointed out during the weeks leading be enacted in 2012, companies must offer an exit plan to up to the company’s annual meeting in October 2011, shareholders who disagree with major company deci- shareholders — even those with significant stakes — had sions, such as diversification or a major acquisition. The little chance of achieving their goals. News Corp. has two proposal, not yet translated into law, would do more than classes of shares, with the Murdoch family’s B shares simply have dissenting shareholders sell their shares. holding 40 percent of the voting power. Some 60 percent Instead, a company would have to offer options to share- of the shares have no voting power. holders, possibly including buying back their shares. “These situations can leave the lower-class shareholders Institutional investors often provide tip-offs to journalists with a majority of the risk and no ability to push out man- about perceived problems at the companies where they agers who are either incompetent or evil,� op-ed colum- have large stakes. Calpers is particularly active. The pen- nist Dan Gillmor wrote in The Guardian (U.K.). sion fund questioned the competence of BP plc’s board Shareholders in emerging markets face similar prob- in 2010 because of its handling of the Gulf of Mexico oil lems, and protecting their interests has become a major spill. Calpers, which held 60.6 million shares of BP , report- concern. edly felt that the board had fallen down in overseeing the company’s U.S. operations even before the spill. Minority shareholders in Russia’s Yukos Oil Company were left out in the cold when the government effectively In April 2011, Calpers was among BP shareholders voting dissolved the company in 2004. The owner and founder, against the company’s reports and accounts at its annual Mikhail Khodorkovsky was sentenced to prison in Siberia. meeting, and also voted against reelecting the director There is ongoing debate about whether the trials and who had been the chairman of the BP board’s safety com- sentencing were politically motivated. mittee. Yukos investors, mostly foreign, have tried a variety of The company’s mishandling of the situation led in early legal maneuvers in an attempt to recover up to $100 bil- March 2012 to a $7.8 billion settlement with more than lion they invested in the company. Despite some minor 100,000 victims of the oil spill. victories in international courts, however, shareholders In emerging markets, where institutional shareholding is have won little relief so far. typically small, shareholders should be able to rely on journalists to dig into such stories and report on dissent within the company or among shareholders. Shareholder Look for minority shareholder stories associations, becoming more common and more active in Sometimes improper treatment of minority investors Asia and Africa, are a good source. prompts regulatory action. That’s what happened in a case involving Mexico’s TV Azteca. Shareholders revolted For example, Minority Shareholders’ Watchdog Group when the company’s chairman and CEO, Ricardo Salinas (MSWG) in Malaysia has a website (http://www.mswg.org. Pliego, came up with a scheme to finance a new telecom my/web/) and now publishes a weekly electronic newslet- venture by having the publicly traded TV Azteca invest in ter highlighting corporate governance issues and ongoing his new enterprise, without notifying shareholders. company transactions. The Securities Investors Associa- tion in Singapore (SIAS) (http://www.sias.org.sg/) performs Minority shareholders filed a lawsuit. Several years later, a similar function and has had several successes in repre- the U.S. Securities and Exchange Commission (SEC) and senting shareholder concerns to companies. Mexican authorities launched an investigation into the deal and the profits reaped by both Pliego and a col- Shareholders of the privatized Karachi Electric Supply league at the expense of the minority shareholders. Company in Pakistan objected to the company’s claims The SEC eventually charged Pliego with fraud. He settled the charges and paid a fine without admitting wrongdo- Another good resource is the Code for ing, but later he decided to delist his companies. Mexican Responsible Investing in South Africa: regulators amended laws to force companies to provide http://bit.ly/HDK2ol more disclosure to minority investors. 26 WHO’S RUNNING THE COMPANY? How We Got the Story Sometimes a tip can lead to a story about minority share- Veldhuijzen obtained a copy of the coal price directive by holders and their struggles. A good source network and using the Right to Information (RTI) Act, an Indian law that knowledge of corporate governance principles are essential allows citizens to access information from the government. to landing the story. He provided us with a copy of the document, which showed that a senior government official had sent the directive to Coal That’s what happened when officials at The Children’s Invest- India’s chairman. ment Fund (TCI) alerted journalists about its plan to sue individual directors on the board of the recently privatized Because the document came from an interested party, I veri- Coal India Limited. TCI is a minority investor in the company, fied its authenticity by checking the official websites to ensure which is 90 percent owned by the government. that the officials named actually occupied the posts. In this edited account, journalist N Sundaresha Subrama- We also needed the other side of the story, because the nian recounts how his newspaper, the Indian daily Business board of Coal India was being accused of failing to protect Standard, got the story: the interests of minority investors and failing in their fiduciary duties. My colleague in Delhi, who is in touch with ministry As soon as TCI tipped us, I sensed the potential of the story and company officials, contacted the company. Coal India — a classic David-Goliath tussle where an investor holding a refused to acknowledge the receipt of the letter from TCI. meager 1 percent of the company takes on the big boy that We were confident about the contents of the letter and had a controls 90 percent. I phoned Oscar Veldhuijzen, a partner first-person confirmation from the fund’s officials, so we went in TCI. ahead with the story. Veldhuijzen said he had been writing to the management All of this was accomplished in a couple of hours. We broke of Coal India ever since the fund invested in the company the story on our website that night, and it was published in the in the 2010 initial public offering. TCI decided to take action next day’s edition. after the government issued a ministerial directive reversing a hike in coal prices, a move that would seriously affect the Read the story: http://bit.ly/I9kRay company’s profitability. in its 2011 annual report that it had reduced post-tax The SEC encourages companies to disclose succession losses from 2010 to 2011. The shareholders’ association plans, and journalists should ask about them when a top charges the lower losses were achieved by “excessive executive takes a sudden leave of absence. Aside from load shedding� — a term used to describe cuts in elec- health, other reasons for abrupt CEO departures may be a tricity when demand is high — and “exaggerated billing.� rupture with the board or an offer from a rival company. Shareholders also criticized the company for decreasing Succession plans for the future leadership of a company generation of electricity and taking a larger government are particularly important for family-owned companies subsidy than when it was government-owned. (see Chapter 4). The age of the founder should prompt Read the story at: http://bit.ly/Hxaexa sharp questions on future succession. In 2011, perhaps prompted by the Jobs situation, a number of shareholder proposals requested that boards Shareholder issues: Check companies’ publicize their succession plans. Activists argued that if a succession planning chief executive’s illness could affect the future prospects Shareholder activists have wildly divergent opinions on of the company, the board has a duty to disclose it. certain subjects. The question of how much a CEO must disclose about his personal health set off a debate that Warren Buffett, CEO of Berkshire Hathaway, said informa- spanned several years as Steve Jobs, CEO of Apple Inc., tion about top management’s health problems should be took successive medical leaves from the company, but divulged. revealed few details publicly. “If I have any serious illness, or something coming up of It was The Wall Street Journal that revealed that Jobs an important nature such as an operation or anything like had a liver transplant in 2009, months after the surgery that, I think the thing to do is just tell Berkshire sharehold- occurred. WHO’S RUNNING THE COMPANY? 27 CHAPTER 3 All about shareholders ers about it. I work for them,� Buffett said in comments minimal and enforcement is weak. Still, it is worth check- to Stanford University’s Closer Look for an article on the ing proxy statements for: topic. n Details about compensation for executives and directors, including special benefits and loans Attend annual meetings to find stories n Issues that will be presented for a vote at the an- Some journalists believe it’s a waste of time to attend nual meeting, including director elections annual meetings, because many meaningful issues are n Background and experience for director candi- decided in advance of the events, and because in some dates should be provided, so that shareholders can cases, dominant shareholders determine the outcome in make an informed decision advance. But Melissa Preddy, a veteran business journal- ist, thinks the meetings are too valuable to pass up. n Share option grants “The meetings are a good place to mingle with corpo- n Information about existing directors’ experience rate executives and to beef up your contacts list with the and other board affiliations names of active shareholders, directors, analysts, blog- gers, community leaders with corporate ties and other The information for any proposal to be presented at the stakeholders,� Preddy wrote in a blog for the website of annual meeting should be clear and complete. If not, the Donald W. Reynolds National Center for Business journalists should ask why. Journalism. The proxy statement may also contain information about Read her article at: http://bit.ly/HPaTwk “related party transactions,� where companies disclose deals made with their own executives and directors (see In preparation for the annual meeting, journalists should Chapter 5 for more on related party transactions). carefully study a company’s proxy statement, the notice to investors, or ballot, usually issued about six weeks in ad- vance of the meeting. (For a definition of “proxy,� please For more information on how to find see the Glossary.) story ideas in a proxy, see Melissa The proxy statement, in countries where stock exchanges Preddy’s “Mine Proxy Statements for or securities regulators require them, should include Executive Pay and Other Stories�: details about several matters. However, in many newly http://bit.ly/J7XjAt created stock exchanges, disclosure requirements are REPORTER’S NOTEBOOK Alexey Navalny, an activist lawyer and blogger The company refused Navalny’s repeated in Russia, bought a few shares in several of the requests for documents to show where the country’s largest companies and then began charitable contributions were funneled, leading investigating their practices. He discovered him to observe, “No one [has] seen any traces that OAO Transneft, Russia’s monopoly pipeline of this charity. operator, had made $112 million in charitable “I spoke to many managers and employees of contributions in 2009, almost eight times the the biggest charity organizations, and they said amount of dividends paid to investors. they’d never seen this money.� The charity contributions had been going on for http://bloom.bg/HAykpC several years, and reached $300 million in 2007 Read a profile of Navalny by The New Yorker’s alone. Meanwhile, Transneft cut dividends to Julia Ioffe: http://nyr.kr/HGk4Bz private shareholders by 75 percent from 2003 to 2009, even as its profits were rising. 28 WHO’S RUNNING THE COMPANY? ‘‘ Business reporters and shareholders in companies from countries with high levels of corruption should pay close attention to the way large, Russian state-controlled companies are run and take a bolder stance against these pernicious practices.� -— Alexey Navalny and Maxim Trudolyubov Nieman Reports, Spring 2011 How to get the most out of the Some journalists shy away from gadflies, seeing them as annual meeting more likely to be pests than sources, but gadflies often Journalists should not assume that they automatically shine a light on questionable practices and board failings. will be admitted to annual meetings, though they usually Often, the first inkling of a major issue within a company are. Outsiders, including the press, have no legal right to comes from a gadfly shareholder proposal, so most busi- attend, unless they own shares. Some reporters — if their ness reporters cultivate sources among gadflies, while organizations allow it — as well as shareholder activists remaining wary. have gotten around this challenge by buying just one or two shares in a company, simply to be admitted to the annual meeting. Pay attention to shareholder rights issues Others simply work around the meeting, interviewing In the wake of widespread corporate scandals, the U.S. shareholders and others near the site or by telephone subprime mortgage meltdown and the global financial afterward. crisis, shareholders have embraced several initiatives designed to give them a stronger voice in companies “Sunshine is the best disinfectant, and companies that and better protection for their investments. Shareholder have nothing to hide welcome the press,� Nell Minow, propositions may provoke opposition and may generate then editor of the watchdog Corporate Library, told The story ideas. New York Times in 2005 after a company barred a Times reporter from its annual meeting. In the United States, under SEC regulations, any share- holder who owns more than $2,000 in shares or 1 percent Yahoo! Inc. drew the critics’ wrath in 2001 when it refused of a company is permitted to make a shareholder propos- to allow reporters to attend its annual meeting. Share- al. (The threshold may vary in other countries.) holders could listen to the meeting over the Internet. How- ever, journalists complained that the ban inhibited their Regulation and enforcement access to shareholders and prevented them from having In some markets, shareholders are pushing for tougher a full sense of the meeting’s tenor. regulations on companies, particularly on disclosure and accountability, and more rigorous enforcement. Any such In recent years, more companies have held Internet-only activism deserves the attention of journalists, who can annual meetings. Critics say this is just another way for also use the occasion to compare the rigor of their stock companies to muffle dissent and insulate themselves from exchange’s requirements with those in other countries. shareholders. Corporate officers, though, say the online meetings can attract more shareholder interest and give Corporate social responsibility more people a chance to attend. Shareholders and stakeholders — such as customers, neighbors of company facilities and vendors — and gov- Another reason for attending annual meetings is to keep ernments often demand that companies act responsibly in track of “gadfly� shareholders — activists who advocate protecting the environment, using natural resources spar- for change within a company, often by showing up at ingly and treating employees fairly. annual meetings and pressuring management and the board on their favorite issues or causes. WHO’S RUNNING THE COMPANY? 29 CHAPTER 3 All about shareholders From 2011 onward, the Bear Creek Mining Corporation has faced as many as 25,000 protestors in Peru. Strikes STORY TOOLBOX erupted, and major highways were blocked with boulders to protest a new silver mine farmers feared would interfere How easy is it for shareholders to participate in com- with their livelihood. Women in the Niger Delta of Nigeria pany meetings? Write a story on this in advance of a seized oil rigs to demand economic benefits from Chevron company meeting. Nigeria Limited. n Are there obstacles to voting? Governments may also apply pressure on companies that n Are there legal barriers, such as a requirement do business in their countries, especially when the busi- to notarize a proxy statement, or difficulty ness involves tapping into a country’s natural resources. mailing in proxies? In Tanzania, for example, President Jakaya Kikwete urged extractive industries to buy goods and services locally. n Are there artificial barriers, such as holding meetings in obscure, distant places at incon- “This will ensure a good relationship between the compa- venient times? nies and the communities where they operate, otherwise n Is sufficient time allowed on the agenda for hostilities between the two cannot be avoided,� he said. meaningful interchange and questioning? The way that boards address social responsibility sheds n How are notices of meetings delivered? In a light on their corporate governance policies and practices legal advertisement published in an official and their investment outlook. Allowing chemicals to pol- bulletin that no one reads, sent by mail, by lute surrounding communities may be a sign of deeper e-mail, or published on a popular publication? problems, from out-of-date manufacturing technologies to erosion in profits. n If the company holds annual meetings online, is there a way for shareholders to ask ques- Questions for journalists to ask when covering issues tions directly? involving corporate social responsibility include: n Is the company’s investor relations depart- n Is the company listening to complaints and ment responsive to questions about the addressing them? company? n Does anyone on the board or in senior manage- — Source: Adapted from Backgrounder on Corporate ment have conflicts of interest that allow them Governance, Initiative for Policy Dialogue to benefit from the company using vendors who violate employment and environmental protection laws? Investors point to the business case for corporate social n Do stakeholders have valid criticisms? responsibility, saying that companies can earn good n What will it take to fix the problems and what is the returns and outlast competitors. Pension funds, such as cost of the solutions? Norway’s, are using guidelines and codes to evaluate whether companies in their portfolio or under consider- n Is there any cover-up? ation are good corporate citizens. More than 550 invest- ment funds managing $18 trillion have signed U.N. Prin- Watch to see whether crises arising from CSR conflicts ciples for Responsible Investment, a set of international lead to changes in leadership, harm the company’s repu- guidelines, using their capital as clout. tation and profits, create political problems for the govern- ment or press regulators to impose workplace, environ- Clashes between companies and community activists mental and other regulations. and investors are ideas for good news stories. For several years, Coca-Cola Co. in India has been under pressure to Institutional investors and nongovernmental organizations, resolve water-scarcity problems farmers say are caused such as environmental groups that have done indepen- by Coke’s bottling plants. For a story on the controversy, dent evaluations of companies, are typically good sources which also involves Intel Corp. in China, see: for corporate social responsibility stories. http://bloom.bg/HRwPGC To better understand whether companies observe best practices, compare their track record with guidelines from 30 WHO’S RUNNING THE COMPANY? CLSA Asia Pacific Markets, which does an annual review Beware of ethical pitfalls of companies in Asia; the United Nations Global Com- Journalists who buy shares to gain insight into a company pact; the Equator Principles of the International Finance or to write a story should keep ethical considerations in Corporation; and the U.N. Principles for Responsible In- mind. As long as the purchase is above board and trans- vestment developed by the world’s largest pension funds. parent, and the amount purchased is minimal — one or two shares — it poses no problems. These best practices include: But any subterfuge can be problematic. Wall Street Tag-along rights Journal reporter Dennis Berman pretended to be his late Protects minority shareholders if a majority shareholder grandmother in an attempt to buy shares in social net- sells a stake. Under this rule, if adopted by a company, working website Facebook through SharesPost, a market minority shareholders have the right to join the transaction for trading in nonpublic technology companies. Berman’s and sell their shares. goal was to test whether the system would detect his at- Separate chairman/CEO tempt to dodge the rules. See Chapter 2 for discussion of this issue. Berman defended his actions, saying that “applying a sim- Say on pay ple test to an entire way of doing business helped shed Gives shareholders a nonbinding vote on executive com- light on an important topic for investors and markets...� pensation. In many countries, shareholders have been However, he was severely criticized by rival reporters, in- given this right as an advisory vote. Negative advisory cluding Reuters blogger Felix Salmon, for misrepresenting votes are worth following, especially if they occur in suc- himself. Salmon called it “a cheap stunt,� and questioned cessive years. Berman’s ethics. (See Chapter 7 for more on ethics for For a story on Australia’s “two-strikes� compensation business reporters.) n policy, see: http://bit.ly/HPb2Qv Be alert for possibly shady deals Regardless of whether shareholders take action, journal- ? WHAT DO YOU KNOW? Quick Quiz ists should be alert to company actions that may not be in investors’ best interests. 1. Tag-along rights means: A. Public citizens may attend a company’s For example, in 2007, China National Offshore Oil Cor- annual meetings poration Ltd. (CNOOC), which is listed in Hong Kong, B. Minority shareholders can join in if a sought to deposit funds for three years with another, majority shareholder sells a stake state-owned company. Such a maneuver could have C. A method of voting on director exposed shareholders to the risk of losses in an entity nominations they didn’t own, so more than 52 percent of independent shareholders voted against the scheme at an extraordi- 2. Succession planning is the nary meeting called to consider the move. responsibility of: A. Shareholders Alert journalists might have noticed that CNOOC had B. Current managers engineered a similar deal in 2004. Shareholders had C. The board of directors approved that transaction, but they had received short notice for the shareholders’ meeting, held during a holi- 3. “Say on Pay� means: day. A Bloomberg story at the time noted that “Chinese A. Board chairman decides CEO state-owned enterprises have been criticized for tapping compensation profits from their publicly traded units…without sharehold- B. Compensation committee makes a ers’ knowledge.