3: Corporate Governance Flashcards
What is Corporate Governance?
Corporate Governance is the system by which companies are directed and controlled through boards of directors
What do the directors do? (4)
- Establish corporate aims
- Provide leadership
- Supervise management
- Report to shareholders
What is the aim of the board?
The board’s role is to provide entrepreneurial leadership within a framework of controls that enable risk to be managed.
What is the aim of good corporate governance?
To ensure that an organisation is governed in a way that will ensure that its overall objectives are most likely to be achieved
What are the overall objectives of an organisation?
- Maximise shareholder wealth
- Stakeholder model
How many NED’s should an organisation have?
The same amount or more than the amount of ED’s
What roles cannot be taken by the same person?
Chairman
CEO
What kind of roles should NED’s not have?
Operational roles
Why should NED’s not have operational roles?
Because this keeps them independent
What are four kinds of independent committees?
- Risk
- Remuneration
- Nomination
- Audit
What should the board review annually the need for?
An internal auditor
Who do we mean when we say “those charged with governance”?
The directors
The audit committee
What do we mean by effective board?
- 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
What do we mean by a balanced board?
Their should be a balance of executive directors and Non-executive directors
Why do we have a balanced board?
So no one group can dominate
Describe the role of a Non-executive director
- Someone who is independent
- Holds the directors to account for decisions
- Do not have day to day operational activities
How should appointments to the board be made?
In a formal, rigorous and transparent manner
How much time do directors need?
All directors should allocate sufficient time to the company to discharge their duties effectively
What should each committee be made up of?
Independent NED’s
Although the board delegates responsibility to the committee’s, what does it still retain?
Responsibility
What do committee’s do for the board?
Make recommendations
What does the risk committee do?
- Monitors risk management processes
- Ensures risk strategy is embedded throughout the company
What does the remuneration committee do?
- Determine remunerations policy on behalf of the board and the shareholders.
- Ensure that each director is fairly but responsibly rewarded for their individual contribution
What does the nominations committee do?
- Suggests suitable board members and senior posts.
- Selecting the right person for the job, not on who they know
What is the minimum number of non-executive directors that must be on the audit committee?
3
What must one of the NED’s on the audit committee have?
Financial experience/expertise
What are the three objectives of the audit committee?
- 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
Advantages of having an audit committee? (5)
- 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
Disadvantages of having an audit committee?
- 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
What are the four stages of the communication process?
1 - Engagement letter
2 - Planning letter
3 - Report to management
4 - Audit report
