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Corporate Governance
Corporate
Governance
SIXTH EDITION

Christine A. Mallin

1
 3
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Christine Mallin 2019
The moral rights of the author have been asserted
Third edition 2010
Fourth edition 2013
Fifth edition 2016
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
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rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
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Library of Congress Control Number: 2018956933
ISBN 978–0–19–253873–4
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Principles and Recommendations, ASX Corporate Governance Council (2014) © Australian
Securities Exchange Limited ABN 98 008 624 691 (ASX) 2014. All rights reserved.
This material is reproduced with the permission of ASX. This material should
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contained in any third party website referenced in this work.
To: Mum and Dad
Preface

Corporate governance is an area that has grown rapidly over recent decades. The global
financial crisis, corporate scandals and collapses, and public concern over the apparent
lack of effective boards and perceived excessive executive remuneration packages have all
contributed to an explosion of interest in this area. The corporate and investment sectors, as
well as public, voluntary, and non-profit organizations, are all placing much more empha-
sis on good governance. More and more universities, both in the UK and internation-
ally, are offering corporate governance courses on undergraduate or postgraduate degree
programmes. Some universities have dedicated taught masters in corporate governance
and/or PhD students specializing in this as their area of research.
Corporate governance is now an integral part of everyday business life and this book
provides insights into its importance not just in the UK, but also globally, including the USA,
Europe, Asia, South Africa, Latin America, Egypt, India, and Australia. The book is designed
to provide an understanding of the development of corporate governance over the past
30 years and to illustrate the importance of corporate governance to the firm, to directors,
shareholders, and other stakeholders, and to the wider business community. It also seeks
to shed light on why there are continuing incidences of corporate scandals, to what extent
these are a corporate governance failure, and in which ways corporate governance—and
the behaviour of those involved in ensuring good governance and an ethical culture in their
business—may be improved in the future.
At the time of writing, the UK is on course with Brexit and plans to exit the European
Union in 2019. The UK has a good reputation for its sound corporate governance frame-
work and as can be seen in this book, the UK and the EU’s corporate governance and
company law are closely related. It will be essential going forward for the UK to maintain
its reputation for transparency, accountability, and integrity in business and to continue to
ensure that its corporate governance framework is fit for purpose in a changing world.

CAM
July 2018
Acknowledgements

I would like to thank everyone who has encouraged and supported me in writing this book.
First, thanks go to those who have encouraged me to research and write about corpo-
rate governance. In the early 1990s, Sir Adrian Cadbury inspired me to undertake research
in the field of corporate governance and was always very supportive. Other leading figures
who have influenced me with their contributions to the development of corporate govern-
ance include Robert (Bob) A.G. Monks, Nell Minow, Jonathan Charkham, Steve Davis, and
Professor Bob Tricker, to name but a few.
Thank you to everyone at Oxford University Press who has contributed to the publica-
tion of this book. Thanks also go to the anonymous reviewers who constructively reviewed
earlier drafts of the book and gave many helpful comments.
A heartfelt thanks to family and friends who have encouraged me to write this book, and
have always been there for me, especially to: Paul; Rita, Bernard, and Christopher; Pam and
Tom; Liz; Alice, Yu Loon, and Thorsten; Ioana, Costin, and Mara; and Jane. Also a special
thank you to Ben. Finally, to Merlin and Harry (‘the two magicians’) for their patience, devo-
tion, and sense of fun at all times.
Contents

How to use this book xiv

How to use the online resources xvi
List of examples and case studies xvii
List of figures and tables xviii
List of abbreviations xx
Glossary xxii

1 Introduction 1
Barings Bank 2
Enron2
Parmalat 3
Satyam 4
Securency 4
China Forestry 5
Olympus Corporation 5
Petrobras 6
Steinhoff 7
Carillion 7
Shortcomings in companies’ corporate governance 8
The role of corporate governance 9
About the book 12

PART ONE Developments in corporate governance 15

2 Theoretical aspects of corporate governance 17

Introduction 17
Theories associated with the development of corporate governance 17
Agency theory 18
Separation of ownership and control 19
x Contents

Transaction cost economics (TCE) 21

Stakeholder theory 22
Stewardship theory 22
Other theoretical perspectives 23
The theories in context 24
Convergence 25
Conclusions 27

3 Development of corporate governance codes 30

The growth in corporate governance codes 30
Corporate governance in the UK 31
Corporate governance codes and guidance in the UK 33
Influence of institutional investors and their representative groups 47
Influences on the regulatory framework 48
Influential corporate governance codes 51
Cadbury Report (1992) 52
OECD Principles of Corporate Governance (1999) as revised (2004 and 2015) 53
World Bank 56
Global Corporate Governance Forum (GCGF) 57
International Corporate Governance Network (ICGN) 57
Commonwealth Association for Corporate Governance (CACG) 58
EU and corporate governance 58
Basle Committee 60
US corporate governance 61
Non-Governmental Organizations (NGOs), public sector,
non-profit organizations, and charities 66
Conclusions 68

PART TWO Owners and stakeholders 77

4 Shareholders and stakeholders 79

Shareholders and stakeholders 79
Stakeholder groups 80
Guidance on shareholders’ and stakeholders’ interests 83
UK guidance 83
International guidance 88
 Contents xi

Roles of shareholders and stakeholders 92

Conclusions 94

5 Family-owned firms 99
Introduction 99
Ownership structures around the world 99
Family-owned firms and governance 101
Smaller quoted companies 104
Unlisted companies 108
Conclusions 110