� decision C. Shareholders have an advisory voice Hong Kong regulators later publicly censured CNOOC for violating disclosure rules on that 2004 transaction. in compensation issues Answers: 1. B, 2. C, 3. C WHO’S RUNNING THE COMPANY? 31 CHAPTER 3 All about shareholders SOURCES Chapter 3 Editor’s note: The following sources were consulted in the preparation of the Chapter 3. Most of the websites are ac- cessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer; registration required. ARTICLES AND PAPERS Richard Siklos, “Phone Company Bars Journalists from An- Dennis Berman, “Meet My Departed Grandma, Fledgling nual Meeting,� The New York Times, Dec. 12, 2005. Facebook Investor,� The Wall Street Journal, April 12, 2011. http://nyti.ms/HGdWcL http://on.wsj.com/HGk9VE Walter Stuart and Jessica Mussallem, “Shareholder Suits: You Maryann Bryant-Rubio, “TV Azteca: A Case Study of Corpo- Ain’t Seen Nothing Yet,� Corporate Board Member, January/ rate Governance in Mexico,� academic case study, Colum- February 2009. http://bit.ly/JT6uFz bia University, New York, Chazen Web Journal of Interna- tional Business, Winter 2005. Tim Webb, “Yukos Shareholders Win First Round in Legal http://bit.ly/IEyn7r Battle,� The Guardian, Nov. 30, 2009. http://bit.ly/HRAOmG Jason Corcoran and Henry Meyer, “Transneft Says Higher Xioa Yu and Darren Boey, “CNOOC to Seek Approval for Dividends Would Deprive Orphans, Sick,� Bloomberg, Transfers to Affiliate,� Bloomberg, April 20, 2004. April 19, 2011. http://bloom.bg/HAykpC http://bloom.bg/HGneVS Maureen Nevin Duffy, “BP Shareholders Send Message at “A Bunch of Angry Mexican Shareholders,� BusinessWeek, Annual Meeting,� Institutional Investor, April 21, 2011. June 28, 1999. http://buswk.co/HxeZqN http://bit.ly/IOWrBe “CEO Health Disclosure at Apple: A Public or Private Matter?� Dan Gillmor, “Why Rupert Murdoch Should Announce a New Stanfordknowledgebase, Stanford Graduate School of Direction for News Corp,� The Guardian, Oct. 19, 2011. Business, Jan. 25, 2011. http://bit.ly/IFkaVo http://bit.ly/HDUtZ6 “Despite Business Tradition, Yahoo Barring Reporters from Julia Ioffe, “Net Impact — One Man’s Cyber Crusade Annual Meeting,� Associated Press, April 26, 2001. Against Russian Corruption,� The New Yorker, April 4, 2011. http://bit.ly/IlSfdi http://nyr.kr/HGk4Bz “KESC Losses Decline Due to Inflated Bills,� Dawn.com, Ross Kerber, “Analysis: Shareholder Meetings via Web Mute Karachi, Oct. 14, 2011. http://bit.ly/Hxaexa Dissident Voices,� Reuters, Sept. 24, 2010. http://reut.rs/IP0rln “Ricardo Salinas Pliego and family,� in “The World’s Billion- aires issue,� Forbes, Oct. 2010 http://onforb.es/HGVcWJ Craig McGuire, “What is a Corporate Gadfly?� The Share- holder Activist, Nov. 6, 2011. http://bit.ly/I9uKVJ “Russia Violated Rights of Yukos Oil Company, Rules Euro- pean Court,� Associated Press, Sept. 20, 2011. Alexei Navalny and Maxim Trudolyubov, “Russian Journalists http://bit.ly/IFkymM Need Help in Exposing Corruption,� Nieman Reports, Spring 2011. http://hvrd.me/J84PLR “Unlocking the Secrets of a Proxy Statement,� Business- Week, March 4, 2002. http://buswk.co/ILLOUC Melissa Preddy, “Mine Proxy Statements for Executive Pay and Other Stories,� Donald Reynolds Center for Business “Yukos Shareholders Win a Large Victory in Stockholm Journalism, April 27, 2011. http://bit.ly/J7XjAt Arbitration…� Investment Arbitration Reporter, Dec. 20, 2010. http://bit.ly/LCLOTD Felix Salmon, “Dennis Berman’s Ethics,� Reuters, April 18, 2011. http://reut.rs/HGCfVV 32 WHO’S RUNNING THE COMPANY? CHAPTER 4 Inside family-owned and state-owned enterprises State-owned enterprises (SOEs) and family-owned enter- economist and executive of the Hawkamah Institute for prises (FOEs), which dominate in most emerging markets’ Corporate Governance in Dubai. economies, can be difficult for journalists to penetrate. Understanding the family business Their structures may mimic those of publicly traded Worldwide, family companies create an estimated 70 per- companies, with boards of directors, similar management cent to 90 percent of global GDP annually, according to structures, published financial reports and shareholders. the Family Firm Institute Inc.’s 2010 global data survey. Many SOEs and FOEs are listed on stock exchanges. Stories about such businesses are often dramatic, But these companies may operate with few checks and featuring outsize personalities that are part of powerful, balances and limited disclosure, making it tough for jour- wealthy — and highly secretive — families. However, for nalists to unravel complex internal operations. journalists, family companies may pose difficulties be- cause of their lack of transparency. Increasingly, international watchdog and financial organi- zations are pressuring SOEs to operate more like public The terms “family-owned� and “family-controlled� are often companies, especially when it comes to disclosure. used interchangeably. But in general, family members are the major shareholders in a family-owned business, while In the Middle East, for example, there is increasing inter- in a family-managed company, the family may be a minor- est in expanded transparency for FOEs and SOEs. Fi- ity shareholder, but controls the company through kinship nancial experts observe that SOEs and FOEs are critical ties, management roles and ownership of special classes to the economy, yet in some cases, they operate without of shares that wield voting power. adequate internal controls and proper oversight. These companies have several benefits, including: “Private companies and family-owned enterprises (FOEs) constitute the backbone of the corporate sector and ac- n Long-term view in decision-making count for a large fraction of employment. It is this sector n Flexibility that needs to grow if the region is to tackle the unemploy- ment crisis and create jobs,� says Dr. Nasser Saidi, chief n Desire to build a business for future generations n Commitment of family management to company The organization of family firms can take On the other hand, family firms have common challenges. various shapes: Issues often include a board of directors that is not suf- ficiently independent; strategic decisions made by family n Wholly owned and managed by founders or members and rubber-stamped by the board; blurred lines their families between responsibilities of directors and management; n Public or private companies in which the and increased tensions among factions as the controlling founder’s family has a controlling stake and a family grows and matures. leading role in executive management as well The key issues, however, are: n Companies in which families still have a significant influence n Non-professional management. Family members often serve in management positions without proper qualifications. WHO’S RUNNING THE COMPANY? 33 CHAPTER 4 Inside family-owned and state-owned enterprises n Succession issues. According to economist agreed to pay $1.6 billion to acquire two companies run Dr. Joseph Fan’s research of the Asian market: by the sons of Ramalinga Raju, Satyam’s chairman and “In the five years after the company founder turns founder. Raju’s family ran Satyam — his brother was CEO over the reins to the next generation, companies — with just an 8 percent shareholder stake. in the sample declined in value by an average of But when the company attempted to acquire the two nearly 60 percent.� Given the importance of family family-owned companies for a huge price, sharehold- businesses for emerging markets, this issue poses ers revolted and the shares took a pounding. The board major challenges for economic development. reversed its decision on the acquisition. Many family businesses appoint a family council to co- Raju was forced to admit, in a public letter, that he had ordinate their interests and serve as the primary link be- falsified the books over the years, and that $1.04 billion in tween the family, the board and senior management. The cash and bank loans that the company listed as assets council also suggests candidates for board membership in the most recent quarter did not exist. Eventually, the and drafts policies on such items as family employment, company restated results for six years, from 2002 to 2008, compensation and shareholding. to delineate the fraud. Cultivating sources within the family council is key for How was Raju able to get away with the fraud for so many journalists who want to stay on top of developments. years, under the eyes of his board, regulators and audi- tors? For more on family businesses and how Should journalists have realized before the scandal broke they function, see “IFC Family Business that all was not right with the company? A BusinessWeek Governance Handbook�: http://bit.ly/JNjkqO story counted the undetected red flags at Satyam: n The board had six non-management directors, but four were academics and one was a former Be aware of family influence on the board government cabinet secretary. Only one member As always, journalists also need sources within the board, had previously served as top executive of a tech- both those connected to the family and independent nology company. directors. n The company had no financial expert on its audit Board independence was an issue in the aftermath of the committee. scandal at India’s Satyam Computer Systems Ltd. n Although Satyam separated the positions of CEO The Satyam fraud was revealed after the company initially and board chairman, both positions were occupied by brothers who also had a major interest in the company and were members of management. Questions to ask about family businesses: n The board had no independent board leadership. n Does the family have its own governing body to interact with the board and management? n Does the board have non-family directors? Examine structures of family companies Are they truly independent, or somehow still A “pyramidal� structure is common in family-dominated connected with the family? companies. Legally independent companies are con- trolled by the same family through a chain of ownership n How many generations of family have ruled relations. The controlling shareholder — usually one who the company? Are there generational ten- owns at least 20 percent of a company’s voting rights — sions? exercises control of one company through ownership of at n Does the company have a way to monitor least one other listed company. and address family conflicts of interest? Such companies can operate legally and ethically, but n Do unequal voting rights give family that kind of structure led U.S. investors to be wary when members a disproportionate role in share- Chinese Internet company Renren Inc. floated an IPO on holder decisions? the New York Stock Exchange in 2011. 34 WHO’S RUNNING THE COMPANY? As the investor website Motley Fool pointed out, the com- newspaper, detailed the family feud, which dated back to pany offering shares in Renren was a Cayman Islands- the 1950s, when the company’s Italian immigrant founder based holding company. The operating company for Ren- divided ownership of the company between his two sons. ren in China was actually Beijing Qianxiang Tiancheng Beer industry insiders said the family split was common Technology Development, which would continue to be knowledge, but Kirin apparently was not expecting the 99 percent owned by the Renren CEO’s wife, a Chinese resistance it encountered. citizen. As with all family business stories, writing authoritatively A dual-class share structure, in which some shares have and accurately about the inner workings of such a com- voting rights and others do not, also limited the influence pany requires good sources within the company, whether of outside shareholders — a typical situation in family- insiders or outsiders, and within the family. dominated companies. Despite those and other warning signs, Renren (RENN) To see how reporters handled this story, raised $740 million at $14 per share. see “Family Feud Upsetting Kirin’s Expan- The success of the IPO indicated that even red flags do sion Plans in Brazil�: http://bit.ly/IhYdK1 not deter investors who think they have spotted a high- flying company. Soon, however, investor concern over ac- counting practices at Chinese firms took a toll on Renren, among other Chinese companies, and its share price Mine lawsuits to uncover family secrets dipped to $4.05 in early 2012. Diligently reading and reporting on lawsuits helps jour- nalists draw back the veil on family firms, because their disputes may end up in court where many of the proceed- ings and documents are public. Feuding families make good copy Sometimes internal family feuds produce tabloid-style That was the case with a tabloid-worthy family feud that media coverage. In Mexico, for example, the Azcarraga erupted in 2008 at Hong Kong’s biggest property devel- family has controlled the largest television broadcaster, oper, Sun Hung Kai Properties Ltd. (SHKP), owned by one Grupo Televisa S.A., for three generations. of the richest families in Hong Kong. It wasn’t until the widow of the company’s former chair- The drama was triggered when the company’s chairman man was arrested and forced to relinquish her claim on a and CEO reportedly wanted to bring his lover onto the major stake in the company that observers began to look SHKP board. That prompted the CEO’s two younger broth- closely at how the company operated and at its board ers to stage a boardroom coup, ousting him and replacing composition. It often takes a major event, such as the at- him with their 79-year-old mother. The raft of subsequent tempted power grab at Grupo Televisa, for family tensions lawsuits included a defamation suit that the ousted CEO to surface. filed against his brothers, who had accused him in letters of suffering from manic depression and of being a “liar.� The Japan-based international beer company, Kirin Holdings Co., became embroiled in a family feud when it The consequences of these family struggles can be seri- tried to acquire a controlling stake in a family-controlled ous for shareholders. Brazilian beer manufacturer, Schincariol Participacoes e Representacoes SA. “What happens when family loyalty turns to family feud? In the case of SHKP , the company’s market value dropped About 50 percent of the shares in the Brazilian com- $4.6 billion over a seven-day period,� reporters wrote in pany that Kirin sought to acquire are held by a company Asia Times Online in a story at the time. owned by the Shincariol CEO and his brother, who are descendants of the founder. However, the other 49 per- Read the story at: http://bit.ly/ILNhdw cent of Shincariol shares are owned by a company run (The younger brothers became co-chairmen of SHKP in by cousins in the same family. 2011, replacing their mother. Their older brother remained The CEO and his brother were anxious to sell, but the a nonexecutive director.) cousins objected and went to court seeking an injunction. A story in The Asahi Shimbun, a Japanese national daily WHO’S RUNNING THE COMPANY? 35 CHAPTER 4 Inside family-owned and state-owned enterprises ‘‘ “In Asia, where more than 70 percent of businesses are family-owned, many of the dominant firms are in transition now, as the founders are quite elderly. If family disputes lead to decisions that damage the businesses, this could cause broader damage to these economies...� Watch for succession stories Succession at family-dominated firms is a particularly — Dr. Joseph Fan is a finance professor and co-director of the Institute of Economics and Finance at The Chinese University of Hong Kong. The 2011 study, “Kin in the Game,� by Pricewater- houseCoopers, found that 38 percent of family businesses tricky question. According to one global survey in 2011, surveyed had not nominated a caretaker management to 27 percent of such businesses expect to change hands step in if the CEO died suddenly before any of his chil- in the next five years. But 47 percent had no succession dren or other relatives were old enough to assume control. plans in place. A company also should welcome outsiders in manage- The sudden illness or incapacitation of a family company ment, according to many experts. CEO can be a major problem if there is no succession “Generally, the more professionals in management there plan in place. One of the overriding issues is whether are compared with family managers, the better run the there is a suitable candidate from within the family, or company should be,� Manesh Patel of Ernst & Young in whether an outsider will be considered. Mumbai told the Financial Times. Journalists should be alert to potential problems State-owned enterprises in SOEs, including: Journalists worldwide find themselves covering state- n Does the board have any directors not owned or state-controlled enterprises, with private busi- appointed by the government, who have a nesses in the minority. This poses special challenges, not degree of independence, or are all directors only because of the politics involved, but because such in some way connected with or formerly enterprises are usually secretive and unwilling to open connected with the government? their books or practices to the public. Yet they are often the backbone of a country’s economy. n Does the board rubber-stamp government policies? Underperforming SOEs undermine competition and thwart n Are company executives specialists in growth, says Dr. Saidi of Hawkamah Institute. the industry sector, or are they political The solution: “We need to level the playing field with the appointees? private sector, reinforce the SOE’s ownership function, n How is the government/company relationship try to delineate and avoid the mixing of political or social structured? policy and business decisions, improve transparency, empower SOE boards and improve their accountability,� n Is there political interference in management he says. decisions — for example, if cutting jobs would be counter to the political goal of full employment, will government intervene? Finding sources at state-owned Does the government encourage domestic n enterprises and foreign competition in the same sector A journalist’s best sources for SOEs are usually not pub- as its SOEs or effectively stifle it? licly filed documents, but insiders, middle-management employees, foreign investors, competitors, whistleblowers 36 WHO’S RUNNING THE COMPANY? in government, opposition party leaders, vendors or even Roger Agnelli, because of displeasure with his strategy of customers. stepping up exports to other countries. A hedge-fund manager tipped journalists to shady prac- Politicians had criticized Agnelli for several years, charg- tices at Russia’s state-owned oil company, Gazprom, in ing him with failing to create and keep jobs and cutting 2000. Bill Browder, manager of The Hermitage Fund, dis- investments after the 2008 financial crisis. He ignored their covered by reading Russian securities registration data pleas to build steel plants in Brazil and to cut back on iron that Gazprom’s managers were shifting corporate assets ore exports to foreign steel producers, such as China. to entities controlled by friends and relatives. Agnelli eventually paid the price for taking the company in a direction that did not have government support. Stories in the Financial Times, BusinessWeek and The New York Times eventually led to reforms within Gazprom, Similarly, Russian officials succeeding in getting rid of including the replacement of the CEO. Browder frankly CEO Bob Dudley of TNK-BP Ltd., a joint venture. London- admitted that he had a financial incentive for tipping off based BP plc’s 50-percent stake proved no match for the reporters. His investment in the company grew from $50 power of the Russian tycoons who engineered legal and million to $1.5 billion as the irregularities were revealed. regulatory pressure on the company in 2008. The hedge-fund manager had the time, expertise and re- Many Western managers, including Dudley, left TNK-BP sources to unravel Gazprom’s complex internal structure complaining that the Russian shareholders — aided by and figure out what was going on. He then passed that the government — were behind legal and regulatory pres- information along to select reporters, betting correctly sures on the venture. Ultimately, in a compromise reached that media attention would put pressure on the company in 2009, the board was whittled down from 13 members to to clean up its practices. six, with BP losing significant control, and a new CEO was appointed. TNK-BP touted the addition of independent directors The unfolding of the Gazprom story was to the newly reconstituted board, including former Ger- examined at a conference sponsored man Chancellor Gerhard Schroeder. But in early 2012, by the Weiss Center for International Schroeder and another independent director reportedly Financial Research at the University of resigned when TNK-BP took steps to sue BP for attempt- Pennsylvania Wharton School. Read about it at: ing to make a side deal with Rosneft, another major Rus- http://bit.ly/IhYdK1 sian state energy company. The Vale and TNK-BP experiences illustrate why journal- ists should pay close attention to how the state can influ- ence companies’ operations, even interfering with man- Watch government pull strings agement and ousting CEOs who do not follow directions. Politics play a major role in the operations of SOEs. Politics often play a role in companies that are ostensibly To increase profits and cut costs, for example, a com- free of government control. That’s often the case with pany’s best strategy might be to eliminate jobs and raise giant telecommunications companies, which usually are prices. However, its owner, the state, might oppose these heavily regulated and subject to political persuasion. and any other actions that would raise unemployment or fuel inflation. Regulators may look the other way instead In South Africa, union critics alleged that politics played a of cracking down on workplace-safety violations. role in the telecom firm Telkom’s decision to sell a portion of its interest in Vodacom, the largest operator in Africa, Even when the government is not the majority share- to British operator Vodafone, and that the tender process holder in a company, or no longer holds a direct owner- was corrupt. ship stake, it can meddle in corporate affairs and affect operations. The Communications Workers Union (CWU) and the South African Communications Union charged that various Brazil’s Vale S.A., the world’s biggest miner of iron ore, Telkom moves — which included outsourcing some of was privatized in 1997. But the government, which its operations — were linked to political upheaval, with wielded power through public sector pension fund invest- company executives seeking to “secure their futures� be- ments in the company, continued to dominate. In 2011, fore new political leadership could impose any changes, government pressure forced out the company’s CEO, WHO’S RUNNING THE COMPANY? 