11. Governance and social responsibility in business

Question 1

what is corporate governance?

Answer 1

set of processes and policies by which a company is directed.

Question 2

what is the agency problem?

Answer 2

when directors may act in their own interest rather than the shareholders.

Question 3

the main recommendations of best practice in effective corporate governance tend to include… (4)

Answer 3

• the Board of Directors
• how directors remunerations are decided
• the role of audit (internal and external)
• public knowledge of business affairs

Question 4

what is the difference between an executive director and a non-executive director?

Answer 4

executive directors are involved in the day-to-day running of the company.

non-executive directors are not employees of the company and have no day-to-day responsibilities.

Question 5

NEDs must not… (5)

Answer 5

• have been an employee at the company in the last 5 years
• have had a material business interest in the business in the last 3 years
• participate in the share options or pension schemes of the business
• had close ties with directors or senior employees
• served as a NED for more than 9 years with the same company.

Question 6

other NED recommendations (4)

Answer 6

o Half of the board (at least) should be NEDs. Smaller companies should have at least 2 NEDs.

• one of the NEDs should be appointed as ‘senior independent director.’ They are available to be contacted by shareholders.
• CEO and Chairman of board should be distinctly different
• executive directors and NEDs would typically be required to stand for re-election every three years.

Question 7

what is a remuneration committee?

Answer 7

made up on non-executive directors and is responsible for deciding on the pay and incentives offered to executive directors

Question 8

pros and cons of remuneration committees

2 +
2 -

Answer 8

+ avoids the agency problem
+ board has more time for other issues
- ‘you scratch my back, I’ll scratch yours’
- meetings are costly

Question 9

what is an audit committee?

Answer 9

independent NEDS who review and monitor internal financial controls and the integrity of the financial statement.

Question 10

The main advantage of an audit committee is that it allows auditors to report their findings to independent directors. This avoids a number of problems, including ….

Answer 10

external audit fraud/error and internal audit weaknesses.

Question 11

what is a nomination committee?

Answer 11

committee that monitors the composition of the board.

Question 12

what does a nomination committee have to consider? (5)

Answer 12

• size of the board
• skills needed to be there
• directors (NED or ED)
• continuity
• diversity

Question 13

public oversight (3)

Answer 13

• publication of annual reports and financial statements
• shared with Companies House so interested parties can review them.
• legally must be shared with stakeholders, optionally (likely) to public

Question 14

benefits of corporate governance (4)

Answer 14

• business success
• investor confidence
• waste reduction
• listing requirements (on stock exchange websites i.e. London Stock Exchange)

Question 15

what is the WBCSD? what categories do they see within corporate responsibility?

Answer 15

World Business Council for Sustainable Development

• corporate financial responsibility, corporate environmental responsibility, corporate social responsibility

Question 16

what is stakeholder need analysis?

how should information be gathered?

Answer 16

research to determine key stakeholders and what their needs are.

information needs to be gathered directly through questionnaires, interviews and focus groups.

Question 17

3 + and 3 - of CSR

Answer 17

+ attracts customers by enhancing business reputation
+ attract and retain good employees
+ avoiding pollution can reduce government tax/fines, thus lowering costs
- increased cost of sourcing ethical products
- loss of revenue due to decreased sales when removing unethical customers
- management time of CSR

Question 18

what is typical of a committee (4)

Answer 18

• long-term
• authority
• follow procedures
• make difficult decisions

Question 19

the main purposes of a committee are (6)

Answer 19

• brainstorm new idea
• co-ordinate
• oversee a function
• gather info
• act as a delaying mechanism
• decision-making

Question 20

types of committees (4)

Answer 20

• Executive committee: a committee with administrative powers which meets frequently to manage the affairs of an organisation. i.e. the Board of Directors.
• Standing committee: formed for a particular purpose on a permanent basis.
• Ad hoc committee: formed to complete a particular task on a short-term basis.
• Sub-committee: subordinate committee appointed by a parent committee.

Question 21

4 + 4 - of committees

Answer 21

+ combine skills and knowledge to complete tasks successfully
+ slow decision making down, less hasty decisions made.
+ increased motivation as decision-making body grows
+ collective responsibility

• slow so increases costs
• slow so decreases efficiency
• work on compromise
• can be dominated

Question 22

the chair is responsible for… (5)

Answer 22

o Keeping the meeting on schedule and agenda
o Maintaining order
o Impartiality
o Concluding the meetings
o Checking and signing the minutes of the meeting.

Question 23

the chair must (4)

Answer 23

o Be decisive
o Have good knowledge of relevant issues
o Have communication skills
o An awareness of non-verbal behaviour.