6 The role of institutional investors in corporate governance 121

Introduction 121
Growth of institutional share ownership 122
Influence of institutional investors 123
Stewardship 126
Development of guidance on institutional investors’ responsibilities 127
UK Stewardship Code 2010 (revised 2012) 129
EU Shareholder Rights Directive (2014) 132
Private equity and sovereign wealth funds (SWFs) 133
Institutional investors’ relationship with investee companies 136
Tools of corporate governance 137
Corporate governance and corporate performance 145
Conclusions 147

7 Socially responsible investment 162

Introduction 162
SRI and corporate governance 163
Strategies for SRI 164
Institutional investors’ policies—UK 165
Institutional investors’ policies—USA 171
Institutional investors’ policies—Europe 172
International guidance 174
CSR indices 176
Corporate social responsibility (CSR) 178
The impact on shareholder value 181
Conclusions 183
xii Contents

PART THREE Directors and board structure 197

8 Directors and board structure 199

Introduction 199
Unitary board versus dual board 199
The UK Corporate Governance Code 200
The board of directors 201
Role of the board 201
Role, duties, and responsibilities 202
Chief executive officer (CEO) 203
Chair204
Senior independent director 205
Company secretary 205
Board subcommittees 206
Audit committee 206
Remuneration committee 209
Nomination committee 210
Risk committee 212
Ethics committee 213
Non-executive directors 213
Independence of non-executive directors 214
Contribution of non-executive directors 216
Higgs Review 217
Director evaluation 217
Succession planning 219
Board diversity 220
Conclusions 225

9 Directors’ performance and remuneration 237

The directors’ remuneration debate 237
UK perspectives 238
Key elements of directors’ remuneration 243
Role of the remuneration committee 244
Role of remuneration consultants 246
Performance measures 247
Remuneration of non-executive directors 249
Disclosure of directors’ remuneration 251
International guidance on executive remuneration 252
‘Say on pay’ 255
Conclusions 258
 Contents xiii

PART FOUR International corporate governance 273

10 Corporate governance in Continental Europe 275

Background 275
Germany 278
Denmark 284
France 288
Italy290
Convergence or divergence 294
Conclusions 295

11 Corporate governance in Central and Eastern Europe 305

Introduction 305
Privatization process and its implications 306
The Czech Republic 308
Poland 312
Russia 315
Hungary 319
Conclusions 322

12 Corporate governance in the Asia-Pacific 331

Introduction 331
Japan333
South Korea 338
Malaysia 341
Singapore 345
China347
Australia 351
Conclusions 355

13 Corporate governance in South Africa, Egypt, India, and Brazil 368

Introduction 368
South Africa 369
Egypt 373
India 375
Brazil 379
Conclusions 383

14 Conclusions 392

Index 397
 How to use this book

Learning objectives
● To understand the various main theories that underlie th
corporate governance
● To be aware of the impact of the form of legal system, cap
ownership structure on the development of corporate go
Learning Objectives
Introducing you to every chapter, learning objectives
outline the main concepts and themes covered in
each chapter to clearly identify what you can expect
to learn. They can also be used to review your learning
and effectively plan your revision.

Examples and Mini Case Studies

Example: Cadbury Plc, UK
Topical, diverse examples and cases illustrate the
This is an example of a family firm that grew over time, developed an a
became an international business. theories and concepts discussed in the chapter with
Today, Cadbury is a household name in homes across the world. It
the nineteenth century when John Cadbury decided to establish a bu
events at real-life organizations, prompting you to
and marketing of cocoa. His two sons joined the firm in 1861 and, ov analyse how organizations actually apply these ideas in
joined, and subsequently the firm became a private limited liability c
A board of directors was formed consisting of members of the family practice.

Questions
Questions
The discussion questions to follow cover the key learning points Check your progress and test your knowledge with
the additional reference material will enhance the depth of stud these end-of-chapter questions, which cover the key
of these areas.
learning points of each chapter.
1. Critically discuss the main theories that have influenced the
governance.
2. Do you think that different theories are more appropriate t
?

Useful Websites
Useful websites
www.accaglobal.com The website of the Association of Charte
Advance your learning and further develop your
information about corporate governance and their related a understanding with relevant and recommended
www.bankofengland.co.uk The website of the Prudential Reg websites that can assist your research and revision.
a part of the Bank of England and responsible for the pruden
banks, building societies, credit unions, insurers, and major i
 How to use this book xv

Financial Times Clippings

Rothschild’s chairman Further real-life, topical examples of corporate
bank’s dynastic reins to governance reported in the FT demonstrate how
operations an
Change coincides with effort to help ride out lean
periods in European M&A market sizeable acqu
frequently the subject permeates our daily news and
Hannah Murphy bank.
The elder M
highlight the most recent and significant governance
Financial Times, 27 February 2018 born in New
the then sepa
issues from the last couple of years.

End-of-Part Case Studies

Part Two case study Institutional investor Longer, integrative case studies pull together ideas
This case study illustrates some of the complex issues of a country tran from across different chapters to better contextualize
how, when an influential group of institutional investors work togethe
of their investee companies which are in a country where there are hum how businesses navigate the range of issues in
instability, and unacceptable risks. This action was part of the SRI rem
Finally it summarizes recent developments relating to corporate gover
corporate governance.
The political instability and human rights abuses make Myanmar
How to use the online resources

Supporting content for both students and registered lecturers of the book is available in the
online resources. Students can test themselves with fill-in-the-blank questions or explore
the subject further with web links to relevant content. Lecturers can download PowerPoint
slides and access additional case studies for use in their teaching.

There is also a link to the Corporate Governance blog, regularly updated by Christine ­Mallin
and Bob Tricker, offering comment on current events in the world of business, economics,
and finance, from the perspective of corporate governance.
Visit www.oup.com/uk/mallin6e/ to find out more.
List of examples and case studies

Barings Bank, UK 2
Enron, USA 2
Parmalat, Italy 3
Satyam, India 4
Securency, Australia 4
China Forestry, China 5
Olympus Corporation, Japan 5
Petrobras, Brazil 6
Steinhoff, South Africa 7
Carillion, UK 7
Cadbury Plc, UK 111
CK Hutchison, Hong Kong 111
Fiat (now FCA), Italy 112
Chevron, USA 148
ThyssenKrupp, Germany 149
Rio Tinto Plc, UK 150
IKEA, Sweden 184
Centrica, UK 185
L’Oréal, France 186
Institutional investors and SRI, Myanmar 190
Statoil, Norway 226
McKesson Corporation, USA 227
Deutsche Bank, Germany 227
Persimmon Plc, UK 259
Honeywell International Inc., USA 259
Pearson Plc, UK 261
Royal Bank of Scotland Plc, UK 266
Safran, France 296
Volkswagen, Germany 297
Telecom Italia, Italy 297
OAO LUKOIL, Russia 323
MOL, Hungary 324
Axiata Group Berhad, Malaysia 357
Samsung Electronics, South Korea 358
Tata, India 384
Ultrapar, Brazil 384
List of figures and tables

Figures
2.1 Main theories influencing the development of corporate governance 24

3.1 Development of corporate governance in the UK 32

4.1 The corporation and its stakeholders 80

5.1 Possible stages in a family firm’s governance 102

5.2 Top banks for European deal making 119

6.1 Beneficial ownership of quoted shares in UK-domiciled companies

at 31 December 2016 123
6.2 Corporate activism is on the rise in Europe 157
6.3 Consumer goods groups’ stock performance, operating margin 158
6.4 Consumer good groups’ stock performance, total shareholder return 159

12.1 Noble Group share price (SGD) 366

Tables
2.1 Summary of theories affecting corporate governance development 18

5.1 Areas of the UK Corporate Governance Code that may prove difficult
for smaller companies 107

6.1 Summary of main categories of share ownership in the UK 1963–2016 122

6.2 SWFs market share by country 134

7.1 UN Sustainable Development Goals (2015) 176

10.1 Predominant board and leadership structure 277

10.2 Summary of key differences between supervisory and management boards 278
10.3 Key characteristics influencing German corporate governance 279
10.4 Key characteristics influencing Danish corporate governance 285
10.5 Key characteristics influencing French corporate governance 288
10.6 Key characteristics influencing Italian corporate governance 291
 List of figures and tables xix

11.1 Ownership structures of companies in selected transition countries (unweighted) 307

11.2 Key characteristics influencing corporate governance in the Czech Republic 309
11.3 Key characteristics influencing Polish corporate governance 313
11.4 Ownership change in Russia 316
11.5 Key characteristics influencing Russian corporate governance 317
11.6 Key characteristics influencing Hungarian corporate governance 319

12.1 Key characteristics influencing Japanese corporate governance 334

12.2 Key characteristics influencing South Korean corporate governance 339
12.3 Key characteristics influencing Malaysian corporate governance 341
12.4 Key characteristics influencing Singaporean corporate governance 345
12.5 Key characteristics influencing Chinese corporate governance 348
12.6 Key characteristics influencing Australian corporate governance 351

13.1 Key characteristics influencing South African corporate governance 370

13.2 Key characteristics influencing Egyptian corporate governance 373
13.3 Key characteristics influencing Indian corporate governance 375
13.4 Key characteristics influencing Brazilian corporate governance 379
List of abbreviations

ABI Association of British Insurers

ACGA Asian Corporate Governance Association
AFG L’Association Française de la Gestion Financière
AFL-CIO The American Federation of Labor and Congress of Industrial
Organizations
AITC Association of Investment Trust Companies
APEC Asia-Pacific Economic Co-operation
ASIC Australian Securities and Investments Commission
ASX Australian Stock Exchange
BEIS Department for Business, Energy & Industrial Strategy
BIS Department for Business, Innovation & Skills
BVCA British Private Equity and Venture Capital Association
CACG Commonwealth Association for Corporate Governance
CalPERS California Public Employees’ Retirement System
CEO Chief executive officer
CEPS Centre for European Policy Studies
CFO Chief financial officer
CLERP Corporate Law Economic Reform Program
CLR Company Law Review
CR Corporate responsibility
CSR Corporate social responsibility
CSRC China Securities Regulatory Commission
Defra Department for Environment, Food and Rural Affairs
DVCA Danish Venture Capital and Private Equity Association
ecoDa European Confederation of Directors’ Associations
EFAMA European Fund and Asset Management Association
EIRIS Ethical Investment Research Service
FESE Federation of European Securities Exchanges
FRC Financial Reporting Council
FSA Financial Services Authority
FTSE Financial Times Stock Exchange
ICGN International Corporate Governance Network
IIC Institutional Investor Committee
ILO International Labour Organization
 List of abbreviations xxi