37 CHAPTER 4 Inside family-owned and state-owned enterprises according to reporter Lesley Stones’ article in Johannes- Transparency a major issue at SOEs burg’s Business Day. Typically, SOEs lag behind listed companies in disclosing information about operations, finances and management Labor organizations can be fruitful sources for journalists structure. when political interference threatens jobs, though their accusations must be weighed carefully for accuracy and The basic standards for disclosure should be the same fairness. as those for listed companies. Often, though, even when SOEs are listed on the country or regional exchange, such requirements are not enforced. Does the company file On the bright side annual and periodic financial statements? Are these au- That doesn’t mean that all state-controlled companies dited? By whom? Are shareholders adequately informed are mismanaged or manipulated. On the contrary, many and involved in annual meetings? are major revenue and job producers. As The Economist noted in a special report on emerging-market multina- tionals, the world’s ten biggest oil-and-gas corporations, For an in-depth discussion of transpar- measured by reserves, are all state-owned, and state- ency and disclosure standards for SOEs, backed companies account for 80 percent of the value of see “Guidelines on Corporate Gover- China’s stock market and 62 percent of Russia’s. nance of State-Owned Enterprises,� from Orga- nization for Economic Coorperation and Devel- Read the essay at: http://econ.st/HGWktw opment (OECD), page 16: http://bit.ly/IhYVXR Business Times of India acknowledged the problems with SOEs, but chose to focus on some that performed extremely well, such as Indian Oil, Steel Authority of India The Russian government-controlled oil company Transneft Ltd. and State Bank of India, among others. illustrated the difficulties shareholders can face when a state-controlled company refuses to disclose its opera- The Business Times focused on Kolkata-based Hindustan tions. It took a shareholder activist, Alexey Navalny, to Copper, which once had illustrated many of the prob- discover that even though the company cut dividends to lems that typically plague SOEs: too many employees, shareholders by 75 percent from 2003 to 2009, it suppos- poor economies of scale, inability to adjust to a declining edly gave $112 million in charitable donations in 2009. market. But a voluntary retirement policy helped cut the (See Reporter’s Notebook, Chapter 3, for more on how workforce from 26,000 to 6,000, and the company stream- Navalny pursued the company on behalf of shareholders.) lined its production methods and paid down its debt, becoming one of the Business Times’ success stories. Navalny, despite lawsuits he filed, has so far been unable to force the company to provide a list of recipients for its Read the story at: http://bit.ly/IlSYLF donations. Transneft calls the information “confidential,� even though the charitable contributions came from the company’s profits. The consequences of poor governance at SOEs can STORY TOOLBOX have far-reaching implications. Typically, they significantly underperform, thus depriving the public of benefits. Ulti- Examine the background, expertise and connections — mately, journalists should ask whether the company has a business and personal — of directors and managers of sustainable business or must rely heavily on government several SOEs in your country. subsidies. To check on whether an SOE is complying with minimal In many cases, such information is not made public by disclosure, journalists should ask these questions: the company or included in its disclosures. That means extra digging by journalists to find biographical informa- n Is there a clear mandate with specific objectives tion on key officials, to determine whether they have the set for the company, including company priorities, expertise the business needs and how connected they available on the company website? are to the government or other key players. n Are special benefits, such as low-cost loans, pro- vided to the company detailed publicly? 38 WHO’S RUNNING THE COMPANY? REPORTER’S NOTEBOOK The Financial Times’ Kevin Brown examined the struggles of Stanley Ho’s Macao gambling empire. This difficulties of succession planning in family com- kind of story is ideal for countries where family compa- panies, particularly those in Asia. His story cites nies dominate. a number of examples, ranging from Indone- Read the story: http://on.ft.com/HxfCjX sia’s Bakrie family, to India’s Tata, to the internal n Are there special obligations (such as free travel speculate that private controlling shareholders and own- for government officials on a state airline) that the ers, not the state, are behind the schemes. n company is obliged to provide? Are these dis- ? closed? Are these obligations specifically identi- fied? n Is the process for nominating and choosing board WHAT DO YOU KNOW? members disclosed? Quick Quiz n Is the background of the directors and manage- ment available to the public? Do they have exper- 1. What is tunneling? tise related to the industry? A. Separating management roles by function B. Directing profits to company activities Watch how shareholders are treated rather than dividends Just as in other listed companies, SOEs should treat all C. Transferring the company’s assets to shareholders equally. However, this is often not the case, deprive shareholders of value and many stories in recent years about SOEs involve 2. A “pyramidal� structure in a family- violation of minority shareholders’ rights. dominated company means: A. The founder is board chairman, other One of the methods SOEs used to deprive minority share- holders of their assets, particularly in Russia and Eastern relatives are in top management Europe during the early days of privatization, was called B. The family dominates the board of “tunneling.� This involves the transfer of resources from directors the company to individuals or entities they own, and can C. A group of legally independent include anything from selling assets at bargain-basement companies are controlled by the prices to loan guarantees at far below market rates. same family Tunneling can also be accomplished when controlling 3. A dual-class share structure, common in shareholders increase their own shares of a company family businesses: by diluting the value of minority shares, or even simply A. Gives one class of shares more power, outvoting minority shareholders. specifically voting rights B. Allows some shareholders to sell their Some post-Soviet privatizations are still making news: shares at a premium The Swiss federal prosecutor’s office recently charged C. Refers only to dividends six Czechs and a Belgian with money laundering and other charges for allegedly syphoning off company cash Answers: 1. C, 2. C, 3. A to allow themselves to take control of a Czech mining company in 1999. A recent academic research paper raised the possibility that similar kinds of tunneling activities are taking place today in Chinese companies. In this case, researchers WHO’S RUNNING THE COMPANY? 39 CHAPTER 4 Inside family-owned and state-owned enterprises SOURCES Chapter 4 Editor’s note: The following sources were consulted in the preparation of Chapter 4. Many of the website links are accessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS “Global Data Points,� Family Firm Institute Inc., 2010. Beverly Behan, “Governance Lessons from India’s Satyam,� http://bit.ly/HRCTyV BusinessWeek, Jan. 16, 2009. http://buswk.co/HMu6Po “Good News About Bad Press: For Corporate Governance, Humiliation Pays Off,� 2007, Knowledge@Wharton. Kevin Brown, “Succession Pains Make Family Planning Cru- http://bit.ly/IGn8Nh cial,� Financial Times, Oct. 11, 2011. http://on.ft.com/HxfCjX “Renren, China’s Facebook, Raises $740 Million…� Wired, May 4, 2011. http://bit.ly/HADylb Jason Corcoran and Henry Meyer, “Transneft Says Higher Dividends Would Deprive Orphans, Sick,� Bloomberg.com, “Swiss File Charges Over Alleged Tunneling of Czech Coal April 19, 2011. http://bloom.bg/HAykpC Miner MUS,� Czechposition.com, Oct. 24, 2011. http://bit.ly/HGoTKX Samnath Disgupta, “Hindustan Copper, In Its Element,� India Times, Aug. 21, 2011. http://bit.ly/IlSYLF “Will You Buy the Facebook of China?� The Motley Fool, April 28, 2011. http://bit.ly/IEIOIk Nathaniel Parish Flannery, research analyst, Governance Metrics International (GMI), “Tele-novela: Ongoing Board Accountability Issues at Mexico’s Televisa,� Forbes, June 9, BOOKS AND STUDIES 2011. http://onforb.es/IOMgNe “Corporate Governance/The Intersection of Public and Pri- vate Reform,� 2009, Center for International Private Enterprise Owen Fletcher and Dinny McMahon, “Investors Spooked by (CIPE). http://bit.ly/JssrvA China,� The Wall Street Journal, Oct. 1, 2011. http://on.wsj.com/HE0cOQ “Kin in the Game,� PwC Family Business Survey, 2010-2011. http://bit.ly/HGgZ4B Gaurav Ghose, “Call to Expand Disclosure Norms,� Gulf- news.com, Oct. 29, 2011. http://bit.ly/ILOAch “Guidelines on Corporate Governance of State-Owned Enter- prises,� Organization for Economic Cooperation and Devel- Emily Godson, “TNK-BP Directors Resign Over Lawsuit Bid,� opment (OECD), 2005. http://bit.ly/IhYVXR The Telegraph, Jan. 14, 2012. http://tgr.ph/IlTglD “Hot Topics: Corporate Governance Trends — Looking Back Samantha Pearson, “Brazil Raises Pressure on Vale,� Finan- as We Look Forward,� July 2011, Deloitte Development. cial Times, March 23, 2011. http://on.ft.com/IlTjOi “Tunneling Through Inter-corporate Loans: The China Lesley Stones, “South Africa: Telkom Not Picking Up on Cor- Experience,� Guohua Jiang, Charles M.C. Lee and Heng Yue, ruption Claims,� Business Day, Dec. 9, 2008. Nov. 2, 2009. http://bit.ly/HDSWOd Jonathan Wheatley, “It’s Official: Agnelli to Leave Vale,� Financial Times, April 1, 2011. http://on.ft.com/I9zSZR Jonathan Wheatley, “Metals and Mining: Government Intent on More Control,� Financial Times, Nov. 4, 2009. http://on.ft.com/HJ9mWI “Emerging-market multinationals: The rise of state capital- ism,� The Economist, Jan. 19, 2012. http://econ.st/HGWktw 40 WHO’S RUNNING THE COMPANY? CHAPTER 5 Toeing the line: regulations and disclosure Some of the most explosive corporate governance “Anyone carefully studying Daewoo’s books could detect scandals of the last two decades have revolved around misconduct of that magnitude,� Lee Dong Gull, a former deliberate fraud. Korean presidential economic adviser, told BusinessWeek in 2001. (For tips on how to recognize certain accounting Being able to spot irregularities in financial and nonfinan- gimmicks, see charts on spotting “shenanigans,� Chapter cial disclosures made in regulatory filings is a must for 6.) investigative business reporters. That often means read- ing the fine print and doggedly attempting to understand Lee added that those held responsible for such frauds the financial information and technical language. should include “the accounting firms and regulatory of- ficials who overlooked the fraud.’’ Financial enforcement and securities regulation agen- cies and stock exchanges should discover fraud and Stock exchanges and regulatory agencies are supposed launch an investigation. However, that doesn’t always to discover such manipulations, essentially by rigor- happen. Enron Corp. sneaked by the U.S. Securities and ously enforcing disclosure and filing requirements. Often, Exchange Commission (SEC) for many quarters before though, it does not work that way, for several reasons: investigators belatedly launched a probe. n Many exchanges and enforcement agencies in Most of the major corporate scams worldwide in the past emerging markets have lax rules, limited resources two decades took place under the very noses of regula- or are not skilled in handling complex laws and tors, auditors, banks and other financial institutions, to say regulations nothing of directors and shareholders. n Enforcement is weak or non-existent n Managers and financial experts within companies How do they get away with it? become expert at hiding their dealings In one of the largest frauds in history — though it certain- n Media are not diligent about reading and reporting ly has competition from subsequent events — managers on financial and other disclosures, or writing about of Korea’s Daewoo Group used accounting maneuvers companies that fail to file on time or omit critical in the late 1990s to commit a $15.3 billion fraud, which information included inflating the company’s equity by $32 billion. The scheme involved dozens of company officials, including Securities regulators are being pushed to toughen several who went to prison and paid large fines. enforcement, and the pressure has had some impact. In 2011, Vietnam’s market regulator, the State Securities The company’s founder and chairman was accused of a Commission (SSC), published the names of 14 listed com- host of criminal charges, sentenced to 10 years in prison panies that violated disclosure requirements, primarily by and directed to forfeit $22 billion, much of which he had late filing of financial statements. sent out of the country. The SSC’s tougher stance was prompted by the revelation As with most of the scandals covered in this Guide, jour- that Vien Dong Pharmaceutical (DVD), which was listed on nalists wrote about the events afterward, not in advance. the Ho Chi Minh Stock Exchange, concealed from share- The goal of media is to get out in front of a story like this holders and regulators that it was forced into involuntary by reporting on irregularities or suspicious claims before bankruptcy by heavy debt. But critics argue that warnings, they erupt in a scandal. Is that possible? fines and trading suspensions are not strong enough to WHO’S RUNNING THE COMPANY? 41 CHAPTER 5 Toeing the line: regulations and disclosure reform the market, and say that only by delisting offend- Mercado with helping the country get through the world- ing companies can regulators improve transparency wide financial crisis in 2008-2009. practices. Perhaps the most dramatic example of a success story is Brazil’s Novo Mercado, a special market for companies Read about the impact of Novo Mercado that voluntarily observe good governance guidelines. The at: http://bit.ly/IFrv7o market, created in 2000 by Brazil’s stock exchange, Bove- Read more about the origins of Novo Mercado spa, is credited with raising the standards of corporate at: http://bit.ly/HGhfRh governance in Brazil and setting an example for exchang- es in other emerging markets. Before Novo Mercado was launched, both domestic and foreign investors were wary of Brazilian companies, and Where to look, what to look for IPOs were rare. Although Novo Mercado got off to a slow One of the key areas to examine is related party trans- start, it now has more than 100 listed companies and actions, which involve a business deal or arrangement hosts frequent IPOs. between any two parties who are joined by a special relationship. This could be a deal between a major share- An executive of Brazil’s investor relations association even holder and the corporation, or between the corporation credited the governance improvements inspired by Novo and a relative of senior management or a director. The basic documents required by many regula- n Auditing firm changes tors and exchanges worldwide are similar to those n Major acquisition or divestiture required by the U.S. Securities and Exchange Commission (SEC). n Change in fiscal year n Delisting of company shares Unaudited periodic (often quarterly) financial statements (Form 10-Q). Look for: n Regulatory actions n Abrupt shifts in revenue, profits, expenses, n Bankruptcy or receivership cash flow, assets and liabilities. What accounts for the change? Annual proxy statement (Schedule 14A), which discloses questions to be put to a shareholder vote, n Share purchases — Has the company in- including election of directors, along with information on creased or decreased its share buying? Why? executive compensation n Current litigation — Are there any new lawsuits, Registration statements, including prospectuses for or cash reserved for a possible loss? If so, what share offerings (Form S-1, or Form F-1, for foreign pri- is the nature of the anticipated loss? vate companies going public) n Spending plans — Are major purchases ahead? Insider holdings and transactions (Forms 3, 4, and n M&A update — What is the impact of a recent 5), including initial holdings of stock by the company’s merger or acquisition? Is there a sound expla- executives, changes in ownership and purchases or nation for the change in revenues and profits? sales Audited annual financial statements (Form 10-K). All For a thorough explanation of each filing requirement items listed above will also appear in the 10-K. and how to find filings for companies in the SEC’s free EDGAR (Electronic Data Gathering, Analysis and Re- Current information, including major events that trieval) database, see: http://1.usa.gov/Ivpgae shareholders should know about (Form 8-K), including: (For a more detailed discussion of how to read and in- terpret numbers in periodic and annual financial filings, n Departure or illness of a key executive or board see Chapter 6. For an explanation of proxy statements, member see Chapter 3.) 42 WHO’S RUNNING THE COMPANY? Related-party transactions might not be abusive, but companies can use these transactions to inflate sales or lower costs and show higher profits on their financial statements. Listed corporations are required to disclose such rela- CEO uncovers fraud at Olympus tionships in the annual report, and all companies should Olympus Corp., the Japanese camera and endoscope disclose related party relationships to shareholders. manufacturer, delayed its fiscal second-quarter earnings release in November of 2011, after abruptly removing its Related party transactions might not be abusive, but British chief executive — two red flags in quick succes- companies can use these transactions to inflate sales sion. The CEO had raised questions about past acquisi- or lower costs and show higher profits on their finan- tions that involved multimillion-dollar payouts for compa- cial statements. Such transactions can also be used to nies that seemed to have negligible value, and he made transfer funds or assets out of a publicly owned business those questions public. to insiders who control or own privately held companies (see “tunneling� in Chapter 4). The deals, which had occurred over several years, were used to hide investment losses dating back two decades. Red flags for journalists include ties of board members The scheme and cover-up reportedly involved top com- to other companies that are vendors; family members in pany officials, including the chairman, president and the key positions of the companies doing business with one internal auditor. another; and disproportionately high costs for supplies of goods and services. Deeper probing into the companies that Olympus ac- quired might have raised suspicions much earlier. A sub- Boardroom infighting can also be a tipoff to suspicious sequent investigation by a panel appointed by the board related party transactions. That was the case at Kenya’s found that fees to buy the companies in some cases Cooper Motor Corporation (CMC), where the company’s amounted to more than a third of the value of the acquisi- managing director alleged that two directors had formed tions themselves. These maneuvers went undiscovered for a syndicate to siphon off funds to offshore accounts. The years, though. chairman of the Capital Markets Authority in Kenya admit- ted that the regulator originally heard about the charges After the board chairman resigned and the special panel from the press, and said the board did not fully disclose was appointed to investigate the acquisitions, the Tokyo its financial position in regulatory filings. Stock Exchange (TSE) pressed Olympus for more disclo- sure and criticized its slow reaction to investor concerns CMC’s shares were suspended from trading while the that led to a sharp decline in share value. The TSE threat- regulator investigated the various internal allegations, ened to delist Olympus. which included allegations that a former board member had overcharged the company for its services. Such Such actions, though, are not necessarily good for conflicts of interest led to the boardroom wars, according shareholders. The Asian Corporate Governance Associa- to an analysis of the CMC situation and its implications for tion publicly asked the TSE not to delist Olympus, saying investor confidence in The Daily Nation, Nairobi. “delisting is generally not a favorable penalty for securities malfeasance since it punishes shareholders as much as Read the story at: http://bit.ly/HDSWOd the managers responsible.� ACGA also noted that, on exchanges in most developed countries, a company such as Olympus would not be WHO’S RUNNING THE COMPANY? 43 CHAPTER 5 Toeing the line: regulations and disclosure How can journalists find stories by monitoring company disclosures? Here are some tips: STORY TOOLBOX 1. Become familiar with regulatory requirements Story idea: Track share trades by prominent investors to The role of stock exchanges and security regulators in uncover stories about which shares are hot and which making sure companies operate legally and in the best might be declining. interests of shareholders is especially important in emerg- ing markets, where regulation and enforcement tend to Example: Any shares traded by a major investor, such be weak. However, such requirements vary widely, and so as Warren Buffett’s Berkshire Hathaway, attracts media does enforcement. attention. Even though Buffett had long shunned invest- Journalists should become familiar with listing and delist- ment in technology shares, journalists noted in fall of ing regulations for the exchanges they cover, and then 2011 that he had bought stakes in IBM and Intel. monitor enforcement diligently. This includes paying atten- http://aol.it/HEaj6c tion even to the basics, such as whether companies file financial statements on time. Listing and delisting regula- tions are published by the exchanges themselves or by the securities regulatory agency, often on their websites. delisted, because “it remains a going concern with a reasonable business.