3 Flashcards
What is corporate governance?
It is the system by which companies are operated and controlled.
✅Ensures companies are run in the best interests of shareholders, employees, and stakeholders.
What are the benefits of good corporate governance?
✅ Greater transparency and accountability.
✅ More efficient operations and better risk management.
✅ Less likely to be mismanaged.
What are examples of corporate governance failures?
Enron (USA)
Carillion (UK)
High-profile financial scandals led to stronger regulations.
whats the organisation for economic co-operation and development (OECD)
Their six principles of corporate governance guide policymakers when setting regulations for their own country
What are the six OECD corporate governance principles?
- Ensuring the basis of an effective corporate governance framework
- Rights and fair treatment of shareholders and key ownership functions
- Role of stakeholders in corporate governance
- Disclosure and transparency
- Institutional investors, stock markets and other intermediaries
- Responsibilities of the board
What are the five parts of the UK Corporate Governance Code?
1️⃣ Board leadership and company purpose
2️⃣ Division of responsibilities
3️⃣ Composition, succession, and evaluation
4️⃣ Audit, risk, and internal control
5️⃣ Remuneration
What approach does the code follow?
“comply and explain”, meaning companies must follow its principles or explain why they do not.
What are the key responsibilities of a company board?
● Promote long-term sustainable success of the company
● Establish the company’s purpose, values and strategy
● Promote the desired culture
● Ensure that the necessary resources are in place
● Ensure that effective controls are in place
● Ensure that workforce policies are consistent with the company’s
values.
What are the main provisions of board leadership and company purpose?
● consider opportunities and risks
● assess and monitor the culture
● regular engagement with the shareholders
● manage conflicts of interest
What is the role of the Chairperson?
Leads the board of directors
Enables flow of information and discussion at board meetings.
Ensures effective communication with auditors.
Ensures board sub-committees function properly.
What is the role of the Chief Executive?
Ensures the effective operation of the company/Oversees daily operations and strategy execution
Head of the executive directors
What is the role of the executive director?
Run the company on a day-to-day basis.
What is the role of Non-Executive Directors (NEDs)?
Monitor executive directors
Provide independent oversight and strategic direction
Division of responsibilities
Principles
The chair:
● leads the board
● ensure contribution of all board members
● ensure that directors receive clear, accurate and timely
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information
The board should be Balanced
● No dominating groups
● NEDs should meet their board responsibilities
What are the key rules about board composition?
The Chairperson should be independent at the time of appointment.
📌 The CEO and Chairperson roles should be separate.
📌 At least half the board (excluding the Chair) should be independent NEDs.
Board should identify the independent NED in annual report
NED is non-executive directors
What are the key principles for board appointments and succession?
✅ Formal Appointment Procedures – (Ensures transparency in selecting board members)
✅ Effective Succession Planning – (Prepares for leadership transitions to maintain stability.)
✅ Merit and Diversity-Based Selection – (Appointments must be fair, inclusive, and based on skills.)
✅ Balanced Skills and Experience – (The board should have a mix of expertise to enhance decision-making.)
✅ Annual Board Evaluations – (Regular assessments to improve board effectiveness and governance.)
What’s the role of the nomination committee?
Appointments of board directors and senior management
What are the advantages of the nomination committee?
● Reduces the risk of ‘jobs for the boys’.
● Reduces the risk of improperly affecting board
decisions
What are the principles of the board regarding audit and risk?
✅ Ensure internal and external audits are independent and effective.
✅ Provide a fair, balanced, and accurate assessment of financial position.
✅ Establish procedures for risk management and internal control.
What are the objectives of an Audit Committee?
✅ Enhances public confidence in the credibility and objectivity of financial reports.
✅ Assists directors in financial reporting responsibilities.
✅ Strengthens external auditor independence.
What is the role of risk management?
✅ Protects the business from unforeseen circumstances.
✅ The board monitors risk assessment and internal controls annually.
✅ A risk committee may be established to oversee risk management.
What are examples of business risks?
⚠️ Products becoming technologically obsolete.
⚠️ Losing key staff.
⚠️ Cybersecurity failures or IT system collapse.
⚠️ Changes in government policies.
⚠️ Natural disasters like fire or floods.
How can businesses manage risks?
✅ Transfer the risk (e.g., insurance).
✅ Avoid the risk by stopping the risky activity.
✅ Reduce the risk through controls and policies.
✅ Accept the risk and prepare for consequences.
What are the director’s responsibilities in risk management?
✅ Implement and monitor internal controls.
✅ Ensure the company is protected from unforeseen risks.
What are the auditor’s responsibilities in risk management?
📌 Evaluate internal controls to reduce the risk of material misstatements.
📌 Report significant control deficiencies and risks to those in charge of governance.
What are the principles of remuneration?
✅ Supports long-term company success and sustainability.
✅ Aligned with company values, purpose, and strategy.
✅ Formal and transparent procedures for developing the policy for
executive directors’ remuneration.
✅ No director sets their own pay to avoid conflicts of interest.
✅ Directors must exercise independent judgment when approving remuneration.
What is the role of the remuneration committee?
Set the remuneration
packages for the chair, executive directors and senior
management
What are some advantages of the remuneration committee?
● Decisions are based on agreement of several people
● No director is involved in setting his own pay
● Long-term performance related elements will be included
What is the relevance of corporate governance to external auditors?
● reduce control risk and inherent risk which together reduce the risk of material misstatements in the financial statements
● The overall quality of the audit is higher
What does good governance reduce?
Control Risk – Risk that internal controls fail
Inherent Risk – Risk of material misstatements in financial reports