IMA Investment Management Association

IMF International Monetary Fund
IoD Institute of Directors
ISC Institutional Shareholders’ Committee
IWG International Working Group of Sovereign Wealth Funds
KPI Key performance indicator
MOF Ministry of Finance
NAPF National Association of Pension Funds
NCVO National Council for Voluntary Organisations
NEST National Employment Savings Trust
NGO Non-governmental organization
NHS National Health Service
OECD Organisation for Economic Co-operation and Development
OPSI Office of Public Sector Information
PBOC People’s Bank of China
PIRC Pensions Investment Research Consultants
PLSA Pensions and Lifetime Savings Association
PSPD People’s Solidarity for Participatory Democracy
QCA Quoted Companies Alliance
RREV Research recommendations electronic voting
SE Societas Europaea
SETC State Economic and Trade Commission
SID Senior independent director
SRI Socially responsible investment
SVWG Shareholder Voting Working Group
SWF Sovereign wealth fund
UKSIF UK Sustainable Investment and Finance Association
UN United Nations
UNPRI United Nations Principles of Responsible Investment
Glossary
Agency theory One party (the principal) delegates
work to another party (the agent). In a corporate
scenario, the principal is the shareholder and the agent
the directors/managers. Agency theory relates to the
costs involved in this principal–agent relationship,
including the costs of aligning the two sets of interests.
Audit The examination by an independent external
auditor to determine whether the annual report and
accounts have been appropriately prepared and give a
true and fair view.
Audit committee A subcommittee of the board that
is generally comprised of independent non-executive
directors. It is the role of the audit committee to review
the scope and outcome of the audit, and to try to ensure
that the objectivity of the auditors is maintained.
Auditor rotation The audit firm is changed after
a number of years in order to help ensure that the
independence of the external auditor is retained. There
are disparate views on the effectiveness of auditor
rotation.
Bank-oriented system Banks play a key role in
the funding of some companies and so may be able
to exercise some control via the board structure,
depending on the governance system.
Board diversity Gender, ethnicity, and other
characteristics considered to make the board more
diverse.
Board evaluation Boards should be evaluated
annually to determine whether they have met the
objectives set. The board as a whole, the board
subcommittees, and individual directors should each
be assessed.
Board subcommittees The board of directors may
delegate various duties in specific areas to specialized
committees, such as the audit committee, remuneration
committee, and nomination committee.
Chair Responsible for the running of the board and
chairing board meetings.
Chief executive officer Responsible for the running
of the company.
Civil law Tends to be prescriptive and based on
specific rules. Generally gives less protection to minority
shareholders.
Co-determination The right of employees to be kept
informed of the company’s activities and to participate
in decisions that may affect the workers.
Common law Based on legal principles supplemented
by case law. Generally gives better protection to
minority shareholders.
Comply or explain A company should comply with
the appropriate corporate governance code but, if it
cannot comply with any particular aspect of it, then it
should explain why it is unable to do so.
Controlling shareholders Those who have
control of the company, although this may be indirectly
through their holdings in other entities, and not
directly.
Corporate social responsibility Voluntary actions
that a company may take in relation to the management
of social, environmental, and ethical issues.
Directors’ remuneration Can encompass various
elements, including base salary, bonus, stock options,
stock grants, pension, and other benefits.
Directors’ share options Directors may be given
the right to purchase shares at a specified price over a
specified time period.
Dual board A dual board system consists of
a supervisory board and an executive board of
management.
Fiduciary duty This is an obligation to act in the
best interests of another party, for example, directors
have a fiduciary duty to act in the best interests of the
shareholders.
Hard law Legally binding pronouncements such as
laws, regulations, and directives.
Inclusive approach The company considers the
interests of all of its stakeholders.
Independent directors who have no relationships
with the business, or its directors and management,
or other circumstances, which could affect their
judgement.
Information asymmetries Different parties may
have access to different levels of information, which
may mean that some have a more complete or more
accurate picture than others.
Insider system Ownership of shares is concentrated
in individuals or a group of individuals, such as families
or holding companies.
Institutional investors Generally large investors,
such as pension funds, insurance companies, and
mutual funds.
 Glossary xxiii

Internal controls Policies, procedures, and Remuneration committee A subcommittee of the

other measures in an organization that are board and should generally comprise independent non-
designed to ensure that the assets are safeguarded, executive directors. Its role is to make recommendations
that systems operate as intended, that information to the board on executive directors’ remuneration.
can be produced in a timely and accurate manner,
Risk assessment An assessment of the overall risk
and that the business operates effectively and
that a company may be exposed to. Overall risk can
efficiently.
include many different types of risk, including financial
Market-oriented system The influence of banks risk, operating risk, and reputation risk.
does not tend to be prevalent and does not impact on
Say on pay Shareholder vote on the remuneration
the company’s board structure.
packages of executive directors, may be binding or non-
Minority rights The rights of shareholders who own binding on the company.
smaller stakes in a company. They should have the same
Shareholder value The value of the firm after
rights as larger shareholders but often this is not the
deducting current and future claims.
case.
Socially responsible investment Involves
Minority shareholders who have smaller holdings
considering the ethical, social, and environmental
of shares.
performance of companies selected for investment as
Nominated advisor A firm or company that acts as well as their financial performance.
an advisor to a company coming to/on the Alternative
Soft law Best practice or self-regulation
Investment Market.
pronouncements such as codes, principles, and
Nomination committee A subcommittee of the guidelines.
board and should generally comprise independent non-
Sovereign wealth fund A fund, often very large and
executive directors. Its role is to make recommendations
influential, which is owned by a government.
to the board on all new board appointments.
Stakeholder theory This theory takes into account
Non-executive director These are not full-time
the views of a wider stakeholder group and not just the
employees of the company (unlike most executive
shareholders.
directors). As far as possible they should be independent
and capable of exercising independent judgement in Stakeholders Any individual or group on which the
board decision-making. activities of the company have an impact, including the
employees, customers, and local community.
Outsider system There is dispersed ownership of
shares and hence individuals, or groups of individuals, Supervisory board In a dual board system the
do not tend to have direct control. supervisory board oversees the direction of the
business, whilst the management board is responsible
Pay ratio The ratio of the pay of the company’s CEO
for the running of the business.
to the pay of the average worker.
Transaction cost economics Views the firm itself as
Private equity A private equity fund is broadly
a governance structure, which in turn can help align the
defined as one that invests in equity which is not traded
interests of directors and shareholders.
publicly on a stock exchange.
Unitary board A unitary board of directors is
Proxy vote The casting of shareholders’ votes by
characterized by one single board comprising of both
shareholders, often by mail, fax, or electronic means.
executive and non-executive directors.
 1 Introduction

