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
How often should the board be evaluated, with all directors subject to re-election, according to the UK Corporate Governance code?
Annually
What is one of the most important principles of the UK Corporate Governance code?
Independence (especially of NEDs)
What are the requirements for the Chairman of the board, set out in the UK Corporate Governance code?
The chair should be independent, separate from the CEO and should not serve for longer than 9 years
What proportion of the board should be NEDs?
At least half
What are the three committees that the board should form, under the UK Corporate Governance code?
A nominations committee (at least half NEDs), an audit committee (all NEDs) and a remunerations committee (all NEDs)
What is the maximum notice period allowed to be set for a board member?
1 year
What 6 key elements should be contained in the annual report?
- Which directors are independent
- No. of meetings of the board and committees
- The work of the committees
- Board responsibility for annual report and accounts
- Confirmation and description of risk assessment
- Statement of going concern
What is the role of the nominations committee?
To lead the process for appointment and ensure a diverse pipeline of succession
What is the role of the audit committee?
To monitor financial and internal control systems, to assess the effectiveness of the internal audit and to conduct the tender process for the external auditors
What are 4 rules for the composition of the audit committee?
- Members should be all NEDs
- At least 3 members (2 for small companies)
- Should not include the chairman
- One member should have recent financial experience
What is the role of the remunerations committee?
To set board pay and review workforce remunerations policy
What aspect of the UK Code was set out in the Cadbury report (1992)?
Separation of chair and CEO and ‘comply or explain’ for UK listed companies
What aspect of the UK Code was set out in the Greenbury report (1995)?
Director remuneration
What was the purpose of the Hampel report (1998)?
Consolidation into the Combined Code
What aspect of the UK Code was set out in the Turnball report (1999)?
Internal controls
What aspect of the UK Code was set out in the Higgs and Tyson report (2003)?
Auditors and the audit committee
What was the purpose of the Walker/FRC report (2010)?
Setting up the UK Corporate Governance Code
What is the standard format of the company annual report?
The chairmans message, a narrative report by management (market environment, business model, strategic priorities and risk), and governance reporting
How do CIMA recommend that companies alter the standard format of their annual report?
Integrate key governance information with the rest of the report and show how it implements, measures and communicates sound governance policies (also separate compliance report)
Which countries use a two tier board system?
Germany and France
What are the two boards adopted in the two tier corporate governance system?
Supervisory (Non exec representatives of the shareholders and employees, for strategic oversight)
Executive (Management board, runs company - elected by supervisory board)
What is the jurisdiction of the Public Company Accounting Oversight Board?
The USA
What are the core elements of SOX reporting? (4)
- All US listed companies must provide certificate of accuracy from CEO and CFO
- CFO and CEO may have to pay back last years bonuses if noncompliant
- Senior audit partner rotation every 5 years
- Majority of board should be non-exec
What is the EU stance on corporate governance?
Governance is a matter for individual states, but there is an eu forum to co-ordinate governance across member states
What is the South African stance on corporate governance?
A principles based system of ‘comply or explain’, set out in the King Code
What are the 9 main categories of the King Code?
- Ethical leadership and corporate citizenship
- Boards and directors
- Audit committees
- Governance of risk
- Governance of IT
- Compliance
- Internal audit
- Stakeholder relationships
- Integrated reporting and disclosure
What was the focus of the King III report?
Global developments in governance, including risk-based internal audit, shareholder approval of NEDs remuneration, evaluation of directors and integrated reporting