� Filing delays often indicate that something is amiss. Trans- mile Group, a Malaysian freight operator, delayed filing its Look for suspicious claims annual report in 2007 for several months. When it finally Journalists can dig beneath the surface and go beyond filed, the company showed a new loss of $36.05 million. paper filings to uncover irregularities. The late filings followed the disclosure that the company had overstated its revenues in 2004 and 2005. Reporters from Canada’s The Globe and Mail and re- search firm Muddy Waters alleged in the fall of 2011 that As a result of this scandal, two independent directors Chinese company Sino-Forest Corp. — Canada’s largest of Transmile’s audit committee were later sentenced to publicly traded timber company — overstated the size prison and fined for making misleading statements in the and value of its timber holdings in China’s Yunnan Prov- company’s quarterly report to Bursa Malaysia. ince. (For a look at how reporters verified the discrepan- cies, see Reporter’s Notebook, this chapter.) Even if there are no losses or false statements connected with filing delays, such delays can indicate that the com- Sino-Forest denied the allegations, but after doubts were pany’s financial functions do not have sufficient resources raised, the Ontario Securities Commission accused the or are incompetent. company of misrepresenting its revenues and exag- gerating its timber holdings. The OSC temporarily halted In contrast, improvements in governance and compliance trading in the company’s shares and also asked that the with regulations can have a positive impact on a com- chairman/CEO and several company directors resign. pany’s reputation. In 2012, ratings agencies Standard & The Royal Canadian Mounted Police also got involved, Poor’s (S&P) and Renaissance Capital (RenCap) noted the launching a criminal probe into fraud allegations. improvement of the Nigerian banking industry, especially in the areas of risk management and governance. “Nigeria now has fewer, but larger, banks with better cor- For an opinion column on the conflict porate governance and regulatory oversight,� S&P said in that sometimes occurs between auditors’ a statement. opinions and investment research firms, Journalists who are knowledgeable about the regulations see: http://nyti.ms/HAEPZC in the sectors they cover, whether banking, commodities, manufacturing or other areas, are in good position to rec- ognize an important news development in press releases In most countries, failure to disclose information that has issued by regulators or, as in this case, reports from rating a “material� or significant effect on the company’s value agencies, reported in This Day, Lagos. incurs penalties. In addition, such disclosures must be timely. If they’re not, it’s a red flag for journalists and Read the story at: http://bit.ly/Hxh6Lg regulators. 44 WHO’S RUNNING THE COMPANY? REPORTER’S NOTEBOOK Sometimes probing into the truthfulness of a company’s was perpetrating a fraud by inflating the value of its disclosures requires a lot more than simply poring over timber holdings. paper filings and examining the numbers. Reporters spent two weeks in Yunnan Province, In fall of 2011, reporters at Canada’s The Globe and conducting interviews with local government officials, Mail traveled to China and spent two weeks on the forestry experts, local business operators and brokers ground there, investigating Sino-Forest Corp., the timber to break the story that essentially backed up Muddy giant that is listed on the Canadian exchange. Waters’ claims. The company continues to deny the Researchers at Muddy Waters LLC initially had raised allegations. alarms about the company, alleging that the company Read The Globe and Mail story: http://bit.ly/HAF1rW and directors, but can also include brokers, friends, family, What can regulators do? Depending on the stakeholders and consultants who may have access to country’s legislative, legal and regulatory frame- inside information that is not public. work, they can: Such disclosure requirements for share trading by insiders n Withdraw a company’s license to operate vary widely by exchange, and may be minimal in emerg- n Halt trading in its shares ing markets. But where such disclosures are required, journalists should keep track of any trades, changes in n Censure a company by so-called “name and ownership and trading patterns. They are worth a regular shame� statements monthly story on trades by directors and managers at top n Levy financial penalties companies. n Seek court injunctions The biggest insider trading criminal conviction to date n Apply to the court to freeze company assets involved Raj Rajaratnam, an investor who once ran Gal- leon Group, one of the world’s largest hedge funds. He n Censure, fine, prosecute and seek court received the stiffest prison sentence so far — 11 years injunctions against directors — and a $10 million fine in 2011 for trading on information provided by company insiders to rack up more than $50 million in profits. The SEC later assessed a $92.8 mil- 2. Pay attention to share trading by insiders lion penalty on Rajaratnam, the largest ever imposed for Some lay people associate the term “insider trading� with insider trading. illegal activity, but company executives and board mem- Even when not criminal, insiders’ decisions to buy or sell bers may buy and sell shares in the company as long shares often send signals to shareholders and would-be as they observe the disclosure regulations and strictly investors, making the information newsworthy. observe the company’s own internal policies on trading. It is illegal for any insider to use non-public information — special knowledge — for any share-trading purpose, The media reported on Nov. 3, 2011, that Sergey including tipping off friends or relatives to news that Brin, co-founder and a director of Google Inc., sold could cause shares to rise or fall sharply, so called “mate- 83,334 shares of Google Inc., or almost $48.5 million, rial news.� on Nov. 1. This was part of a planned strategy by Brin and co-founder Larry Page to sell off some of On most exchanges, corporate insiders — including their holdings over a period of time and give up ma- management and directors, along with any individual who jority control of the company. For the insider transac- has a significant stake in a company — must report their tion page where this was reported, see: holdings and transactions in the company’s shares. http://yhoo.it/L0IC8P Insiders are not only the company’s top management WHO’S RUNNING THE COMPANY? 45 CHAPTER 5 Toeing the line: regulations and disclosure For example, a prominent Thai family sold its remaining The former vice foreign minister, who was serving as an 49.6 percent stake in a leading Thai telecommunications adviser to the mining company, issued a press release company, Shin Corp., just three days after a new telecom- claiming that that CNK had secured a project to mine munications act took effect in 2006. The families netted about 420 million carets of diamonds in Cameroon. about $1.88 billion from the deal. Certainly other inves- tors and shareholders would have found such information The foreign ministry issued its own press release, which worth knowing. led to an immediate and sharp hike in the company’s share price. The former minister, Cho Jung-pyo, allegedly made more than $1 billion from the scheme. Prosecutors For more on how to track insider trading, said other government officials could be implicated as see: http://bit.ly/ISulrE well. 4. Examine auditors’ report In almost all the corporate scandals mentioned in this 3. Be alert for share manipulation Guide, auditing firms have been castigated for failing to Share manipulation can be difficult for journalists to de- spot fraud, and some have even been criminally charged. tect unless they are tipped off by regulators, brokers or analysts who notice unusual changes in share purchases The principal role of an auditor is to determine if financial and price fluctuations. reports were prepared in accordance with accounting rules and principles. Auditors note that they relied solely There have been occasions when journalists were ac- on the information provided by the company’s manage- cused by companies of influencing share prices by print- ment. Their opinions are limited to stating whether the ing negative news, but as long as the news is accurate company has complied with accounting rules and prin- and factual, journalists bear no responsibility for the effect ciples. of their reporting on share prices. In the United States, Arthur Andersen, which signed off A case of share manipulation led to a criminal investiga- on all Enron transactions and received large fees from the tion in February 2012 in South Korea, where a former company, was ultimately destroyed by such failures and a senior government official was accused of hyping the op- criminal indictment from the U.S. Justice Department, even erations of a South Korean developer, CNK International, though it was never convicted of wrongdoing in its audits. in a diamond mining project in Cameroon. In Italy, the reputations of bankrupt Parmalat SpA’s audi- Journalists writing about annual reports and finan- cannot provide an opinion on the financial statements. cial statements need to understand the various Adverse Opinion — Auditor asserts that financial state- types of audit opinions. ments do not present the financial position, results of In the audit report, the independent auditing firm operations and changes in financial position in confor- expresses its unbiased opinion on the company’s mity with generally accepted accounting principles. financial statements. Audit opinion provides “reason- Journalists should be alert for another paragraph that able assurance� that statements are free of “material� might be part of an auditor’s report, called “emphasis misstatements, but are not a guarantee. of matter.� These are used by the auditor to draw the Unqualified Opinion — No reservations about the reader’s attention to certain disclosures in the directors’ financial statements. report, and are becoming more common, according to some experts. Emphasis of matter statements are typi- Qualified Opinion — The auditor takes exception cally issued when there’s uncertainty about the com- to certain current-period accounting applications or pany’s ability to survive as a “going concern.� “Going cannot establish the potential outcome of a material concern� means that there is a reasonable expectation uncertainty. that the company will continue in business for the next Disclaimer of Opinion — Auditor does not have period and that there are no significant doubts that the enough information to obtain sufficient evidence, and company can pay its debts for that period. 46 WHO’S RUNNING THE COMPANY? ? tors, Grant Thornton and Deloitte Touche Tohmatsu, were battered by their failure to detect fraud in the dairy com- pany’s books. They eventually agreed to pay a $15 million WHAT DO YOU KNOW? settlement to shareholders. Quick Quiz In fact, all of the Big Four accounting firms have featured 1. Only one of the following financial in criminal cases involving clients at one time or other. disclosure filings must be audited. Two PricewaterhouseCoopers partners were crimi- Which one is it? nally charged in connection with the Satyam Computer A. Periodic earnings statement Systems Ltd. fraud in India. KPMG was charged by the B. Annual financial statement SEC with permitting Xerox Corp. to manipulate accounts. C. Proxy statement KPMG settled the complaint in 2005 without admitting wrongdoing. 2. When the auditor gives an “unqualified� opinion to a company’s financial Questions reporters should ask about a company’s statements, it means: auditors and their audits include: A. The auditor does not endorse the statements n Is the external auditor qualified, credible, indepen- B. The auditor has reasonable assurance dent and free of regulatory or legal problems? that the reports are an accurate n What are the limitations of the auditors’ opinion? reflection of the financial state of the company n What process was used to verify and audit the C. The auditor declines to make a judgment financial statements? 3. Insider trading is illegal if: n What does the audit report say about the A. The number of shares exceeds 10 company’s financial statements? percent of an investor’s holdings n What kind of business relationship does the B. The investor has confidential, material auditing firm have with the company, aside from (significant), non-public information its audit services? Any conflicts of interest? obtained from inside sources about the company and trades on that information n Is the audit team knowledgeable in the client’s C. The buyer or seller is related to a business? company insider n Did management cooperate with the auditors? Answers: 1. B, 2. B, 3. B Corporate scandals often produce tougher regulation and more rigorous enforcement. After the Enron and WorldCom debacles, the Sarbanes-Oxley Act of 2002 Throughout 2011, Muddy Waters LLC, a short-selling contained new provisions governing audits, auditing research firm, criticized Chinese companies listed in the firms, audit committees and disclosure requirements for United States for allegedly overstating assets and rev- off-balance-sheet transactions, among many other new enues. (A warning to journalists, however: In a number rules. The new law also held chairmen, CEOs and CFOs of cases, internal investigations by the companies them- personally accountable for the financial reports, com- selves disputed those allegations.) pelling them to be more diligent in their oversight of the auditor’s work. However, Muddy Waters continued to fault the Big Four accounting firms — PricewaterhouseCoopers, Deloitte 5. Develop multiple sources in the Touche Tohmatsu, KPMG and Ernst & Young — for poor financial world oversight of the Chinese firms. Hedge-fund managers, short sellers, analysts and Regulators in a company’s industry or sector also may researchers can be valuable sources for journalists be good sources. because they delve deeply into the company financial and non-financial information and perform extensive due (See Chapter 7 for more on potential sources for journal- diligence for their clients. ists.) n WHO’S RUNNING THE COMPANY? 47 CHAPTER 5 Toeing the line: regulations and disclosure SOURCES Chapter 5 Editor’s note: The following sources were consulted in the preparation of Chapter 5. Most of the websites are accessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS Duncan Mavin and Ken Brown, “Embattled Sino-Forest Fights Jamie Allen, “Corporate Governance Failures in Asia: How Back Against Muddy Waters,� The Wall Street Journal, Nov. Can Directors and Corporate Counsel Help Manage Risk?� 16, 2011. http://on.wsj.com/HDYaOq Asian Corporate Governance Association (ACGA) presenta- tion, May 6, 2009. http://bit.ly/IidfPV Rick Aristotle Munarriz, “The 5 New Stocks That Warren Buf- fett Is Buying,� The Motley Fool, Nov. 18, 2011. Catherine Belton and Neil Buckley, “Russia’s Banks: Collat- http://aol.it/HEaj6c eral Damage,� Financial Times, Sept. 22, 2011. http://on.ft.com/INw0Pe Floyd Norris, “Troubled Audit Opinions,� The New York Times, June 9, 2011. http://nyti.ms/HRM52T Joseph Bonyo, “Kenya: Boardroom Wars Expose CMA’s Soft Underbelly,� Daily Nation, Nairobi, Sept. 19, 2011. Kate O’Keeffe, “Hong Kong Charges Executive in Inside http://bit.ly/HDSWOd Deal,� The Wall Street Journal, Aug. 26, 2011. http://on.wsj.com/HH41js Obinna Chima, “Nigeria: S&P — Banks Now Better in Corpo- rate Governance,� March 1, 2012, This Day, Lagos, Nigeria. Chris Roush, “How to Use SEC Filings to Cover Companies,� http://bit.ly/Hxh6Lg Journalist’s Resource, Harvard’s Shorenstein Center and Carnegie-Knight, March 17, 2011. http://bit.ly/IEU0oo Hans Christianson and Alissa Koldertsova, “The Role of Stock Exchanges in Corporate Governance,� Financial Mar- Neil Stewart, “Brazilian Companies Blossom on Novo ket Trends, OECD 2008. http://bit.ly/IvwX07 Mercado,� Inside Investor Relations, March 1, 2010. http://bit.ly/IvzXth Steve Eder and Amy Or, “Manager Blasts Green Mountain,� The Wall Street Journal, Oct. 18, 2011. “Emphasis of Matter Paragraphs in Company Accounts,� http://on.wsj.com/IFBj18 accountingweb.co.uk, June 5, 2009. http://bit.ly/HRLnpB Nathaniel Parish Flannery,� researcher, GovernanceMetrics “Prosecutors Summon Ex-vice FM in Stock Manipulation International (GMI), “New Developments: Management Woes Scandal,� Yonhap News, Feb. 28, 2012. and Risk at Foreign-Listed Companies, Aug. 26, 2011. http://bit.ly/HGKv8m http://onforb.es/HH3App Shincorp Deal, Oct. 18, 2006. http://bit.ly/HDZctB Moon Ilwahn, “Kim’s Fall from Grade at Daewoo,� Business- Week, Feb. 19, 2001. http://buswk.co/HDXVCV “What Investors Can Learn from Insider Trading,� Investope- dia, Nov. 10, 2011. http://bit.ly/ISulrE Kana Inagaki, “TSE Pressure on Olympus Intensifies,� The Wall Street Journal, Oct. 31, 2011. http://on.wsj.com/IvxnDx “Google Co-founders to Sell Shares,� BBC News, Jan. 24, 2010. http://bbc.in/HGwklt Peter Lattman, “Rajaratnam Ordered to Pay $92.8 million Penalty,� The New York Times, Nov. 8, 2011. “48.4M of Google Inc. (GOOG stock) Sold by Sergey Brin,� http://nyti.ms/HH3JZG Marketbrief.com, Nov. 3, 2011. http://bit.ly/HJfJJK Dinny McMahon, “Could a Signature Bolster China Audits?� “Raj Rajaratnam — Galleon Group Founder Convicted in Wall Street Journal, Oct. 22, 2011. Insider Trading Case,� The New York Times, Oct. 26, 2011. http://on.wsj.com/HPnLCO http://nyti.ms/HPpR5x Mark MacKinnon and Andy Hoffman, “Key Partner Casts “Time for Transparency: What Will it Take to Improve Corpo- Doubt on Sino-Forest Claim,� Globe and Mail, June 18, 2011. rate Governance in the Middle East?� knowledge@wharton, http://bit.ly/HAF1rW Wharton School, University of Pennsylvania, March 11, 2009. http://bit.ly/HRNE0P 48 WHO’S RUNNING THE COMPANY? CHAPTER 6 Finding the story behind the numbers How can journalists, most of whom are not accountants n Summaries of analysts’ opinions on the company, and have little background in the specialty, learn to spot its strategy and the outlook for its share price. sophisticated accounting tricks, much less unearth out- Some of this is not free. right lying and cheating by corporate executives? n Information about the company’s major sharehold- Short of taking an accounting course, reporters can ers, its officers and salaries for top officers educate themselves on the terminology used in company n Current company news and information, including financial reports and learn to interpret the numbers. press releases about current events n A variety of educational tools can help journalists n Financial blogs with information about the company improve their knowledge, including a number of n A company profile, including its history, strategy books (see Selected Resources, appendix). Tutori- and major events als and articles are available free on financial web- sites; see links in this chapter and in the Sources 2. Dissect financial statements section at the end of the chapter. Financial statements generally consist of: n A free, self-directed course in reading financial n Balance sheet statements especially developed for business n Income statement journalists is available at the Donald W. Reynolds National Center for Business Journalism at Arizona n Cash flow statement State University: http://bit.ly/HRNIxk n Statement of shareholders’ equity n Another resource is “Deterring and Detecting n Notes to financial statements Financial Reporting Fraud — a Platform for Action,� Balance sheet: The balance sheet is often described issued by the US Center for Audit Quality in as a “snapshot� of a company’s financial statement at a October 2010, available at: http://thecaq.org certain moment — usually, the last day of the company’s Here are some other tips: fiscal year. It is a key part of the company’s financial state- ments and shows the assets the company has available to 1. Start with the web undertake operations and its outstanding liabilities. Check the company’s own website; check the stock exchange where the company is listed; look for blogs re- The balance sheet expresses the relationship between as- lated to the industry and for analysts’ sites. Visit websites sets (what the company owns) and liabilities (what it for regulatory agencies and check them frequently. Information on the web includes: Do you know how to go about researching companies that are incorporated offshore? n Key company statistics, including financial statis- tics such as revenue, earnings and share perfor- Consult the Investigative Dashboard, a web-based mance center for investigative reporters to find resources, share information and learn new tricks of the trade. n A public company’s financial disclosure filings Technical support provided by the International n A summary of the company’s competitors in its Center for Journalists. http://www.datatracker.org/ industry WHO’S RUNNING THE COMPANY? 49 CHAPTER 6 Finding the story behind the numbers owes). What is left over is shareholder’s equity, which is Cash flow statement: Many analysts and investors known, too, as �net worth� or “book value.� Equivalently, consider cash flow the most important of a company’s it is share capital plus retained earnings minus treasury financial statements. Public companies are required by shares. Investopedia, the financial education website, most exchanges to report all cash inflows from ongoing defines shareholders’ equity as the amount by which a operations, investments and financing activities, and cash company is financed through common and preferred outflows. shares. Cash inflows and outflows show where the company’s Or, expressed as a formula: cash comes from and how it is spent over the period of one year. Shareholders’ Equity = Total Assets - Total Liabilities Cash flow can be positive even if the company is not OR profitable. It does not account for assets and liabilities, Shareholders’ Equity = accounts receivable or accounts payable. It needs to be Share Capital + Retained Earnings - Treasury Shares analyzed in conjunction with the other financial statements to provide a complete picture of a company’s health. Current liabilities include accounts payable, short-term debt and the current portion of long-term debt, among In “Avoiding Future Enrons,� the Columbia Journalism other items. Non-current liabilities include notes and Review (CJR) noted that journalists reporting on deadline bonds payable, long-term debt and pension and post- tend to focus on revenue and profit reported in the income retirement obligations, which may contain significant statement. information. “But studying cash flow figures, especially from opera- Off-balance-sheet entities may be used to disguise losses tions, gives a much clearer view of how much money is or create false profits. For an introduction to off-balance- actually coming in and out of a business in a given period, sheet entities — a favorite ploy in accounting fraud scan- and can be more revealing,� Anya Schiffrin wrote in the dals in recent years — see: http://bit.ly/IvAFGS CJR article. A company may be making a profit but still show negative For more detail on how to read and cash flows from operations. One reason is that sales may interpret a balance sheet, see: be made on credit and the receipt of cash will depend on how reliably the payments are made later. Continuing http://bit.ly/IFGGxw negative cash flows from operations is a red flag. Without cash, a company cannot pay its employees or cover other running expenses. Income statement: This might also be called “state- ment of income,� “statement of earnings,� or “statement Recurring negative operating cash flows are a bad sign of operating results.