Businesses around the world need to be able to attract funding from investors in order to
expand and grow. Before investors decide to invest their funds in a particular business, they
will want to be as sure as they can be that the business is financially sound and will continue to
be so in the foreseeable future. Investors therefore need to have confidence that the business
is being well managed and will continue to be profitable.
In order to have this assurance, investors look to the published annual report and accounts
of the business, and to other information releases that the company might make. They expect
that the annual report and accounts will represent a true picture of the company’s present
position; they are, after all, subject to an annual audit whereby an independent external audi-
tor examines the business’s records and transactions, and certifies that the annual report and
accounts have been prepared in accordance with accepted accounting standards and give a
‘true and fair view’ of the business’s activities. However, although the annual report may give
a reasonably accurate picture of the business’s activities and financial position at that point in
time, there are many facets of the business that are not effectively reflected in it.
There have been a number of high-profile corporate collapses that have arisen despite the
fact that the annual report and accounts seemed fine. These corporate collapses have had
an adverse effect on many people: shareholders who have seen their financial investment
reduced to nothing; employees who have lost their jobs and, in many cases, the security of
their company pension, which has also evaporated overnight; suppliers of goods or services
to the failed companies; and the economic impact on the local and international communi-
ties in which the failed companies operated. In essence, corporate collapses affect us all. Why
have such collapses occurred? What might be done to prevent such collapses happening
again? How can investor confidence be restored?
The answers to these questions are all linked to corporate governance. Companies with
a sound corporate governance structure should have a balanced board comprised of inde-
pendent and non-independent directors with appropriate skills and knowledge to contribute
to the ongoing success of the company and the confidence to question matters they feel
may not be in the best interests of the company. The board should be diversified in terms of
gender, ethnicity, age, education, experience to help ensure diversity of thought. The roles
of CEO and Chair are generally perceived as being more appropriately vested in two indi-
viduals rather than in one individual who may then wield too much power in the company.
Board subcommittees, including audit and remuneration committees, should be established
and comprised of appropriately qualified individuals. There should be robust internal con-
trols in place and an appropriate risk management structure which considers all aspects of
risk, financial and non-financial, to which the business may be exposed. However a lack of
2 INTRODUC TION

effective corporate governance has meant that high profile collapses could occur; good cor-
porate governance can help prevent such collapses happening again and restore investor
confidence.
To illustrate why corporate failures might occur, despite the companies seeming healthy, it
is helpful to review a few examples from over the years, each of which has sent shock waves
through stock markets around the world.

Barings Bank
The downfall in 1995 of one of England’s oldest established banks was brought about by the
actions of one man, Nick Leeson, whose actions have been immortalized in the film Rogue
Trader. Nick Leeson was a clever, if unconventional, trader with a gift for sensing the way that
stock market prices would move in the Far Eastern markets. In 1993 he was based in Singa-
pore and made more than £10 million, about 10 per cent of Barings’ total profit that year. He
was highly thought of at that time.
However, his run of good luck was not to last and, when a severe earthquake in Japan
affected the stock market adversely, he incurred huge losses of Barings’ money. He requested
more funds from Barings’ head office in London, which were sent to him, but unfortunately
he suffered further losses. The losses were so great (£850 million) that Barings Bank collapsed
and was eventually bought for £1 by ING, the Dutch banking and insurance group.
Barings Bank has been criticized for its lack of effective internal controls at that time, which
left Nick Leeson able to cover up the losses that he was making for quite a number of months.
The case also illustrates the importance of having effective supervision, by experienced staff
with a good understanding of the processes and procedures, of staff who are able to expose
the company to such financial disaster. The collapse of Barings Bank sent ripples through
financial markets across the world as the importance of effective internal controls and appro-
priate monitoring was reinforced.

Enron
Enron was ranked in the USA’s Fortune top ten list of companies, based on its turnover in
2000. Its published accounts for the year ending 31 December 2000 showed a seemingly
healthy profit of US$979 million and there was nothing obvious to alert shareholders to the
impending disaster that was going to unfold over the next year or so, making Enron the largest
bankruptcy in US history.
Enron’s difficulties related to its activities in the energy market and the setting up of a series
of ‘special purpose entities’ (SPEs). Enron used the SPEs to conceal large losses from the mar-
ket by giving the appearance that key exposures were hedged (covered) by third parties.
However, the SPEs were really nothing more than an extension of Enron itself and so Enron’s
risks were not covered. Some of the SPEs were used to transfer funds to some of Enron’s direc-
tors. In October 2001 Enron declared a non-recurring loss of US$1 billion and also had to dis-
close a US$1.2 billion write-off against shareholders’ funds. Later in October Enron disclosed
another accounting problem, which reduced its value by over US$0.5 million. It looked as
 INTRODUC TION 3

