Examining Corporate Governance Practices By CIS Managers
Corporate Governance is the new buzzword. The aftermath of Asian Crisis in 1997, the Enron and WorldCom cases, etc, have instilled the envorcement of new regulations and codes like the Cadbury Report, Sarbanes & Oxley act.
But one of the main areas in corporate governance that has caught the headlines recently is risk management. There is a widely held perception that in recent years many boards have not managed the risks associated with their businesses well – whether that was because they did not identify the risks fully or whether because having identified the risks, they did not take appropriate action to manage them.
The application of risk management techniques to asset (/portfolio) management crucially depends upon modern portfolio theory, beginning with the seminal contributions of Markowitz (1952), Treynor (1961, 1999), Sharpe (1964), and Lintner (1965).
Managing risk is, of course, relevant to all parties in the business and financial world as the article by Sophia Grene ‘Managing risk is the main task ahead’ (Financial Times, Pg 1, 4thJanuary 2010) illustrates. In her article, Sophia points out that ‘many financial models failed in the past two years as markets demonstrated they did not behave according to conventional assumptions’ and that ‘the main challenge for asset managers in the coming decade is understanding, managing and communicating risk’. Good governance practices are largely important in the management of risks process. The absence of concrete guidance on expected standards of governance, and associated sanctions, is likely to result in widely differing investment by companies in corporate governance measures.
The research will start with a study of the relevant theories of Corporate Governance (e.g. agency theory, stewardship theory, stakeholder theory, etc) applicable to Asset Management and a study of the codes and standards on corporate governance (the code of corporate governance for Mauritius - 2003, Cadbury Report – 1992, Greenbery Report – 1995, OECD (Organization for Economic Cooperation and Development) Principles of Corporate Governance – 1999, Public Accounting Reform and Investor Protection Act of 2002.. ) and also an analysis of recent studies pertaining to corporate governance practicable by Investment Managers. We will also consider risk management techniques employed by fund managers to avoid/minimise risks. Recent studies on risk management in asset management will also be examined. Thus Corporate Governance theories shall be considered while investigating on corporate governance practices by CIS Managers in Mauritius and about Risk Management while dealing in investment.
The aim of this research is to examine corporate governance practices by CIS Managers and compliance to the codes ascertaining good governance practices. We shall identify the risk management techniques involved while managing the funds and how good governance practice aid in avoiding/minimising the risks. Moreover, concepts from recent research works and relevant theories will be applied to the current situations and analysed.
2.0 Literature Review
2.1 Corporate Governance
The Originated from a Greek verb kubernan ( to pilot or steer).
Corporate Governance has been practised ever since the existence of corporate entities. Yet, the study of the subject is as old as about half a century only. The word ‘Corporate Governance’ was not much in use until the 1980’s. Now it has become the practise to which an organisation is run; laying emphasis on accountability, integrity and risk management.
The turmoil started with the UK Cadbury Report in the 1990’s. The report considerably influenced thinking about good governance practices in other countries with them founding their own reports on corporate governance, for instance, the Viénot Report (1995) in france, the King Report (1995) in South Africa, the Report on corporate governance in Hong Kong from Hong Kong society of Accountants (1996), the Netherlands Report (1997), amongst others.
The concept of corporate governance is identified in various jurisdictions. Still, corporate governance remains a topic, blurred at the edge, to which the proponents have not yet settled to any universally accepted definition. Hence, to understanding the topic, it seems more appropriate to list several definitions here, rather than any specific one.
“Corporate governance is to conduct the business in accordance with the owner’s or shareholders desires, which generally make as much money as possible while confirming to the basic rules of the society embodied in the law and local customs” Milton Friedman (DATE????).
“Corporate Governance is concerned with holding the balance between economic and social goals, and between individual and communal goals...the aim is to align as nearly as possible the interests of individuals, corporations and society.” Sir Adrian Cadbury, Corporate Governance Overview, 1999, World Bank Report.
Corporate governance is “the methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and they earn a return on their investment.” Shleifer and Vishny, 1997.
“Corporate Governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance” OECD, April 1999