� It presents the company’s revenues as they indicate the company is not generating net cash and expenditures within the covered period, usually one from its normal operations. If this continues, the company fiscal year, and provides useful information on revenue would likely be in financial trouble in the near future. growth if compared with last year’s income statement. It also shows gross margin, expenses and net income Operating cash flows may also be artificially increased by changes. the company stretching out or delaying payments. It will show in the cash flow statement as a decline in operating Operating expenses are the usual costs a company cash outflows. However, this is not sustainable as even- incurs to support its main business activities. Non- tually the company’s creditors will put pressure on the operating expenses refer to the expenses related to company for timely payments. A comparison of the “cash the company’s financing and investing activities. outflows from operatons� with the “accounts payable� in the balance sheet would reveal this. The income statement measures profitability, not cash flow (see below). For an explanation of fundamental analysis used in income statements, definitions of termi- For an explanation of cash flow and a nology used in income statements and a sample income sample cash flow statement, see: statement, see: http://bit.ly/IFH5jj http://bit.ly/HRM3eE 50 WHO’S RUNNING THE COMPANY? Investopedia, the financial education website, advises investors to learn to recognize what it calls green, yellow and red flags that are often embedded in such areas of the annual report as “Summary of Significant Accounting Policies.� 3. Look for stories on annual reports, being properly assessed and prepared for? For periodic statements example, in its 2007 annual report, the Coca-Cola The annual report, which includes the annual financial Co. cited water scarcity and poor water quality, and statements, usually contains many story ideas and may the effect they could have on Coke’s profitability. reveal new information about the company’s strategy or n Read the footnotes. They often lead to further story its operations during the previous year. Often, the annual ideas. As Columbia Journalism Review pointed out report is more revealing than the periodic earning reports in “Avoiding Future Enrons,� a careful reading of companies file, because regulators require more informa- footnotes in Enron’s financial reports could have tion. prompted questions about the extent of the off- balance sheet partnerships and conflicts of inter- In addition to reading through the entire report, report- est. Another potential red flag is the relationships ers should pay special attention to the year-end financial a company has with clients and suppliers, often statements. referred to in footnotes. Raw numbers only rarely make intriguing stories, but n Look for any changes in the company’s accounting as with any kind of reporting, it is the new information, policies, or the potential impact of complying with glimpses into company strategy and potential changes in new accounting regulations. the company’s operations that provide ideas for stories. Investopedia, the financial education website, ad- n Look for changes from one year to another in all of vises investors to learn to recognize what it the numbers reported; percentage changes reveal calls green, yellow and red flags that are often more valuable information. embedded in such areas of the annual report as n Ask whether the changes make sense in light of “Summary of Significant Accounting Policies.� the current economic environment. Learn how to recognize these: http://bit.ly/HJg8vC n Study risk factors for potential story ideas. Is risk n Look for the size of debt obligations in the next year and beyond, and consider what sources of funding REPORTER’S NOTEBOOK On the importance of journalists understanding believe the risk has increased substantially], and no the numbers: one asks a question. There’s a problem there when “… it’s shocking how few [reporters] actually un- that happens and nobody asks a question. I think derstand the difference between price and yield. we have training issues in a huge way in our profes- Hardly any business journalist actually covers the sion. We brought a knife to a gunfight.� financing. If you cover a company and all of a — The late Mark Pittman, reporter for Bloomberg News sudden their borrowing costs go from 100 (basis Source: Audit Interview, Ryan Chittum, Columbia points) over to 250 or 300 over [meaning investors Journalism Review WHO’S RUNNING THE COMPANY? 51 CHAPTER 6 Finding the story behind the numbers whether the company might be paying as much as a 20 percent premium for the business. The newspaper used STORY TOOLBOX regulatory filings, company presentations and press re- leases to arrive at its conclusions. When writing the bread-and-butter periodic earnings sto- ry for a listed company, compare the company’s analysis Many business journalists write pro forma stories about of its performance in the press release to the numbers in companies’ periodic financial statements, or earnings. the actual financial filing, and the company’s discussion But a more critical reading of the financial statements can in the filing of the numbers. lead to enterprising stories that unearth telling details. Learning to spot potential trouble spots in corporate ac- The press release often puts a positive spin on certain tions or decisions is usually the path to good stories. numbers, and altogether ignores other numbers that may tell a different story. 4. Ask uncomfortable questions The same is true for the annual report: The glossy While it is unlikely that journalists by themselves can photos and upbeat analysis are sometimes contradicted uncover fraudulent activity by rogue traders, they certainly by the numbers in the financial statements, and it’s the can ask questions of banks and investment firms about journalist’s job to study the numbers rather than report- their risk-management policies, the risk-management ing the spin. the company has. See “Ten Tips to Spotting Trouble in the Companies You Cover� at: n Study the section on lawsuits and other legal mat- http://bit.ly/HGol8e ters. Sometimes shareholders lodge the lawsuits, but suits by vendors, clients and competitors can also be a tip-off to allegedly shady practices, or at ? least an indication of dissatisfaction with the com- pany. n Often, the company’s account of its prior year and WHAT DO YOU KNOW? discussion of future strategy simply put a positive Quick Quiz spin on information already known, but sometimes story ideas can be buried in these discussions. 1. This statement gives a “snapshot� of the company’s financial position at a n “Management discussion and analysis,� included particular moment. in most annual reports and required by some secu- A. The periodic earnings report rities regulators, provides management with an op- B. Balance sheet portunity to explain past events and outline plans C. Cash flow statement for growth. This section helps provide insights into management’s style. The information in this section 2. Non-operating expenses are: is unaudited. A. Expenses related to financing and investing activities n Are major company purchases or sales realistically B. Expenses connected with normal valued? business operations For example, Fortis Healthcare India announced it was C. Unexpected costs buying the overseas healthcare business of its family 3. Subtracting liabilities from a company’s owners, Malvindor and Shivinder Singh, in September total assets yields: 2011. Soon afterward, investment analysts expressed A. Net income concerns about whether the $665 million intra-group B. Short-term debt transaction really was fair for shareholders of the listed C. Shareholders’ equity company. Answers: 1. B, 2. A, 3. C An analysis by Economic Times of India questioned 52 WHO’S RUNNING THE COMPANY? qualifications of executives and board members, and whether banks and other financial institutions have poli- Financial Shenanigans cies and systems to protect against unauthorized trades. Earnings Manipulation Though many of the corporate scandals of recent years n Recording revenue too soon were engineered by top executives, some shady dealings n Recording bogus revenue were the work of rogue employees who managed to hide n Boosting income using one-time or their activities from their superiors until it was too late. unsustainable activities n Shifting current expenses to a later period At U.K.’s Barings Bank plc, futures trader Nick Leeson n Employing other techniques to hide expenses was a star in the early 1990s, responsible in one early n Shifting current income to a later period high-flying year for 10 percent of the bank’s entire annual n Shifting future expenses to an earlier period profits. But then the Asian financial crisis began to unfold, and losses piled up. Leeson managed to hide more than Cash Flow Shenanigans £800 million in losses in an obscure account. n Shifting financing cash inflows to the operating section His bosses began to uncover the dealings with a spot au- n Shifting normal operating cash outflows to the dit in 1995, but by that time, all of the bank’s assets and investing section its very future were on the line. Eventually, heads rolled, n Inflating operating cash flow using acquisitions Leeson went to prison and Barings was sold. or disposals Despite investigations and lessons learned from the n Boosting operating cash flow using unsustain- Leeson case, another rogue trader caused similar prob- able activities lems for French banking giant Societe Generale many Key Metrics Shenanigans years later, in 2008. The tab for Jerome Keviel’s rogue n Showcasing misleading metrics that overstate trades was £7 billion. performance That same year, Kweku Adoboli, a trader for Switzerland’s n Distorting balance sheet metrics to avoid show- UBS AG’s investment bank, was starting to hide his trad- ing deterioration ing losses, which ultimately caused a $2 billion loss for UBS, discovered in 2011. Adoboli was charged with fraud and false accounting, and governance experts immediately began questioning Warning Signs: the banks’ risk management and oversight. USB chief Breeding Ground for Shenanigans executive Oswald Gruebel at first said that USB had “one n Absence of checks and balances among senior of the best� risk-management units in the industry. But he management soon resigned, saying he was shocked that a trader was n An extended streak of meeting or beating able to inflict multibillion-dollar losses through unauthor- Wall Street expectations ized trades. n A single family dominating management, ownership or the board of directors n Presence of related party transactions 5. Tips for spotting “shenanigans� n An inappropriate compensation structure that Detecting accounting gimmicks is not a job for amateurs, encourages aggressive financial reporting but accounting professor Howard M. Schlilit has tried n Inappropriate members placed on the board of to make it easier to recognize devious tricks. His book, directors “Financial Shenanigans� was first published in 1993 and n Inappropriate business relationships between most recently updated in 2010 (see Sources at the end of the company and board members this chapter). n An unqualified auditing firm n An auditor lacking objectivity and the appearance The following charts, used with permission, show where of independence to look for gimmicks and fraud in financial reports. n n Attempts by management to avoid regulatory or Both charts from “Financial Shenanigans: How to Detect Ac- legal scrutiny counting Gimmicks and Fraud in Financial Reports,� Howard Schilit and Jeremy Perler, third edition, McGraw-Hill, 2010. WHO’S RUNNING THE COMPANY? 53 CHAPTER 6 Finding the story behind the numbers SOURCES Chapter 6 Editor’s note: The following sources were consulted in the preparation of Chapter 6. Most of the websites are accessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS Jill Treanor, Simon Bowers and Sam Jones, “’Rogue trader’ Giles Broom, “UBS Chief Executive Gruebel Resigns After Kweku Adoboli Faces Charges Dating Back to 2008,� The $2.3 billion Loss,� Bloomberg, Sept. 24, 2011. Guardian, Sept. 17, 2008. http://bit.ly/IFIPJD http://bloom.bg/HDZPmQ Jill Treanor, “Trading Tactics: Soc Gen’s Jerome Kerviel, and Lillian Chew, “Not Just One Man: How Leeson Broke Barings UBS’s Kweku Adoboli,� The Guardian, Sept. 15, 2011. and Lessons from Leeson,� case study, International Finan- http://bit.ly/IEXJlF cial Risk Institute. http://riskinstitute.ch/137550.htm Jill Trainor, “UBS Admits Failure of Internal Controls,� The Lindsay Fortado and Ben Moshinsky, “UBS Trader Adoboli Guardian, Oct. 25, 2011. http://bit.ly/HxlTML Charged with Fraud, Accounting Dating to 2008,� Bloomberg, Sept. 17, 2011. Rick Wayman, “Footnotes: Early Warning Signs for Investors,� Investopedia, Feb. 22, 2008. http://bit.ly/HJgwKF Richard Loth, “12 Things You Need to Know About Financial Statements,� Investopedia, April 1, 2011. Rick Wayman, “An Investor’s Checklist to Financial http://bit.ly/ISLPUQ Footnotes,� Investopedia, Feb. 15, 2008. http://bit.ly/IFJbjm Richard Loth, “Understanding the Income Statement,� “The Essentials of Corporate Cash Flow,� Investopedia, Investopedia, Oct. 10, 2011. http://bit.ly/HRMANT March 14, 2011. http://bit.ly/HRMANT Cassie McLean, “Ten Tips to Spotting Trouble in Companies Free, self-directed course on financial statements from the You Cover,� Talking Business News, March 18, 2012. Donald W. Reynolds National Center for Business Journalism http://bit.ly/HGol8e at Arizona State University. http://bit.ly/HRNIxk Megan Murphy and Haig Simonian, “Banking: Lightening “Beginners Guide to Financial Statements,� U.S. Securities Strikes Twice,� Financial Times, Oct. 2, 2011. and Exchange Commission. http://1.usa.gov/HEfOBP http://on.ft.com/HGoBUP “How Leeson Broke the Bank,� BBC News, June 22, 1999. Brent Radcliffe, “How to Decode a Company’s Earnings Reports,� Investopedia, Nov. 19, 2010. http://bbc.in/HAKsqR http://bit.ly/HxlLg2 “CAO Case ‘Bitter Medicine’ for State Companies,� Xinhua Chris Roush, “Understanding Financial Statements,� Journal- News Agency, Dec. 20, 2004. http://bit.ly/HRNiL1 ist’s Resource, Harvard’s Shorenstein Center and Carnegie- Knight, April 7, 2011. http://bit.ly/IEU0oo BOOKS AND STUDIES Robert A. G. Monks, Alexandra Reed Lajoux, “Corporate John Samuel, “Fortis Heathcare Hit by Governance Issues; Valuation for Portfolio Investment,� New York: Bloomberg Shares Down 25% Since Intra-Group Deal,� The Economic Press, 2011. Times of India, Dec. 12, 2011. http://bit.ly/HRMNAu Howard Schilit and Jeremy Perler, “Financial Shenanigans: Anya Schiffrin, “Avoiding Future Enrons,� Columbia Journal- How to Detect Accounting Gimmicks and Fraud in Financial ism Review, March/April 2002. Reports,� third edition, McGraw-Hill, 2010. Lisa Smith, “Off-balance Sheet Entities: An Introduction,� Investopedia, Jan. 14, 2011. http://bit.ly/J8Dmtm 54 WHO’S RUNNING THE COMPANY? CHAPTER 7 Writing and reporting tips “I wish you and your families a slow and painful death.� — Fausto Tonna, former finance director of Italy’s Parmalat SpA, to journalists as police led him from jail to court. Journalists rarely get any thanks from the movers and chairman, shareholders lodged lawsuits, regulators inves- shakers whose careers come to a screeching halt or who tigated and the Olympus board’s failures — not a cultural wind up in prison as a result of scandals uncovered by clash between a British executive and a Japanese board, the press. as the board had claimed — became the center of atten- tion. Some executives and directors see the journalist’s role as serving the market or investors. Most journalists have a different view: The press as watchdog, with a profession- al duty to uncover and write about a company’s activities, How to spot a corporate governance story How do journalists recognize the corporate governance including corporate malpractice. stories lurking behind breaking news, such as the sudden “The current crisis illustrates perfectly that insistent, dismissal of a CEO, the “retirement� of a board chairman, drumbeat, muckraking reporting about systemic abuses or a sudden and unexpected shift in strategy? in the lending industry, for one, would have provided the Often such stories emerge at the same time that the vital, long-term warnings that investors clearly lacked,� company is going through a major change, whether it’s Dean Starkman wrote in The Audit, a blog about the busi- a major acquisition, expansion or setback. Along with ness press for the Columbia Journalism Review. regulatory and financial issues outlined in Chapters 5 and How do corporate governance issues dovetail with this 6, some other possible tip-offs are: watchdog responsibility? The answer is that often, cor- n Announcements of plans to buy companies or be porate governance principles — or flagrant disregard for acquired them — are at the heart of developing stories at com- panies. When scandals unfold, investors and regulators n The selling off of divisions, brands or facilities immediately ask one overriding question: “Where was the board?� n Moves by directors to join other boards, resign from their companies or sell shares The chain of events in 2011 at Olympus Corp., Japan’s camera and endoscope manufacturer, seemed to start n Moves by individual or institutional shareholders to out as a cultural clash between the company’s British challenge company policies or practices CEO and its Japanese board. At least, that’s what Olym- Personality-driven stories about CEOs, clashes between pus chairman Tsuyoshi Kikukawa gave as the reason the board and management, disagreements between regula- company ousted Chief Executive Michael Woodward. tors and company officials or between employees and Before long, though, journalists — tipped by Woodward management and about shareholder activists’ concerns — learned that the real problem was that Woodward was have great audience appeal and potential for breaking trying to hold the board and former executives account- news. able for a series of questionable transactions designed to hide huge losses. Kikukawa was forced to resign as WHO’S RUNNING THE COMPANY? 55 CHAPTER 7 Writing and reporting tips Journalists sometimes get caught up in the daily minutia of business reporting, and forget that some of the best stories involve people and relationships. How to find the right sources Topics covered in working papers available on Harvard’s Many reporters who cover corporate governance issues corporate governance website in late 2011 alone included call on experts who alert them to stories and are willing studies on excess pay clawbacks, risk-taking by nuclear to comment on events at companies. These include staff power plants and staggered boards, among others. members at corporate governance think tanks, academ- Diligent research into footnotes, appendixes, explanations ics who specialize in the topics, and members of cor- of accounting practices and other details in regulatory fil- porate governance institutes at major business schools. ings is a key component of breaking stories about compa- (See Resources in the appendix section for contacts and nies, as Chapters 5 and 6 explain. websites.) Other sources, both inside and outside of companies, can Academic studies by faculty and research fellows associ- be equally important. Middle management at many com- ated with university corporate governance programs can panies, especially those in the finance departments, are provide useful story tips and excellent background for often helpful. Every journalist loves to hear from whistle- stories. This Guide cites a number of academic papers on blowers, who can often be the route to uncovering a great such cases as Mexico’s TV Azteca, India’s Satyam Com- story. Whistleblowers, however, come with drawbacks, puter Systems Ltd., Italy’s Parmalat SpA and the U.S.’s En- including personal agendas and grudges, a sometimes ron Corp., to name just a few. (See Sources section at the limited viewpoint of company operations and a lack of end of each chapter, and Selected Resources, appendix.) rigorous fact-checking. Getting Your Corporate Governance Conflict: Is there dissension among the board direc- Story on the Front Page tors, investors, other stakeholders, the government or senior management? It’s the reporter’s job not only to dig up stories, but to “sell� them to the editor, and convince the editor that Suspense: Is there a deadline, for example, by which the story deserves prominent play. the company must prove that it is fiscally solvent to obtain new loans to stay in business? In the end, the story you pitch must be news. Emotions: This news element — commonly called Most journalists agree that the following eight ele- human interest — involves stories that stir our recog- ments grab editors’ attention, and more important, nition of basic human needs, both psychological and attract readers: physical. Immediacy: Did board decision or company action Consequence: If conflicts of interest have led the occur today, or is it scheduled? board and senior management to make bad deci- Proximity: How will the corporate governance matter sions, can the company stay in business? Are inves- affect the community, region or country? If compa- tors and markets adequately informed about those nies are poorly governed generally in a country, can conflicts, and have they priced the consequences the economy grow in a sustainable manner over the into the company’s share value? long term? — Source: “Business Reporting Beyond Numbers: Looking for the Good, Prominence: Is the chairman, CEO, or board director the Bad and the Ugly in Corporate Governance� well known? Global Corporate Governance Forum http://bit.ly/I9LEmZ Oddity: Did the board approve purchasing a beach resort when its business is computer manufacturing? 56 WHO’S RUNNING THE COMPANY? Portfolio managers, investors and analysts can also be Steer clear of jargon excellent sources. Hedge-fund managers and short Business stories that confuse readers are stuffed full of sellers often provide insight into complicated financial numbers, studded with jargon and characterized by ram- maneuvers and accounting practices that may escape bling sentences. the average business reporter. Defining terms is one way to avoid using jargon. Some- Top union leaders, human resource consultants, corpo- times technical terms cannot be avoided — “collateralized rate compensation experts and recruiting firms also can debt obligations (CDOs)� is a phrase that popped up fre- provide tips and expertise. quently in the wake of the subprime mortgage meltdown. The New York Times explained it succinctly and clearly: “Collateralized debt obligations, or CDOs, are created Look for plots and subplots by banks that pool together otherwise unrelated debt- Journalists sometimes get caught up in the daily minutia instruments, like bonds, and then sell shares of that pool of business reporting, and forget that some of the best to investors.