2. Corporate Governance Flashcards
Define corporate governance.
The system by which companies are directed and controlled
What is the purpose of corporate governance?
To help build and environment of trust, transparency and accountability
What is agency theory?
The assumption that agents act in their own interest
Corporate governance is applicable to all organisations where there is division between…
Who runs the company (directors) and who owns the company (shareholders)
Which two roles are vitally split in good corporate governance?
Chairman of the board and CEO
Define an organisation.
A social arrangement for the controlled purpose of collective goals
What are the 6 types of organisation?
Profit-oriented Not-for-profit Public sector Private sector NGO (Non-Governmental Organisation) Co-operatives
Which law sets out the role of the board?
The Companies Act 2006
What is the difference between executive and non-executive directors?
Exec are involved in day to day running and are employees
NEDs are independent of the company, paid a fee to attend board and committee meetings
Directors duties include… (8)
- To act within their powers
- To promote the success of the company
- To exercise independent judgement
- To exercise reasonable skill, care and due diligence
- To avoid conflict of interest
- Not to accept benefits from 3rd parties
- To declare interests in proposed transactions
- To declare interests in existing transactions
Which organisation set out the principles for establishing good corporate governance?
The OECD - the Organisation for Economic Co-operation and Development
What are the categories of the OECD principles for good corporate governance? (6)
- The basis for an effective corporate governance framework
- Rights and equitable treatment of shareholders
- Relationships with institutional investors
- The rights of stakeholders and importance of co-operation
- Timely, accurate and transparent disclosure
- The responsibility of the board
Who issues the UK Corporate Governance Code?
The Financial Reporting Council
What is the difference between the basis of corporate governance in the UK compared to the US?
In the UK it is principles based (the UK Corporate Governance Code) whereas in the US it is rules based (SOX)
Who must follow the UK Corporate Governance Code?
All UK listed companies
How much all UK listed companies follow the Corporate Governance Code?
By either complying with the principles or explaining why they have not done so
What are the main categories of the UK Corporate Governance Code? (5)
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration