4. Corporate Governance

Question 0

What are the two headings that corporate governance mechanisms can be looked at under?

Answer 0

Internal - mechanisms that are in place internally within a company
External - external assessment of the effectiveness of those controls

Question 1

What is corporate governance?

Answer 1

It is a mechanism that ensures that companies are run in the best long-term interests of their shareholders.

Question 2

Name some internal examples of corporate governance.

Answer 2

1. An independent board of directors which monitors the activities of the executive officers of the company in the exercise of their duties.
2. separation of responsibilities between the chairman & chief executive
3. Appointment of independent non-executive directors
4. The establishment of specialist committees, such as audit & risk committees, to undertake independent assessment & oversight of risks & financial reporting

Question 3

Name some external examples of corporate governance.

Answer 3

1. Legal duties imposed on directors
2. Listing rules of stock exchanges that have to be adhered to
3. Reporting of financial performance
4. Independent audit of financial, & other, statements

Question 4

What is the Corporate Governance Code also known as in the UK?

Answer 4

The Combined Code or the Code of Best Practice.

Question 5

When were the recent credit crises?

Answer 5

2007-2009

Question 6

Name some of the market failures that led to the refinement of corporate governance standards prior to the credit crisis.

Answer 6

1. The collapse of Barings Bank, which revealed failings in risk management processes;
2. The bursting of the high-tech bubble in the late 1990s, which revealed a severe conflict of interest between brokers and analysts;
3. The collapse of Enron & WorldCom, which highlighted the independence needed by audit committees;
4. The fraud of Parmalat, where the extent of losses & debts was hidden, in part, by the use of derivatives.

Question 7

What is the OECD?

Answer 7

The OECD, or Organisation of Economic Co-operation & Development issues standards for corporate governance that are used globally to develop local market practices.

Question 8

Name 4 areas of corporations that failed or resulted in the lead up to the credit crisis.

Answer 8

1. Poor risk management
2. Remuneration & incentive schemes - caused the development of unsustainable balance sheet positions.
3. Ratings Agencies - credit rating agencies assigned high ratings to complex structured sub-prime debt, based on inadequate historical data, and in some cases, flawed models. They were also involved in advising on how to structure the instrument so as to obtain a desired rating, posing serious conflicts of interest.
4. Regulatory Framework failures - effective supervisory, regulatory & enforcement authorities are integral in ensuring a sound corporate governance framework. In the UK, for example, the division of responsibilities between the FSA, the BoE & the treasury was unclear, and the under-resourcing & shortage of expertise in some fundamental areas, notably prudential banking experience & financial data analysis, was also an issue.

Question 9

What are the 6 areas that the OECD Principles of Corporate Governance cover?

Answer 9

1. Ensuring the basis for an effective corporate governance framework
2. The rights of shareholders & key ownership functions
3. The equitable treatment of shareholders
4. The role of stakeholders
5. Disclosure & transparency
6. The responsibilities of the board