3: Corporate Governance

Question 1

What is Corporate Governance?

Answer 1

Corporate Governance is the system by which companies are directed and controlled through boards of directors

Question 2

What do the directors do? (4)

Answer 2

• Establish corporate aims
• Provide leadership
• Supervise management
• Report to shareholders

Question 3

What is the aim of the board?

Answer 3

The board’s role is to provide entrepreneurial leadership within a framework of controls that enable risk to be managed.

Question 4

What is the aim of good corporate governance?

Answer 4

To ensure that an organisation is governed in a way that will ensure that its overall objectives are most likely to be achieved

Question 5

What are the overall objectives of an organisation?

Answer 5

• Maximise shareholder wealth

- Stakeholder model

Question 6

How many NED’s should an organisation have?

Answer 6

The same amount or more than the amount of ED’s

Question 7

What roles cannot be taken by the same person?

Answer 7

Chairman

CEO

Question 8

What kind of roles should NED’s not have?

Answer 8

Operational roles

Question 9

Why should NED’s not have operational roles?

Answer 9

Because this keeps them independent

Question 10

What are four kinds of independent committees?

Answer 10

• Risk
• Remuneration
• Nomination
• Audit

Question 11

What should the board review annually the need for?

Answer 11

An internal auditor

Question 12

Who do we mean when we say “those charged with governance”?

Answer 12

The directors

The audit committee

Question 13

What do we mean by effective board?

Answer 13

• They are good at their jobs and have the relevant skills needed
• They have sufficient time to devote to the organisation
• Appointments should be made formal and transparent

Question 14

What do we mean by a balanced board?

Answer 14

Their should be a balance of executive directors and Non-executive directors

Question 15

Why do we have a balanced board?

Answer 15

So no one group can dominate

Question 16

Describe the role of a Non-executive director

Answer 16

• Someone who is independent
• Holds the directors to account for decisions
• Do not have day to day operational activities

Question 17

How should appointments to the board be made?

Answer 17

In a formal, rigorous and transparent manner

Question 18

How much time do directors need?

Answer 18

All directors should allocate sufficient time to the company to discharge their duties effectively

Question 19

What should each committee be made up of?

Answer 19

Independent NED’s

Question 20

Although the board delegates responsibility to the committee’s, what does it still retain?

Answer 20

Responsibility

Question 21

What do committee’s do for the board?

Answer 21

Make recommendations

Question 22

What does the risk committee do?

Answer 22

• Monitors risk management processes

- Ensures risk strategy is embedded throughout the company

Question 23

What does the remuneration committee do?

Answer 23

• Determine remunerations policy on behalf of the board and the shareholders.
• Ensure that each director is fairly but responsibly rewarded for their individual contribution

Question 24

What does the nominations committee do?

Answer 24

• Suggests suitable board members and senior posts.

- Selecting the right person for the job, not on who they know

Question 25

What is the minimum number of non-executive directors that must be on the audit committee?

Answer 25

3

Question 26

What must one of the NED’s on the audit committee have?

Answer 26

Financial experience/expertise

Question 27

What are the three objectives of the audit committee?

Answer 27

• Increase public confidence in creditability of the financial information
• Support the directors in the financial reporting function
• Communicate with external auditors on any issues within the company

Question 28

Advantages of having an audit committee? (5)

Answer 28

• Improve quality of financial reporting
• Improve internal control environment
• Finance director can raise concerns with audit committee
• Can make recommendations for appointment of external auditors
• Give advice on risk management

Question 29

Disadvantages of having an audit committee?

Answer 29

• Implies directors are not trustworthy
• Cost incurred
• Information overload can distract from key risks of the business
• Difficulty finding NED with the right financial experience for the role

Question 30

What are the four stages of the communication process?

Answer 30

1 - Engagement letter
2 - Planning letter
3 - Report to management
4 - Audit report