though a takeover might be on the cards from a rival, Dynegy, but in November, announce-
ments by Enron of further debts led to the takeover bid falling through. In December 2001
Enron filed for bankruptcy.
In retrospect, it seems that the directors were not questioned closely enough about the use
of the SPEs and their accounting treatment. What has become clear is that there was some
concern amongst Enron’s auditors (Andersen) about the SPEs and Enron’s activities. Unfortu-
nately, Andersen failed to question the directors hard enough and Andersen’s own fate was
sealed when some of its employees shredded paperwork relating to Enron, thus obliterating
vital evidence and contributing to the demise of Andersen, which has itself been taken over
by various rivals.
Lawsuits were brought against the directors of Enron and whilst it was notable that some
directors were able to settle the lawsuits by paying hugely significant sums of money person-
ally, others received hefty jail sentences. In 2006 Jeffrey Skilling, former Enron Chief Executive,
was found guilty of fraud and conspiracy and sentenced to more than 24 years in prison. In
April 2012 the Supreme Court rejected his appeal, although his sentence may be shortened.
Kenneth Lay, also a former Chairman and Chief Executive of Enron, was similarly found guilty
of fraud and conspiracy although he died in 2006, no doubt taking to the grave many of the
details of what went on at Enron.
Interestingly, one of the employees at Enron, Sherron Watkins, had made her concerns
known to Andrew Fastow, the Chief Finance Officer, and to the firm’s auditors, Arthur
Andersen, about some of the accounting transactions taking place at Enron as early as
1996. However, no notice was apparently taken of her concerns and she moved to work in
a ­different area of the company. In 2001 she was again back in the finance department and
became aware that an extensive fraud was taking place with SPEs being used as vehicles
to hide Enron’s growing losses. She then expressed her concerns more openly and became
the whistle-blower to one of the most infamous corporate scandals of all time.
The Enron case highlights the overriding need for integrity in business: for the directors to
act with integrity and honesty, and for the external audit firm to be able to ask searching ques-
tions of the directors without holding back for fear of offending a lucrative client. This latter
situation is exacerbated when auditors receive large fees for non-audit services that may well
exceed the audit fee itself, thus endangering the independence of the auditors. Enron also
highlights the need for independent non-executive directors who are experienced enough to
be able to ask searching questions in board and committee meetings to try to ensure that the
business is operated appropriately.

Parmalat
Parmalat, an Italian company specializing in long-life milk, was founded by Calisto Tanzi. It
seemed to be a marvellous success story although, as it expanded by acquiring more com-
panies, its debt increased and, in late 2003, Parmalat had difficulty making a bond payment
despite the fact that it was supposed to have a large cash reserve. After various investigations
had been carried out, it transpired that the large cash reserves were non-existent and Par-
malat went into administration. With debts estimated at £10 billion, Parmalat has also earned
itself the name of ‘Europe’s Enron’.
4 INTRODUC TION

Calisto Tanzi was a central figure in one of Europe’s largest fraud trials which started during
2005. He was accused of providing false accounting information and misleading the Italian
stock-market regulator. In December 2008 after a trial lasting more than three years, he was
found guilty on a number of counts, including falsifying accounts, and misleading investors
and regulators. He was given a ten-year sentence.

Satyam
Satyam Computer Services was India’s fourth largest information technology group by rev-
enue. In early 2009 its Chairman, B. Ramalinga Raju, wrote to the board and confessed to
having manipulated many of the figures in the company’s annual financial statements over
a number of years, resulting in overstated profits and non-existent assets. The case has been
called ‘India’s Enron’ and has undermined confidence in Indian companies, with the Bombay
Stock Exchange suffering a significant fall in share prices. The Securities and Exchange Board
of India (SEBI) moved quickly to make it mandatory for controlling shareholders to declare
whether they have pledged any shares to lenders as this was one of the contributory factors
in this case. Satyam was sold in 2009 to Tech Mahindra and was later renamed Mahindra
Satyam. In March 2012 Tech Mahindra announced plans to combine with Mahindra Satyam
which were approved in 2013; the combined group is known as Tech Mahindra. The com-
bined group still faced legal charges brought by shareholders in relation to the Satyam scan-
dal. In 2015, B. Ramalinga Raju, former Chairman of Satyam Computer Services, was jailed for
seven years and nine others were also found guilty of corporate fraud.

Securency
Securency, a Reserve Bank of Australia (RBA) subsidiary which produces and supplies polymer
banknotes, has been the subject of allegations of bribery and corruption. The allegations cen-
tred on Securency’s payment of commissions to foreign middlemen, who it is believed would
then attempt to bribe central banking officials in countries throughout Asia, Latin America,
and Africa to replace their paper notes with Securency’s polymer banknotes. The allegations
were made by a Securency insider who witnessed much of this behaviour first-hand. KPMG
Forensics prepared an audit report that showed impropriety on the part of Securency’s offi-
cials, and in April 2012 the RBA fired two top executives of Securency, the former Managing
Director and the former Director of Commercial Services.
In 2016, David Ellery, Securency’s financial controller and company secretary until 2010,
admitted in court that he had lied a few times to cover up alleged corrupt activities at Securen-
cy and he was given a suspended sentence on one count of false accounting, conditional on
his co-operation with prosecutors and giving evidence in other trials. In 2016, he gave evi-
dence against Peter Chapman, Securency’s former African business development director,
who he alleged had given bribes to officials in Nigeria. Although the Judge found Peter Chap-
man guilty, the sentence he gave was mitigated because of the role he felt that Securency’s
management had played putting pressure on Chapman to achieve sales and also that they
had been aware of the bribes that were being paid. The Judge’s sentence of 30 months meant
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 Hon. Secretary.
J. Maitland Thomson, LL.D., Advocate, 3 Grosvenor Gardens,
Edinburgh.