� stories involve people and relationships. As the family As with any story, researching the background, getting in- feuds detailed in Chapter 4 show, many corporate gov- sight from experts in the field and writing clearly are what ernance stories are about brother pitted against brother, attract readers. stepchildren fighting with second wives and infighting among heirs and would-be heirs. n First rule: Understand what you’re writing about Staying on top of court filings is one way to discover such n Don’t “bluff,� or pretend to know more than you do stories, and sometimes contain details that allow journalists to delve deeply into family relationships. Macau gambling n Count the number of clauses, commas and semi- kingpin Stanley Ho’s several wives and children fought colons. Try streamlining the writing by simplifying. most of their battles over ownership of his empire in the A journalist who thoroughly understands the story is more courts, revealing juicy details in the supposedly dull filings. likely to write a clear, focused article, and to concentrate on the points that most interest readers. Editor’s Tip Sheet n Unusual movements in profits and performance Editors can help reporters learn to spot compelling that may reveal accounting or financial report- corporate-governance issues in routine business ing scandals or demonstrate that the company stories. is well-run Be alert for the story-behind-the-story in typical n New strategic direction for the company, such business events. Often, they are prompted by as entry into new markets or product lines deeper corporate-governance issues. (These topics n Company is in persistent decline or trouble, are treated in more depth in previous chapters of which may intensify conflicts within manage- the Guide.) ment and the board over how the company can n Appointments or dismissal of top executives or survive board members n Theft, corruption or misuse of company funds n Significant changes in company ownership n Shareholder conflicts with the board and man- (share issues and buy-backs; notable agement owners, including institutional investors; share classes and other changes in the structure or n Disagreements with community leaders, inter- distribution of share ownership; mergers and est groups, vendors or labor over environmen- acquisitions; family ownership to dispersed tal, workplace and public health issues, among ownership or privatization) others n Changes in compensation of top executives n Changes in stock exchange listing rules. What or directors precipitated them and why? WHO’S RUNNING THE COMPANY? 57 CHAPTER 7 Writing and reporting tips Almost any business story can be enhanced by using video or audio along with the print or web version of the story. For a business reporter, the first question is: What medium best tells the story — a video clip, photo or series of photos with explanatory text or an audio narration? How to choose a format for the story possible heirs to top officer spots; issues surrounding Corporate governance stories do not follow a formula. succession, especially in a family business. They’re often about human drama — personality con- News-feature flicts, power struggles, greed, fear, status and power. The Some stories fall in the gray zone between news and nature of the story dictates the format — news, feature, features. The topic may be a current event or person in news-feature, profile, investigative. the news, but the story takes a broader view, with more In choosing a format, ask three questions: behind-the-scenes details than can be included in a news story. Examples: How new directors have influenced n What’s the best way to tell the story, to grab the company policy and decision-making; how a company reader’s interest and then hold on to it? is rebuilding after an accounting scandal or share price decline. n What format is most appropriate for the material in this story? Profile A profile concentrates on one person and attempts to give n Why should the reader care about this story? a fully rounded portrait of that person. It may be based on Here are some general definitions of various kinds of interviews with the subject, but should also include other stories. sources — colleagues, family, friends, even rivals. A profile can also focus on a particular business or company, if News there is something distinctive or newsworthy about the If the story is fresh news, not previously reported, about company. Examples: Younger family members in a family something that has happened or is about to happen, the business; a prominent shareholder who challenges com- format will be the traditional news story. The lead tells the pany policies or decisions. reader the most important information first and arranges the rest of the information in inverted pyramid style. Investigative The investigative story has elements of both the news In a business story, it’s particularly important to choose and feature story, and can be written effectively in either carefully the key numbers for the lead, and avoid packing style. To be considered investigative, a story must uncover the first sentences with too many numbers. Examples: wrongdoing and bring it to light for the first time. It is usu- Stories about the resignation or firing of a top company ally lengthier than the typical news or feature, and may be officer; a major acquisition or decision to sell a line of presented as a series of stories over a number of days, business; shareholder initiatives. with sidebars. Sidebars are smaller stories accompany- Feature ing the main story, and each concentrates on a particular Stories that do not have a strong time element, or that sub-topic addressed in the story, giving more detail or are about general topics or about a particular angle on a background. news story, are features. For example, a story about Hewl- Examples: In-depth stories about company accounting ett-Packard’s board was a feature or background story, practices can be investigative if they uncover suspicious which appeared a few days after the company tossed out or even illegal maneuvers. For a good example, see The its CEO. Examples: Stories about changes in company Globe and Mail’s story on Sino-Forest Corp.’s actual tim- strategy or direction; backgrounders about ber holdings in China (Chapter 5). 58 WHO’S RUNNING THE COMPANY? Opinion column separated by graphic device such as a large dot or large Journalists can question company strategy, criticize man- capital letter, or by subheads. agement and the board and speculate in columns, where Wall Street Journal formula they have much more leeway than in straight, factual This technique, named for the newspaper that developed news stories. In this column by Tamal Bandyopadhyay in and perfected it, is usually used for a feature or news India’s Livemint.com, notice how the writer manages to feature story. It begins with a “soft� or feature lead that raise questions about the stewardship of Praval Kumar focuses on a person, scene or event. The story usually be- Tayal, under pressure to give up control of the Bank of gins with the specific and proceeds to the general. It must Rajastham. http://bit.ly/I9LOuC have, in the third or fourth paragraph, a “nut graph,� which states the main theme or focus of the story. Use these tools for story structure In constructing corporate governance stories, it is often Enhance the story with multimedia a good idea to break down complex information into Almost any business story can be enhanced by using smaller “bites,� or pieces, for readers and viewers. video or audio along with the print or web version of the List technique story, often by adding a human voice and face to the text. Often used for budget stories, this method also lends it- For a business reporter, the first question is what medium self to other stories that include a number of highlights or best tells the story — a video clip, photo or series of pho- important points. This method starts with a traditional lead tos with explanatory text or an audio narration? — usually a news lead — followed by a few paragraphs The decision depends partly on what “visuals� are avail- of backup information, then a list of supporting points. able for the print story. Sources may be interviewed on Tick tock camera, for example, for a video. Or they can be inter- This slang term (referring to the sound of minute or sec- viewed and recorded for a podcast — an audio file that ond hands on a clock ticking off time) is used to describe the audience can download from a website and listen to a background story that traces chronologically the devel- on a computer or on an MP3 player. A series of photos opment of a major news event, usually from the viewpoint with audio narration — a slideshow — can be a good way of the principal players. to explain complicated technology. Sections technique Many newsrooms are now equipped with their own digital This is primarily a visual device that serves to divide a media departments, and if you’re lucky enough to work story into sections, like book chapters, to alert the reader in this environment, your editor may send a videographer to various kinds of subject matter. The sections are or reporter or sound technician along on an assignment. REPORTER’S NOTEBOOK At one time, journalists relied heavily on analysts “If they do quote them,� Morgenson continued, “they for tips and insights. That changed, however, after should at least identify the firm and the firm’s relation- Enron Corp. imploded. Analysts had been largely ship to the company that they’re talking about.� uncritical and even euphoric about Enron. As it In 2012, Morgenson elaborated on that viewpoint, turned out, many of the analysts’ companies were saying: “Specifically, many analysts at large invest- receiving fees or being paid for contract work with ment banks have been known to write favorable Enron. Such analysts are not independent and research about companies for whom their firms tended to spin positive news. conducted other business, such as raising capital “Business reporters should probably not quote from investors or providing mergers and acquisition analysts at all,� Gretchen Morgenson of The New advice. This conflicted position exploded into public York Times was quoted as saying in a 2002 view in the aftermath of the Internet bubble, when Columbia Journalism Review story, “Enron: investigations into analysts’ work uncovered internal Uncovering the Uncovered Story.� e-mails disparaging companies that the same analysts were recommending to investors.� WHO’S RUNNING THE COMPANY? 59 CHAPTER 7 Writing and reporting tips Ethical considerations for business reporters are not much different from those for reporters covering politics, sports or any other topic, but there are some special considerations and perhaps more opportunities for conflicts of interest to arise. Many reporters, however, have bought simple, inexpen- all sides will have a better chance of convincing higher- sive videocameras or digital recorders so that they can ups that a story deserves to be published. collect their own digital media to post online. The best defense against efforts to intimidate or thwart publication is accuracy. But sometimes, even that is not enough. Some reporting requires courage Journalists who reveal wrongdoing while digging into A story involving a powerful businessman in Indonesia company finances and operations may find themselves caused a firestorm for Bambang Harymurti, then chief facing pressure from large corporations and wealthy busi- editor of Tempo, Indonesia’s largest news magazine. ness people. The story detailed accusations that a suspicious fire in a market in Jakarta in 2003 might have been connected to a Reporters may even find that their editors or publishers developer’s plans to build an expensive commercial shop- shy away from tough stories or investigative journalism, ping center on the site. perhaps for fear of offending big advertisers, influential business people or powerful politicians. Making a case for The businessman behind the development, Tomy Winata, publication can be difficult, but journalists who can show sued Harymurti and two of the editor’s colleagues for civil that their stories are meticulously researched and fair to defamation. Then the government got into the act, charg- ing criminal defamation and asking for two-year sentences for the journalists. The charges produced an outcry from journalists around the world, who said that prosecuting STORY TOOLBOX the Tempo staff members under criminal law rather than the press law was a major setback for democracy and Where to find early tipoffs for stories? press freedom in Indonesia. Social media has become a favorite source for journal- Harymurti was found guilty of libeling the businessman ists, who regularly check financial blogs, sign up for and sentenced to a year in prison. The two reporters were “tweets� and check social networks such as Facebook. acquitted. But the Supreme Court of Indonesia ultimately Felix Salmon’s financial blog for Reuters, “A slice of lime reversed the lower-court decision and said the journalists in the soda,� often has breaking news about company should have been tried under the press law. events and management changes. Lawsuits represent a major threat to journalists, but http://blogs.reuters.com/felix-salmon/ pressure from corporations and public relations repre- Zero Hedge is another blog that got journalists’ atten- sentatives are far more common occurrences. Negative tion by delving deeply into sometimes arcane financial stories can prompt an immediate reaction, especially if issues that are not the stuff of daily mainstream the subject of the story is a major advertiser. Support from journalism, but can serve as a source of ideas for other editors and owners is critically important to resisting such pressure. journalists. http://www.zerohedge.com/ Both Salmon’s blog and Zero Hedge have established A number of organizations provide resources and support a reputation for accuracy and reliability, but journalists for investigative journalism. These include tutorials, self- should exercise the usual caution in checking social directed courses and examples of investigative journal- networks and blogs. ism. Among these organizations are: Center for Investigative Reporting: http://cironline.org/ 60 WHO’S RUNNING THE COMPANY? ? Investigative Reporters and Editors: http://www.ire.org/ Investigative Dashboard: http://www.datatracker.org/ WHAT DO YOU KNOW? International Center for Journalists: http://www.icfj.org/ International Journalists’ Network (ijnet): http://ijnet.org/ Quick Quiz International Consortium of Investigative Journalists: 1. A business reporter regularly covers a http://www.publicintegrity.org/investigations/icij/pages/re- major steel company. His parents own a sources/ considerable amount of the company’s shares. He knows the company is experi- The Poynter Institute: http://www.poynter.org/ encing some major difficulties that could Philippine Center For Investigative Journalism: affect the share price dramatically. What http://pcij.org/ should he do? A. Tell his editor about his parents’ share holdings and ask to be removed from Overcoming ethical challenges covering that company Ethical considerations for business reporters are not B. Keep reporting as fairly as possible much different from those for reporters covering politics, on the company. No need to inform the sports or any other topic, but there are some special con- editor siderations and perhaps more opportunities for conflicts C. Tell his parents to cash in their share im- of interest to arise. mediately Product giveaways are a frequent enticement from 2. The slang term for the type of story companies looking for favorable coverage. While journal- that recounts chronologically the ists may certainly accept the loan of a product to test or background of a major event is called review it, the product should be returned to the company. A. Investigative Accepting gifts of computers, mobile devices or any such B. Tick tock item can compromise the journalist’s objectivity and cre- C. Sections technique ate a conflict of interest. 3. Reporters should be somewhat skepti- In many countries, journalists have a long tradition of ac- cal about using analysts as sources for cepting “envelopes� containing money, sometimes osten- stories, according to some reporters, sibly to cover expenses. Most international news organi- because: zations forbid their employees from taking such gifts. But A. Analysts are not necessarily the tradition persists in media companies where report- independent from the companies ers are paid little and regard the favors as a supplement they cover to their salary. B. Analysts are not particularly knowledgeable Journalists who resist the temptation to take gifts or favors C. Many analysts want to be quoted are in a much better position to win the trust of their audi- ence and establish credibility. off the record Answers: 1. A, 2. B, 3. A Most major news organizations do not allow business reporters or their immediate families to own shares in the companies they cover, or any companies they might cover in the future. They must not privately divulge information of managers and board members can all be affected by they pick up in the course of covering companies to oth- what appears in the media. That doesn’t mean reporters ers who have some interest in the companies, whether should be overly cautious, only that they need to apply investors, analysts or anyone else. the highest professional standards to their reporting and writing. Share prices can move up or down solely on news or rumors, providing another reason journalists need to be Such considerations also point to the critical importance especially careful about verifying all information thorough- of writing fair, balanced stories that adequately cover all ly. Consumer views, investor actions and the reputation sides. n WHO’S RUNNING THE COMPANY? 61 CHAPTER 7 Writing and reporting tips SOURCES Chapter 7 Editor’s note: The following sources were consulted in the preparation of Chapter 7. Most of the websites are accessible to any reader. Stories in certain publications, such as The Wall Street Journal and the Financial Times, require a subscription for access. The New York Times provides a limited number of archived materials per month to each viewer. ARTICLES AND PAPERS Ben Worthen and Joann S. Lublin, “Crisis Unfolds at H-P Over Tamal Bandyopadhyay, “Of Corporate Governance and CEO,� The Wall Street Journal, Sept. 22, 2011. Bank of Rajasthan,� LiveMint.com, Nov. 21, 2011. http://on.wsj.com/HEhew9 http://bit.ly/I9LOuC “Indonesia Editor Jailed for Libel,� BBC News, Sept. 16, Anne Molyneux, “Corporate Governance: Investigative Busi- 2004. http://bbc.in/J8GEga ness Reporting,� presentation, May 2011, Hanoi. Sponsor: Global Corporate Governance Forum. “The Supreme Court Overturns One-Year Sentence Against Bambang Harymurti,� Reporters Without Borders, March 8, Takashi Nakamichi and Atsuko Fukase, “Japan Central 2006. http://bit.ly/IFMmr9 Banker Bemoans Olympus Affair,� The Wall Street Journal, Nov. 16, 2011. http://on.wsj.com/IM8VhF BOOKS AND STUDIES Dean Starkman, “What is Financial Journalism For?� “Business Reporting Beyond the Numbers: Looking for the The Audit, Columbia Journalism Review, Jan. 13, 2009. Good, the Bad and the Ugly in Corporate Governance,� Les- http://bit.ly/HDZts0 sons Learned October 2009, Global Corporate Governance Forum and International Finance Corporation, World Bank Mark Tran, “Ex-Parmalat Finance Chief Lambasts Journal- Group. ists,� The Guardian, Jan. 5, 2004. http://bit.ly/IEZAHl Paul Wolfowitz, “The First Draft of Freedom,� The New York Times, Sept. 16, 2004. http://nyti.ms/ISPbr0 62 WHO’S RUNNING THE COMPANY? SELECTED RESOURCES Journalists who want to delve more deeply into corporate governance will find a wealth of resources online. With- in your country or region, the Institute of Corporate Governance or Directors (some are listed) may offer courses and speeches in addition to background materials and other resources. Below is a selection of some resources, a sample of the many available. See also specific organizations that aid journalists with information and resources on investigative reporting. n CORPORATE GOVERNANCE OVERVIEW Organization for Economic Co-operation and Development (OECD) International Organizations http://www.oecd.org/topic/0,3699,en_2649_37439_1_1_1_1_37439 ,00.html CFA Institute Headquartered in France, has 34 member countries. The http://www.cfainstitute.org OECD Principles of Corporate Governance are the foundation A global, not-for-profit organization comprising the world’s larg- of corporate governance laws, regulations and best practices est association of investment professionals who have passed worldwide. Other resources include statistics, studies, papers examinations to become chartered financial analysts. Offers and global information about corporate governance. access to experts worldwide, publishes background material and academic research on accounting, auditing, corporate Transparency International governance (“The Corporate Governance of Listed Companies: http://www.transparency.org A Manual for Investors,� Second Edition ) and other investment A global civil society organization leading the fight against cor- topics (also webcasts, podcasts). ruption through a global network including more than 90 locally established national chapters and chapters-in-formation. Global Corporate Governance Forum http://www.gcgf.org/ World Bank Reports on the Observance of Dedicated to corporate governance reform in emerging markets Standards and Codes (ROSCs) and developing countries, the Forum provides training materi- http://www.worldbank.org/ifa/rosc.html als on corporate governance, publishes research on corporate ROSCs help to better identify weaknesses that may contribute to governance issues, and reports periodically on its activities economic and financial vulnerability, foster market efficiency and worldwide. discipline, and ultimately contribute to a global economy, which is more robust and less prone to crisis. International Finance Corporation www.ifc.org/corporategovernance REGIONAL ORGANIZATIONS IFC, a member of the World Bank Group, is the largest global de- velopment institution focused on the private sector in developing Africa (Sub-Saharan) countries. Website provides extensive resources on corporate governance around the world, particularly about family-owned FITC - Nigeria (Financial Institutions Training Centre) enterprises (FOEs) and state-owned enterprises (SOEs). http://www.fitc-ng.com/index.asp Designs and delivers training programs in general manage- International Chamber of Commerce ment, leadership development, banking and finance. http://www.iccwbo.org ICC activities cover a broad spectrum, from arbitration and dis- Institute of Directors - Southern Africa pute resolution to making the case for open trade and the market http://www.iodsa.co.za/ economy system, business self-regulation, fighting corruption or Aims to bring about development and lifelong learning through combating commercial crime. internationally recognized director development and educational programs. International Corporate Governance Network http://www.icgn.org Asia and The Pacific Global membership organization operating in 50 countries to raise standards of corporate governance worldwide. ICGN is Asian Corporate Governance Association sought for its views on corporate governance issues. Its “In the http://www.acga-asia.org/ News� section provides good insights into trends in corporate Independent, nonprofit membership organization works with governance stories. investors, companies and regulators on effective corporate governance practices in Asia. International Integrated Reporting Council http://www.theiirc.org/ Bangladesh Enterprise Institute Comprised of leaders from the corporate, investment, account- http://www.bei-bd.org/ ing, securities, regulatory, academic and standard-setting sec- Nonprofit, non-political research center that promotes issues of tors, as well as civil society. Publishes reports. importance to the private sector; seeks to influence policy for the development of a market-oriented economy. Islamic Financial Services Board http://www.ifsb.org/ The Institute of Company Secretaries of India Promotes soundness of Islamic financial services industry by http://www.icsi.edu/ issuing global standards and guiding principles banking, capital Only recognized professional body to develop and regulate the markets and insurance sectors. profession of Company Secretaries in India. WHO’S RUNNING THE COMPANY? 