4 - The Meaning of Governance

Question 1

what is corporate governance

Answer 1

the system by which organisations are directed and controlled

Question 2

what is the purpose of corporate governance

Answer 2

facilitate effective, entrepreneurial and prudent management that can deliver the long term success of company

Question 3

what are the three aspects of an organisation

Answer 3

1. collective goals = max of shareholder wealth/value for money
2. social arrangements = allowing working together
3. controlled performance = systems to ensure collective goals

Question 4

what are the aims of corporate governance

Answer 4

• ensuring companies well run in interests of shareholders
• reduction in risk
• setting best practice guidelines
• providing ethical and effective management framework
• willingness to follow the spirit
• accountability for management

Question 5

examples of poor governance in companies

Answer 5

• dominant board members
• weak boards, lack of knowledge
• lack of stakeholder interaction
• lack of internal controls
• corporate greed and stock market pressures
• poor financial reporting
• lack of interest from investors

Question 6

what aspects do corporate governance codes cover in general

Answer 6

• role of directors/boards
• accuracy of financial statements
• protecting shareholders
• rules of stock exchanges overlap

Question 7

why do laws need to be supplemented with corporate governance

Answer 7

• legal rules aren’t watertight
• investors concerned with return earned, not how its run
• shareholders don’t have power to take on directors of business

Question 8

what is stewardship theory

Answer 8

views management as its stewards tasked with managing assets in line with wishes of owners

requires investors to take active interest in affairs of organisation

Question 9

what is a fiduciary relationship

Answer 9

relationship based on ‘good faith’ between parties so stewards act in best interest of owners rather than self interest

Question 10

what is stakeholder theory

Answer 10

more organic view of the organisation going beyond stewardship and that management have a commitment to the stakeholder community too

Question 11

what is agency theory

Answer 11

views managers as servicing their own self interest giving rise to the agency problem

Question 12

what is the resource dependency theory

Answer 12

study of how external resources of organisations affect their behaviour

Question 13

what is the logic of the resource dependency theory based on

Answer 13

• organisations depend on resources
• resources come from external sources
• environment contains other organisations
• some necessary resources held externally
• resources are a source of power
• interdependency can exist

Question 14

what is OECD

Answer 14

Organisation for Economic Co-operation and Development

published principles in 1999

Question 15

what are the 6 principles of OECD

Answer 15

1. ensuring basis for effective corporate governance framework
2. rights of shareholders and key ownership functions
3. equitable treatment of shareholders
4. role of stakeholders in corporate governance
5. disclosure and transparency
6. responsibility of the board

Question 16

what are IFAC’s key drivers to success

Answer 16

• customer and shareholder focus
• effective leadership and strategy
• integrated governance, risk and control
• innovation and adaptability
• financial management
• people and talent management
• operational excellence
• effective and transparent communication

Question 17

what are cima’s 5 proposals for better corporate governance

Answer 17

• tone from the top
• the board as an exemplar of a ‘good’ team
• key actions of the board and its committee
• board effectiveness; performance to be communicated
• communication and engagement with stakeholders