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OF THE
SCOTTISH HISTORY SOCIETY
For the year 1886-1887.
1. Bishop Pococke’s Tours in Scotland, 1747-1760. Edited by D.
W. Kemp.
2. Diary and Account Book of William Cunningham of
Craigends, 1673-1680. Edited by the Rev. James Dodds, D.D.
For the year 1887-1888.
3. Grameidos libri sex: an heroic poem on the Campaign of 1689,
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Rev. A. D. Murdoch.
4. The Register of the Kirk-Session of St. Andrews. Part i.
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For the year 1888-1889.
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Edited by Gilbert Goudie.
6. Narrative of Mr. James Nimmo, a Covenanter, 1654-1709.
Edited by W. G. Scott-Moncrieff.
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For the year 1889-1890.
8. A List of Persons concerned in the Rebellion (1745). With a
Preface by the Earl of Rosebery.
Presented to the Society by the Earl of Rosebery.
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Patrick, first Earl of Strathmore, and other documents
(1684-89). Edited by A. H. Millar.
10. John Major’s History of Greater Britain (1521). Translated
and edited by Archibald Constable.
For the year 1890-1891.
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D.D., and the Rev. James Christie, D.D.
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Rev. D. G. Barron.
For the year 1891-1892.
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1687. Edited by the Rev. Walter Macleod.
For the year 1892-1893.
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—Letters of Sir Thomas Hope, 1627-46. Rev. R. Paul.—Civil
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Papers, 1660-1719. V. A. Noël Paton.—Accompt of Expenses
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1745. H. Paton.
16. Account Book of Sir John Foulis of Ravelston (1671-
1707). Edited by the Rev. A. W. Cornelius Hallen.
For the year 1893-1894.
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Charles ii. and Scotland in 1650. Edited by Samuel Rawson
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18. Scotland and the Commonwealth. Letters and Papers
relating to the Military Government of Scotland, Aug.
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For the year 1894-1895.
19. The Jacobite Attempt of 1719. Letters of James, second
Duke of Ormonde. Edited by W. K. Dickson.
20, 21. The Lyon in Mourning, or a Collection of Speeches,
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Charles Edward Stuart, by Bishop Forbes. 1746-1775.
Edited by Henry Paton. Vols. i. and ii.
For the year 1895-1896.
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23. Itinerary of Prince Charles Edward (Supplement to the
Lyon in Mourning). Compiled by W. B. Blaikie.
24. Extracts from the Presbytery Records of Inverness and
Dingwall from 1638 to 1688. Edited by William Mackay.
25. Records of the Commissions of the General Assemblies
(continued) for the years 1648 and 1649. Edited by the Rev.
Professor Mitchell, D.D., and Rev. James Christie, D.D.
For the year 1896-1897.
26. Wariston’s Diary and other Papers—
Johnston of Wariston’s Diary, 1639. Edited by G. M.
Paul.—The Honours of Scotland, 1651-52. C. R. A.
Howden.—The Earl of Mar’s Legacies, 1722, 1726.
Hon. S. Erskine.—Letters by Mrs. Grant of
Laggan. J. R. N. Macphail.
Presented to the Society by Messrs. T. and A. Constable.
27. Memorials of John Murray of Broughton, 1740-1747.
Edited by R. Fitzroy Bell.
28. The Compt Buik of David Wedderburne, Merchant of
Dundee, 1587-1630. Edited by A. H. Millar.
For the year 1897-1898.
29, 30. The Correspondence of De Montereul and the
brothers De Bellièvre, French Ambassadors in England
and Scotland, 1645-1648. Edited, with Translation, by J. G.
Fotheringham. 2 vols.
For the year 1898-1899.
31. Scotland and the Protectorate. Letters and Papers
relating to the Military Government of Scotland, from
January 1654 to June 1659. Edited by C. H. Firth, M.A.
32. Papers illustrating the History of the Scots Brigade in
the Service of the United Netherlands, 1572-1782. Edited
by James Ferguson. Vol. i. 1572-1697.
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Families in Scotland; Manuscripts in the Advocates’ Library. 2
vols. Edited by J. T. Clark, Keeper of the Library.
Presented to the Society by the Trustees of the late Sir William Fraser, K.C.B.
For the year 1899-1900.
35. Papers on the Scots Brigade in Holland, 1572-1782. Edited
by James Ferguson. Vol. ii. 1698-1782.
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John Lauder, Lord Fountainhall. Edited by Donald
Crawford.
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Reign in Scotland. Chiefly from the Vatican Archives. Edited by
the Rev. J. Hungerford Pollen, S.J.
For the year 1900-1901.
38. Papers on the Scots Brigade in Holland, 1572-1782. Edited
by James Ferguson. Vol. iii.
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by A. G. Reid, F.S.A.Scot.
For the year 1901-1902.
40. Negotiations for the Union of England and Scotland in
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41. The Loyall Dissuasive. Written in 1703 by Sir Æneas
Macpherson. Edited by the Rev. A. D. Murdoch.
For the year 1902-1903.
42. The Chartulary of Lindores, 1195-1479. Edited by the Right
Rev. John Dowden, D.D., Bishop of Edinburgh.
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Jan. 1562. Reproduced in Facsimile. Edited by the Rev. J.
Hungerford Pollen, S.J.
Presented to the Society by the family of the late Mr. Scott, of Halkshill.
44. Miscellany of the Scottish History Society, Second
Volume.—The Scottish King’s Household, 14th Century.
Edited by Mary Bateson.—The Scottish Nation in the
University of Orleans, 1336-1538. John Kirkpatrick, LL.D.—