63 SELECTED RESOURCES Pakistan Institute of Corporate Governance Private Sector Organization of Jamaica http://www.picg.org.pk/index.php http://www.psoj.org/ Public-private partnership to promote good corporate gover- Its Corporate Governance Committee aims to promote best prac- nance practices in Pakistan. tices to leaders of business enterprises. Europe Procapitales (Asociación de Empresas Promotoras del Mercado de Capitales European Bank for Reconstruction and Development (EBRD) http://www.procapitales.org/ http://www.ebrd.com/pages/homepage.shtml Trade association of agents in Peruvian capital market; promotes International financial institution that supports projects in 29 good corporate governance practices. countries, from central Europe to central Asia. Promotes entre- preneurship and fosters transition towards open and democratic Middle East and North Africa market economies. Corporate Governance Responsibility Forum European Confederation of Directors’ Associations http://www.cgrforum.com/Public/Main_English.aspx?site_ http://www.ecoda.org/about.html id=1&page_id=308 Aims to promote directors’ skills, professionalism and impact on Regular event gathering of global experts on corporate gover- society. nance and responsibility together with business leaders in the MENA region. European Corporate Governance Institute http://www.ecgi.org/index.htm Hawkamah, the Institute for Corporate Governance Provides a forum for debate and dialogue among academics, http://www.hawkamah.org/ legislators and practitioners, focusing on major corporate gover- Aims to promote corporate sector reform and good governance, nance issues. assist the countries of the MENA region in developing corporate governance. Baltic Institute of Corporate Governance http://www.corporategovernance.lt/ Lebanese Transparency Association Pursues global-class transparency and competitiveness of http://www.transparency-lebanon.org/ Baltic public, private and state or municipality owned companies First Lebanese NGO focusing on curbing corruption and promot- through corporate governance. ing the principles of good governance. Institute of Directors in the UK North America http://www.iod.com/home/default.aspx Supports, represents and sets standards for company directors. National Association of Corporate Directors http://www.nacdonline.org/ Slovenian Directors’ Association Aims to advance exemplary board leadership — for directors, by http://www.zdruzenje-ns.si/zcnsweb/vsebina.asp?s=381&n=1 directors. It is focused on meeting the needs of board members Only membership organization in Slovenia representing supervi- and supporting directors to perform more effectively and ef- sory board members. Provides education, certification, research, ficiently. professional standards, publishing and consulting services to members. Council of Institutional Investors www.cii.org Latin America and The Carribbean The nonprofit, nonpartisan association of pension funds and other employee benefit funds, foundations and endowments (with Brazilian Institute of Corporate Governance combined assets that exceed $3 trillion) has publications, com- http://www.ibgc.org.br/Home.aspx ment letters and other resources to learn more about corporate Central forum for introduction and dissemination of the corporate governance. governance concept and best practices in Brazil. Center for Excellence in Corporate Governance (El Centro de Excelencia en Gobierno Corporativo) n ACADEMIC INSTITUTIONS AND THINK TANKS http://ols.uas.mx/cegc/ Many universities have established research centers for corporate Nonprofit that promotes excellence in corporate governance in governance. These websites publish research, sponsor public Mexico. Sponsors programs providing updated methodology forums and other events and recommend other websites. These and tools of corporate governance. institutions often make available experts to provide background and analysis to journalists. Center for Corporate Governance and Capital Markets (Centro de Gobierno Corporativo y Mercado de Capitales) Center for Corporate Governance, http://www.cgcuchile.cl/ Tuck School of Business, Dartmouth Includes representatives of civil society, academia and private http://mba.tuck.dartmouth.edu/ccg/ sector to promote better corporate governance practices in Research focuses on understanding how international differences Chile. in capital markets, ownership structures, and legal traditions affect the optimal design of financial contracts. The center also The IGCLA.net examines potential conflicts between shareholders (as owners of http://igcla.wordpress.com/ the firm) and other corporate constituents. Informal association of Corporate Governance Institutes from Latin America established at Corporate Governance Roundtable organized by OECD and Global Corporate Governance Forum. 64 WHO’S RUNNING THE COMPANY? Centre for Corporate Governance, London Business School n SPECIFIC TOPICS http://www.london.edu/facultyandresearch/researchactivities/centre- forcorporategovernance.html Accounting and Auditing Access faculty and monitor research through news updates. Accounting and audit firms provide background information on corporate governance and often conduct research on issues Centre for Corporate Law and Securities Regulation, companies confront. While the focus of their websites is on University of Melbourne boards that are existing or potential clients, their updates and http://cclsr.law.unimelb.edu.au analyses can be useful. Professional groups offer research and Undertakes and promotes research on corporate law and securi- may serve as forums for discussion. They may help journalists ties regulation. Provides links to corporate governance sites find accounting and auditing experts. worldwide. Deloitte Center for Corporate Governance The INSEAD Corporate Governance Initiative http://www.corpgov.deloitte.com/site/us/template.PAGE/ http://www.insead.edu/facultyresearch/centres/ governance_initiative/ Ernst & Young – Governance and Reporting Sponsors cutting-edge research and teaching tailored to the http://www.ey.com/US/en/Issues/Governance-and-reporting needs facing board members in an international context. Pro- vides case studies and access to experts and alumni. Institute of Chartered Accountants of England and Wales http://www.icaew.com/ Knowledge@Wharton Professional membership organization supporting over 138,000 http://knowledge.wharton.upenn.edu/ chartered accountants worldwide. Publishes reports and blogs Analysis of news events affecting economies from business and hosts webinars on accounting and governance issues. Posts school’s faculty. news updates. National University of Singapore Governance and International Federation of Accountants Transparency Index http://www.ifac.org http://bschool.nus.edu/CGIO/OurProjects/Governance Promotes best practices and speaks out on public interest issues TransparencyIndex.aspx for its 2.5 million members in 127 countries and jurisdictions. Pub- The index evaluates the quality of corporate governance and lishes reports and issues comments on regulatory and legislative transparency for more than 700 companies in Asia.The gover- proposals. nance component covers board matters, remuneration, account- ability and audit. The transparency measurement focuses on KPMG Audit Committee Institute how companies communicate with their shareholders. http://www.kpmginstitutes.com/aci/ Oxford University Centre for Corporate Reputation Case Studies PricewaterhouseCoopers (PwC) Center for Board Governance http://www.sbs.ox.ac.uk/centres/reputation/research/Pages/ http://www.pwc.com/us/en/corporate-governance CaseStudies.aspx Access research and faculty on the reputational consequences Corporate Governance Policies in Company Statements of corporate behavior, including relationships between journal- Companies may publish their corporate governance policies on ists and corporate decision-makers. their websites and include a statement in their annual reports. Institutional investors are requiring companies they hold shares Sabanci University Corporate Governance Forum of Turkey in to provide written, disclosed governance procedures and poli- http://cgft.sabanciuniv.edu/about/background cies. The following examples give a flavor of corporate gover- Contributes to the improvement of corporate governance frame- nance policies that may be found in company statements. Please work and practices through scientific research, supports the note that this information is for illustrative purposes only and does policy development process by active engagement, encourages not endorse or guarantee the particular standards of corporate and facilitates dialogue between academicians and practitio- governance in the companies listed below. ners, and disseminates research. Access Ban Weinberg Center for Corporate Governance, http://www.accessbankplc.com/Pages/page.aspx?value=45# University of Delaware A large financial services provider based in Nigeria with interests http://www.delawarecorporategovernance-blog.com/ across Africa and in the United Kingdom. Provides a forum for business leaders, members of corporate boards, the legal community, academics, practitioners, graduate BHP Billiton and undergraduate students, and others interested in corporate www.bhpbilliton.com governance issues to meet, interact, learn and teach One of the world’s largest independent mining, oil and gas com- panies based in Australia. Yale School of Management Millstein Center for Corporate Governance Hysan Development Company Limited http://millstein.som.yale.edu/ http://www.hysan.com.hk/eng/index_company.html Leading global resource for studying the premise that corpora- A leading property investment, management and development tions should serve society responsibly, ethically and transpar- company based in Hong Kong. ently. Efforts are directly related to understanding the capacity of corporations and institutional investors around the world to deal Natura with strategy and risk, and their alignment with each other and http://www.natura.net with the interests of beneficial owners. A leading Brazilian cosmetics company which emphasizes sus- tainability in its governance and products. WHO’S RUNNING THE COMPANY? 65 SELECTED RESOURCES Petronas Institutional Investors http://www.petronas.com.my/Pages/default.aspx An integrated international oil and gas company, wholly owned Aberdeen by the Government of Malaysia. www.aberdeen-asset.com Tata Group Bradesco http://www.tata.com http://www.bradescori.com.br/site/conteudo/governanca/default. The Code of Conduct of this prominent Indian company covers aspx?secaoId=730 more than 100 operating companies in seven business sectors CalPERS globally. http://www.calpers-governance.org/ Turkcel Hermes http://www.turkcell.com.tr/site/en/turkcellhakkinda/Sayfalar/genel. http://www.hermes.co.uk/Portals/8/The_Hermes_Ownership_Prin- aspx ciples_US.pdf A prominent international mobile communications company in Turkey. Ratings Several organizations provide independent assessments of a Dispute Resolution company’s compliance with corporate governance, which may Centre for Effective Dispute Resolution form the basis of a story. http://www.cedr.com CLSA CEDR is an independent, non-profit organization with a mission https://www.clsa.com/index.php to cut the cost of conflict and create choice and capability in The independent brokerage and investment bank publishes, in dispute prevention and resolution. CEDR provides mediation, collaboration with the Asian Corporate Governance Association, consultancy, and training services. the most comprehensive assessment of corporate governance performance, issues and trends in Asia. Ethics GovernanceMetrics International Ethics Institute of South Africa http://www2.gmiratings.com/ http://www.ethicsa.com U.S. based, covers more than 20,000 companies globally. Non-profit that conducts research, provides training and advisory Provides analysis, reports, research and ratings. Subscribe to services, and conducts assessments and certifications. Re- FeedBurner blog for updates. search available online and resource center has books and other materials available on-site only. Corporate Social Responsibility, Sustainability Ethisphere Investors, interest groups and governments are pressing compa- http://ethisphere.com nies to adopt policies and practices that will ensure the com- International think-tank dedicated to the creation, advancement pany’s long-term sustainability and minimize its impact on society and sharing of best practices in business ethics, corporate and the environment. The following organizations may provide social responsibility, anti-corruption and sustainability. Provides background on issues and some assess companies for their rankings, holds events including webcasts, and publishes back- social responsibility. ground materials. Caux Round Table Globethics.net http://www.cauxroundtable.org/ www.globethics.net An international network of business leaders working to promote A worldwide ethics network based in Geneva that provides an a moral capitalism. The CRT Principles apply fundamental ethical electronic platform for ethical reflection and action. Online library norms to business decision-making. offers free access to journals, encyclopedias, e-books, and other Center for International Private Enterprise resources. Journalists can expand contacts through networking http://www.cipe.org opportunities. CIPE works with business leaders, policymakers, and journal- Markkula Center for Applied Ethics ists to build the civic institutions vital to a democratic society. Its http://www.scu.edu/ethics key program areas include: anti-corruption, advocacy, business Center for Santa Clara University conducts research and holds associations, corporate governance, democratic governance, ac- forum on ethical issues. cess to information, the informal sector and property rights, and women and youth. Rio Tinto Statement of Business Practices http://procurement.riotinto.com/ENG/supplierregistration/34_ Equator Principles the_way_we_work.asp www.equator-principles.com Based on IFC and World Bank standards, these principles es- Standard Approach to Sustainability tablished a credit risk management framework for determining, http://www.standardchartered.com/en/sustainability/ assessing and managing environmental and social risk in project our-approach/ finance transactions. Thrivent Financial Code of Conduct https://www.thrivent.com/aboutus/privacy/conduct.html 66 WHO’S RUNNING THE COMPANY? Extractive Industries Transparency Initiative SustainAbility http://eiti.org/ www.sustainability.com Sets the global standard that ensures accountability and trans- Founded in 1987, the business helps clients and partners better parency of the revenues from a country’s extractive sector. understand and create business and societal value in response to issues from consumption, transparency, stakeholder engage- The Global Reporting Initiative ment and strategy to innovation and transformation. http://www.globalreporting.org/ A non-profit organization that promotes economic, environmental United Nations Global Compact and social sustainability. GRI provides all companies and organi- http://www.unglobalcompact.org/ zations with a comprehensive sustainability reporting framework This is a strategic policy initiative for businesses that are commit- that is used worldwide. ted to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labor, environ- International Institute for Environment and Development (IIED), ment and anti-corruption. Participatory Learning and Action Series www.iied.org IIED supports journalists in a broad range of media to report more often and more accurately on the links between environ- n ONLINE LIBRARY ment and development in ways that are relevant to their various Open-Access Text Archive audiences. http://archive.org/details/texts Responsible Investor An Internet library of books, articles and other materials in digital http://www.responsible-investor.com/ format. Also provides an extensive list of links for many online The only dedicated news service reporting on responsible libraries established by nonprofit organizations, universities and investment, ESG (environmental, social and governance) and others worldwide. sustainable finance issues for institutional investors globally. Site provides free access to limited number of articles. WHO’S RUNNING THE COMPANY? 67 GLOSSARY Definitions are reprinted or adapted from several sources, including Practical Guide to Corporate Governance, Organization for Economic Cooperation and Development (OECD), Businessdictionary.com and Investopedia.com A Audit: Is a review of the historical financial statements to enhance the degree of confidence in them. Then, examination and verification Accountability: In corporate governance terms, it is the responsi- of a company’s financial and accounting records and supporting bility of a board of directors to shareholders and stakeholders for documents by a competent, qualified professional and independent corporate performance and actions of the corporation. It is the con- external auditor is to assure readers that they are in accordance with cept of being responsible for all actions performed by the company’s applicable reporting and accounting requirements, are free from management and reporting this information to stakeholders. It also material misstatement due to fraud or error and are true and fair repre- refers to the accountability of management to the board for its actions sentation of the company’s financial condition. in running the business. Audit Committee: A committee constituted by the board of directors, Accounting Standards (also see Generally Accepted typically charged with oversight of company reporting and disclosure Accounting Principles, GAAP): A widely accepted set of rules, of both financial and non-financial information to stakeholders. The conventions, standards and procedures, as established by committee usually is responsible for selecting and recommending accounting standard setters, for recording and reporting financial the company’s audit firm to be approved by the board/shareholders. transactions and information. Usually the Audit Committee is also responsible for the control environ- ment of the company and risk oversight, if there is no separate risk Acquisition: Gaining control of another corporation by share pur- committee of the board. chase or exchange. An acquisition can be hostile or friendly. Agency Conflicts: Problems that can arise when a principal hires an agent to act on his behalf, giving the agent authority and decision- B making power. Board of Directors: The collective group of individuals elected by Agency Costs: Costs incurred by an organization for problems the shareholders of a company to direct and control the company. related to divergent management-shareholder objectives. The costs They define vision and mission, set the strategy and oversee the consist of two main sources: costs inherently associated with using management of the company. The board is charged with selecting the an agent (e.g., the risk that agents will use organizational resources chief executive officer (CEO), defining the compensation package of for their own benefit) and costs of techniques used to mitigate the officers and setting the long-term objectives of the firm and oversight problems associated with using an agent (e.g., the costs of produc- of risk and compliance ing financial statements or the use of share options to align executive interests to shareholder interests). Board Statutes (or Board Charter): Document that details the roles, responsibilities, composition and functioning of the board of directors Agency Theory: A theoretical framework used to describe the rela- and its committees. tionship of power and interest between someone, the principal, who hires a second party, the agent, to act on his behalf. By-Laws: A written document stating the rules of internal governance for a company as adopted by its board of directors or shareholders. American Depositary Receipt (ADR): A security issued by a U.S. Includes topics such as election of directors, duties of officers, and bank in place of the foreign shares held in trust by that bank, facilitat- how share transfers should be conducted. ing the trading of foreign shares in U.S. markets. Annual General Meeting (AGM) (Shareholders’ Assembly): A shareholders’ gathering, usually held just after the end of each fiscal C year, at which shareholders, directors, and management discuss the Cash Flow Rights: The right to receive a specified portion of the previous year, the financial statements and the outlook for the future. company’s profits. Cash-flow rights for shareholders are determined At the meeting, directors are elected and other shareholder concerns by the company, based on the amount invested and the ownership of may be raised. The AGM is the main opportunity for shareholders to the specific class of shares. put questions directly to the directors of the company and to exercise their voting and decision-making power. Chairman/Chairperson of the Board: Highest-ranking director in a board of directors. The chairman is responsible for leadership of the Annual Report: A document issued annually by companies to their board, the effectiveness of the board’s functioning, that it has proper shareholders. It contains information on financial results and overall access to all the information it requires to make an informed decision, performance during the previous fiscal year and comments on the the elaboration of the board agenda, and ensuring that the board’s future outlook. The Annual Report should include the Corporate business is conducted in the interest of all shareholders. Governance Report and other narrative reports, such as the CEO’s Report. Company Charter: An official document filed with the relevant government agency in the country where the firm is incorporated. The Auditor’s Opinion: A certification that accompanies financial state- charter outlines the corporation’s purpose, powers under law, autho- ments, provided by independent auditors who audit a company’s rized classes of securities to be issued and the rights and liabilities of financial statements and records. The opinion indicates whether or shareholders and directors. not, overall, the financial statements present a fair reflection of the company’s financial condition. 