The French Garrison at Dunbar, 1563. Robert S. Rait.—De
Antiquitate Religionis apud Scotos, 1594. Henry D. G. Law.
—Apology for William Maitland of Lethington, 1610.
Andrew Lang.—Letters of Bishop George Græme, 1602-38.
L. G. Græme.—A Scottish Journie, 1641. C. H. Firth.—
Narratives illustrating the Duke of Hamilton’s Expedition
to England, 1648. C. H. Firth.—Burnet-Leighton Papers,
1648-168-. H. C. Foxcroft.—Papers of Robert Erskine,
Physician to Peter the Great, 1677-1720. Rev. Robert Paul.—
Will of the Duchess of Albany, 1789. A. Francis Steuart.
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1727-1743. Edited by James Colville, D.Sc.
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Manufactory, 1681-1690. Edited by W. R. Scott.
47. Chronicles of the Frasers; being the Wardlaw Manuscript
entitled ‘Polichronicon seu Policratica Temporum, or, the true
Genealogy of the Frasers.’ By Master James Fraser. Edited by
William Mackay.
48. Proceedings of the Justiciary Court from 1661 to 1678.
Vol. i. 1661-1669. Edited by Sheriff Scott-Moncrieff.
For the year 1904-1905.
49. Proceedings of the Justiciary Court from 1661 to 1678.
Vol. ii. 1669-1678. Edited by Sheriff Scott-Moncrieff.
50. Records of the Baron Court of Stitchill, 1655-1807.
Edited by Clement B. Gunn, M.D., Peebles.
51. Macfarlane’s Geographical Collections. Vol. i. Edited by
Sir Arthur Mitchell, K.C.B.
For the year 1905-1906.
52, 53. Macfarlane’s Geographical Collections. Vols. ii. and iii.
Edited by Sir Arthur Mitchell, K.C.B.
54. Statuta Ecclesiæ Scoticanæ, 1225-1559. Translated and
edited by David Patrick, LL.D.
For the year 1906-1907.
55. The House Booke of Accomps, Ochtertyre, 1737-39. Edited
by James Colville, D.Sc.
(Oct. 1907.)
56. The Charters of the Abbey of Inchaffray. Edited by W. A.
Lindsay, K.C., the Right Rev. Bishop Dowden, D.D., and J.
Maitland Thomson, LL.D.
(Feb. 1908.)
57. A Selection of the Forfeited Estates Papers preserved in
H.M. General Register House and elsewhere. Edited by A.
H. Millar, LL.D.
(Oct. 1909.)
For the year 1907-1908.
58. Records of the Commissions of the General Assemblies
(continued), for the years 1650-52. Edited by the Rev. James
Christie, D.D.
(Feb. 1909.)
59. Papers relating to the Scots in Poland. Edited by A.
Francis Steuart.
(Nov. 1915.)
For the year 1908-1909.
60. Sir Thomas Craig’s De Unione Regnorum Britanniæ
Tractatus. Edited, with an English Translation, by C. Sanford
Terry.
(Nov. 1909.)
61. Johnston of Wariston’s Memento Quamdiu Vivas, and
Diary from 1632 to 1639. Edited by G. M. Paul, LL.D., D.K.S.
(May 1911.)
Second Series.
For the year 1909-1910.
1. The Household Book of Lady Grisell Baillie, 1692-1733.
Edited by R. Scott-Moncrieff, W.S.
(Oct. 1911.)
2. Origins of the ’45 and other Narratives. Edited by W. B.
Blaikie, LL.D.
(March 1916.)
3. Correspondence of James, fourth Earl of Findlater and
first Earl of Seafield, Lord Chancellor of Scotland.
Edited by James Grant, M.A., LL.B.
(March 1912.)
For the year 1910-1911.
4. Rentale Sancti Andree; being Chamberlain and Granitar
Accounts of the Archbishopric in the time of Cardinal
Betoun, 1538-1546. Translated and edited by Robert Kerr
Hannay.
(February 1913.)
5. Highland Papers. Vol. i. Edited by J. R. N. Macphail, K.C.
(May 1914.)
For the year 1911-1912.
6. Selections from the Records of the Regality of Melrose.
Vol. i. Edited by C. S. Romanes, C.A.
(November 1914.)
7. Records of the Earldom of Orkney. Edited by J. S.
Clouston.
(December 1914.)
For the year 1912-1913.
8. Selections from the Records of the Regality of Melrose.
Vol. ii. Edited by C. S. Romanes, C.A.
(January 1915).
9. Selections from the Letter Books of John Steuart, Bailie
of Inverness. Edited by William Mackay, LL.D.
(April 1915.)
For the year 1913-1914.
10. Rentale Dunkeldense; being the Accounts of the
Chamberlain of the Bishopric of Dunkeld, a.d. 1506-1517.
 Edited by R. K. Hannay.
(March 1915.)
11. Letters of the Earl of Seafield and Others, illustrative
of the History of Scotland during the Reign of Queen
Anne. Edited by Professor Hume Brown.
(Nov. 1915.)
For the year 1914-1915.
12. Highland Papers. Vol. ii. Edited by J. R. N. Macphail, K.C.
(March 1916.)
(Note.—Origins of the ’45, issued for 1909-1910, is
issued also for 1914-1915.)
For the year 1915-1916.
13. Selections from the Records of the Regality of Melrose.
Vol. iii. Edited by C. S. Romanes, C.A.
14. Johnston of Wariston’s Diary. Vol. ii. Edited by D. Hay
Fleming, LL.D.
In preparation.
Bibliography of Topographical Works relating to Scotland.
Compiled by the late Sir Arthur Mitchell, and edited by C. G.
Cash.
Records relating to the Scottish Armies from 1638 to 1650.
Edited by Professor C. Sanford Terry.
Seafield Correspondence. Vol. ii. Edited by Major James Grant.
Register of the Consultations of the Ministers of
Edinburgh, and some other Brethren of the Ministry,
since the interruption of the Assembly 1653, with other
Papers of public concernment. Edited by the Rev. W.
Stephen, B.D.
Miscellany of the Scottish History Society. Third Volume.
Charters and Documents relating to the Grey Friars and
the Cistercian Nunnery of Haddington.—Register of
Inchcolm Monastery. Edited by J. G. Wallace-James, M.B.
Analytical Catalogue of the Wodrow Collection of
Manuscripts in the Advocates’ Library. Edited by J. T.
Clark.
A Translation of the Historia Abbatum de Kynlos of
Ferrerius.
Papers relating to the Rebellions of 1715 and 1745, with other
documents from the Municipal Archives of the City of Perth.
The Balcarres Papers.
 Transcriber’s Notes
Obvious typographical errors have been silently corrected. Variations in
hyphenation and accents have been standardised but all other spelling and
punctuation remains unchanged.
The Corrigenda and Errata (page vi) have been corrected in place.
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