68 WHO’S RUNNING THE COMPANY? Chief Executive Officer (CEO): The highest-ranking management Cumulative Voting: A voting system that gives minority sharehold- officer of the company who reports to the board of directors. The ers more power, by allowing them to cast all of their board of director CEO is tasked with short-term decisions and leadership of employ- votes for a single candidate, as opposed to regular or statutory voting, ees, implementation of strategy, risk management and oversight of in which shareholders must vote for a different candidate for each management.. available seat, or distribute their votes between a number of candi- dates. Classified Board: Structure of board of directors in which every year, a fraction of the directors are elected, each for a multiyear term. Current Ratio (current assets/current liabilities): A measure of Also called classified board. the short-term liquidity of the firm — the ability to pay its short-term liabilities. Codes of Conduct/Ethics: Developed and adopted by organiza- tions to define appropriate behaviors and actions on relevant and potentially delicate subjects. It is an indicator of how the company will achieve its goals and go about its business. D Committees of the Board: Comprises board members only; com- Daily Volume of Shares Traded: Volume of a given share traded on mittees are established to assist the board in the analysis of specific the financial exchange each day. subjects outside of regular board meetings. Common committees are Debt Ratio (current + long term financial debt / total assets): A the Audit, Remuneration and Nomination Committees. measure of the long-term financial leverage of the firm. Common Shares: Equity securities representing ownership in a Dividend Yield: The ratio of annualized dividends to the price of a corporation and providing the holders with voting rights and the right share. Dividend yields are used widely to measure the income return to a share in the company’s residual earnings through dividends and/ of a share. or capital appreciation. Disclosure: Refers to the obligation of a firm to provide material, Compliance: Agreeing to and abiding by rules and regulations. In market-influencing information in accordance with the requirements of general, compliance means conforming to a specification or policy a number of parties, including regulatory authorities, the public or in (internal or external), standard or law that has been clearly defined. accordance with standards, such as accounting standards, and self- Concentrated Ownership: A form of ownership in which a single regulatory contracts. Disclosure contributes to the transparency of the shareholder (or a small group of shareholders) holds the majority of firm, which is one of the main corporate governance principles. the company’s voting shares. Dispersed Ownership: An ownership structure in which there is Conflict of Interest: Reflects both a legal and/or ethical situation no controlling block of shareholders. The shares are held by many where loyalties, interests and duties compete and conflict. It includes shareholders, each of whom owns only a small percentage of shares, a situation that has the potential to undermine the impartiality of a and none of whom can make or influence decisions on corporate person because of the possibility of a clash between the person's matters alone. self-interest and professional interest or public interest. It may also be Dual-class shares: Shares that have different rights, such as A Class a situation in which a party's responsibility to a second party limits its and B Class shares, where one class has voting rights and the other ability to discharge its responsibility to a third party. Directors have a does not. duty to avoid conflicts of interest and should always act in the best interests of the company and the shareholders as a whole. Control Block: The combined group of shares that represent the E majority of a company’s voting shares. EBITDA Margin (EBITDA / operational revenues): A measure of Controlled Companies: Firms in which an individual or a number of profitability, indicating the margin of return for a company’s Earnings connected individuals or a legal entity holds the majority of the voting Before Interest, Tax, Depreciation, and Amortization. rights. Economic Profit (Residual Profit): The profit earned after deduc- Controlling Shareholders: Shareholders who own enough of the tions for the cost of all capital invested. Economic profit equals operat- company’s voting capital to control the composition of the board ing profit after income tax minus cost of capital invested. of directors — typically, this is 30 percent or more and is usually a controlling family or state shareholder. Economic Value Added (EVA): A financial measure that estimates the true economic profit after adjustments/corrections to deduct the Cost of Capital: The expected rate of return the market requires to opportunity cost of equity capital. The measure represents the value attract funding for a particular investment. created, above the required return, for the company’s shareholders. Cost of Debt: The cost of funds borrowed at current market rates. Executive Session: The portion of a board of directors’ meeting that excludes the chief executive or any other executive. Cost of Equity: The minimum rate of return a firm must offer the owners — as compensation for a delay in the return on the invest- ment and for taking on the risk. WHO’S RUNNING THE COMPANY? 69 GLOSSARY F H Family Constitution: Guidelines for the rights and duties of family Hostile Takeover: The continued pursuit of a company acquisition members who will share in the family’s resources, mainly those as- after the target company’s board rejects the offer; or a situation, in sociated with invested companies. which the bidder makes an offer without prior notification of the target company’s board. Family Council: Organized forum for family members to meet and discuss the current and future state of the family business. Members I may, or may not, be directly involved in the day-to-day business operations. The family council is a way of building family unity and co- Independent Auditors: Professionals from an external audit firm hesiveness through a shared vision of the family’s guiding principles charged with undertaking an audit of the financial statements. An and to separate the professional management of the firm from the audit may be required annually, half-yearly or quarterly. In most coun- personal family issues. It is usually the forum to determine how the tries the independent auditors undertake an annual audit. They must family shareholding will be voted on any matter. have no personal interest in the financial statements and ought not to have had any role in the development of the financial statements. The Family Office: A group of support services designed for families independent auditor is required to render an unbiased judgment that with very large and complex sets of assets. Often they will com- the financial statements and accounting records of the firm are likely prise financial, legal and investment banking support. The office is to be free from material misstatement and are a fair reflection of the intended to protect family interests. The Family Office is intended as financial position of the firm. a vehicle for optimal management and comprehensive coordination of individual wealth components. The family office can be a tool to Independent Director: Someone whose only nontrivial professional, implement broader succession, leadership, and family governance familial, personal or financial connection to the corporation, its chair- plans. man, CEO or any other executive officer is his or her directorship. The independent director is expected to be capable of applying objective Family-Owned Businesses: Companies and projects in which the judgment to all company decisions. controlling shareholders belong to the same family (immediate or wider family members) or group of families. Insider trading: Trading in securities by someone connected with the company or with special knowledge about the company. Insider Fairness: Respect for the rights of all shareholders and stakehold- trading can be illegal or legal, depending on when the insider makes ers. One of the corporate governance principles ensuring the equal the trade. It is illegal when the material information is not available to treatment of all shareholders and attention to the legitimate rights of the public and such information has the capacity to have an effect on stakeholders. the share price. Financial Statements: a complete set of financial statements Institutional investors: Are professional investors who act on behalf comprises a balance sheet, an income statement, a statement of of beneficiaries, such as individual savers or pension fund members. changes in equity, a cash flow statement and notes. They collectively Institutional investors/shareholders may be the collective investment communicate an entity’s economic resources or obligations at a point vehicles, which pool the savings of many or the asset managers to in time or the changes therein for a period of time in accordance with whom they allocate the funds. (Definition taken from ICGN – Corporate a financial reporting framework. Risk Oversight Guidelines 2010). Free-Float: The portion of shares negotiated in the market, giving Internal Audit: An independent, objective assurance and consulting liquidity to shares. These shares are not held by large owners and are activity designed to add value and improve an organization’s opera- not shares held in the company’s treasury. tions. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effec- FSA: Financial Services Authority in the United Kingdom, responsible tiveness of risk management, control and governance processes. for market regulation and oversight. Investor Relations: The corporate communications department of a company. This department specializes in information and disclosure management for public and private companies as they communicate G with the investment community at large. Generally Accepted Accounting Principles (GAAP): Account- ing rules, conventions and standards for companies, established by reporting requirements and accounting standard setters in the L country. Each country is likely to have a GAAP , which is unlikely to be identical to any other country’s GAAP . For example US GAAP is the Lead Director: A term used in the United States to refer to an inde- body of accounting policies applicable to U.S.-registered firms and pendent director who should provide counterbalance to the power of the GAAP rules are issued by the Financial Accounting Standards any controlling shareholders’ representatives on the board and/or the Board (FASB). These are not identical to IFRS standards issued by CEO. The Lead Director tends to be the leader of several independent the International Accounting Standards Board and applied in Europe directors on the board and who ensures that the supervisory respon- and many other countries. sibilities of the board are being accomplished. The Lead Director’s core responsibilities include involvement in agenda setting, chairing executive sessions, providing feedback to the CEO after executive sessions and helping to shape boardroom dynamics. Liquidity Index: Created by stock markets to provide a broad indica- 70 WHO’S RUNNING THE COMPANY? tion of the traded percentage of volume for a given stock over the to act on behalf of another party. Very often, shareowners not attend- total volume traded by all stocks in the period. ing a company’s annual meeting, may choose to vote their shares on resolutions being put to the meeting by proxy. The proxy will cast votes on relevant issues on the shareowners’ behalf. Most companies, when they circulate notices for the annual meeting M to shareowners, include a proxy notice. This is a notice provid- Market Capitalization: The market value of the firm, defined by the ing information on the issues on which there will be a vote at number of outstanding stock multiplied by the market price of the the meeting. The proxy information should allow shareowners to stock. make an informed decision on the issue. Minority Shareholders: Those shareholders with minority stakes in Pulverized/Dispersed Ownership: An ownership structure in a company controlled by a majority shareholder — usually less than which there are no controlling shareholders. a 5 percent stake. However, each country may determine various Pyramidal Structure: An organizational structure common in thresholds applicable to the term “minority shareholder.� family-dominated companies. Legally independent companies are controlled by the same family through a chain of ownership relations. N Non-Voting Shares: Owners holding this share class do not com- monly have voting rights at the AGM, except on some matters of high- R est importance. Usually, non-voting shareowners have preferential Related Party: A party is related to an entity if it can directly or rights for receiving dividends. indirectly control the other party or exercise control through other parties; it may also be where parties are subject to a common control from the same source. Related parties tend to have influ- O ence over the financial or operating policies of a firm or have the power to influence another party’s actions. A related party may One-tier board: A board of directors composed of both executive be a close family member (including partners, spouses, children, and non-executive members. It delegates day-to-day business to the other relatives), a key manager in the entity (and their close family management team. Found in U.S., the U.K., Commonwealth countries. members), or entities, such as subsidiaries of the entity, it holding (see Two-tier Board) company, joint ventures, and associates. Ownership Structure: The way in which company shares are distrib- Return on Equity (ROE): Net income/book value of equity. A mea- uted among shareholders. sure of profitability, indicating the percentage return on capital invested by shareholders. P Risk Management: The process of identifying, analyzing, manag- ing and monitoring a corporation’s exposure to risk and determin- Payout Index (dividend per share / earnings per share): A mea- ing optimal approaches to handling such exposure. sure of the dividends paid by the firm based on its net earnings. Price/Earnings (PE) Ratio: A measure of relative valuation of a firm, determined by the current share price divided by the projected earn- S ings per share. Sarbanes-Oxley Act: U.S. legislation that tightened up corporate Present Book Value (PBV): A measure of relative valuation of a financial reporting, introduced a federal accounting supervision firm, given by the current share price divided by the book value of board and criminal liability for executives who are shown to have shares. falsified accounts. Poison Pill: A device designed to prevent a hostile takeover by Say on Pay: The ability of shareholders in a corporation to increasing the takeover cost, usually through the issuance of new actively vote on how much senior executives employed by the preferred shares that carry severe redemption provisions or other company should be compensated. Corporate laws may provide mechanisms that invoke special bonus exit provisions for senior this power to shareholders. executives of the takeover target. Securities and Exchange Commission (SEC): The U.S. agency Preferred Shares: Equity securities representing ownership in a cor- empowered to regulate U.S. financial markets to protect investors. poration with preferential rights over other share classes in regard to All companies listed in U.S. stock exchanges must comply with the payment of dividends and distribution of assets upon liquidation. SEC rules and regulations. Preferred shares usually do not carry voting rights. Shareholders: Holders of shares issued by companies. Proxy: A proxy in CG terms is an person or agent, legally authorized Shareholders’ Agreement: A written document governing the relations among shareholders and defining how the company will be managed and controlled. The agreement helps to align the objectives of controlling shareholders to safeguard common interests and to protect the interests of minority shareholders. WHO’S RUNNING THE COMPANY? 71 GLOSSARY Shareholders Rights: The rights resulting from ownership of Trading Policy: Terms and conditions that specify the condi- shares, which may be based in legal rights or other rights con- tions under which insiders — typically directors and officers of a tracted with the company. The basic shareholder rights include company — can trade company shares. It also includes specific the right to information on the company, to attend the meeting of periods when insiders may not trade their shares, called “black shareholders, to elect directors, to appoint the external auditor, out periods.� voting rights and cash flow rights. Transparency: The corporate governance principle of publishing Standard & Poor’s 500 Index (S&P500): An index of the 500 larg- and disclosing information relevant to stakeholders’ interests and est U.S. companies, accounting for 85 percent of the dollar value to shareholders on all price-sensitive material matters of all shares listed on the New York Stock Exchange (NYSE). The index provides a general measure of the overall performance of Tunneling: An illegal business practice in which a majority share- the U.S. stock market. holder or a high-level company insider directs company assets or future business to themselves for personal gain. Solvency Ratio (EBIT/Interest Expense): A measure of a firm’s ability to pay its interest expenses in a given period. Two-tier Board: A board of directors that divides supervisory and management duties into two separate bodies. The supervisory Staggered Board: Structure of board of directors in which every board, comprising non-executive directors, oversees the manage- year a fraction of the directors are elected, each for a multiyear ment board, comprising executive directors. Common in France, term. Also called a classified board. Germany, Eastern Europe. Not all styles of two-tier board are identical. Stakeholder: A person or organization with a legitimate interest in a project or company. In a more general sense, it refers to suppliers, creditors, clients, employees, and the local community — all affected by the actions of the company. V Share Multiple (Share Ratios): Ratios designed to measure the Value Based Management (VBM): Value Based Management claims of shareholders relative to earnings (cash flow per share) (VBM) is the management approach that ensures corporations and equity (book value per share) of a firm. are managed consistently on value (normally maximizing share- holder value). The three elements of VBM are: creating value Share Option: An agreement, or privilege, which conveys the — how the company can increase or generate maximize future right to buy or sell a specific security or property at a specified value, similar to strategy; managing for value — governance, price, by a specific date. The most common share options are: change management, organizational culture, communication and calls — the right to buy a specified quantity of a security at a set leadership; and measuring value — valuation. strike price at a time on or before expiration — and puts — the right to sell a specified quantity of a security at a set strike price Voting Rights: The right to vote at shareholders’ meetings on is- at a time on or before expiration. sues of importance for the company. Voting Shares: Shares that give the shareholder the right to vote on matters of corporate policy, including elections to the board of T directors. Tag-Along Rights: If a majority shareholder sells his/her stake, minority holders have the right to participate and sell their stake under the same terms and conditions as the majority sharehold- W er. This right protects minority shareholders and is a standard Weighted Average Cost of Capital (WACC): A measure of return inclusion in shareholders’ agreements. on a potential investment. The measure includes cost of debt and Takeover: The purchase of a public company (the target) by equity, weighted by their relative contribution to overall costs in another company (the acquirer or bidder). proportion to total funding and the cost of the related interest or dividend payments Tobins’ Q: A proxy for corporate market value commonly used in academic literature. It is calculated as the market value of a firm’s assets divided by the replacement value of the firm’s as- sets. The indicator is named for James Tobin, the Yale University Nobel-winning economist who created it. 72 WHO’S RUNNING THE COMPANY? About the Forum The Global Corporate Governance Forum is the leading knowledge and capacity-building platform dedicated to corporate gover- nance reform in emerging markets and developing countries. The Forum offers a unique collection of expertise, experiences, and solutions to key corporate governance issues from developed and developing countries. The Forum’s mandate is to promote the private sector as an engine of growth, reduce the vulnerability of developing and emerging markets to financial crisis, and provide incentives for corporations to invest and perform efficiently in a transparent, sustainable, and socially responsible manner. In doing so, the Forum partners with international, regional, and local institutions, drawing on its network of global private sector leaders. 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