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4. BA4 CIMA > 5 - Governance and Corporations > Flashcards

5 - Governance and Corporations Flashcards

1
Q

what are some responsibilities of the board of a company

A
  1. monitoring performance of CEO
  2. overseeing strategy
  3. monitoring risks and control systems
  4. monitoring human capital
  5. effective comms with stakeholders
  6. developing corporate social responsibilities
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2
Q

characteristics of the board

A
  • independent = companys interests above own
  • objective = bias free
  • sceptical = question info provided
  • resourceful = innovative leadership
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3
Q

when do shareholders get involved

A

when decisions are at a very high level

shareholders = most important stakeholders

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4
Q

what is the UK structure of corporate governance

A

single or unitary board

mix of executive or non executive directors

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5
Q

what is a supervisory board

A
  • workers and stakeholder management reps
  • elected by shareholders
  • responsible for safeguarding stakeholder interests
  • advises and appoints management board
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6
Q

how is a management board made up

A
  • entirely managers
  • membership of two boards is mutually exclusive
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7
Q

advantages of two tier board approach (supervisory and management)

A
  • separation of power
  • strong implicit shareholder involvement
  • stakeholder involvement
  • more independent thinking
  • empowered managers
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8
Q

problems with two tier board approach (supervisory and management)

A
  • dilution of power, confusion over rules/decision making
  • extra bureaucracy = slower decisions
  • board remote from business
  • confusion over who has actual authority
  • lack of transparency
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9
Q

advantages of single board approach

A
  • non executive director (NED) brings expertise
  • neds are empowered = more active
  • better decision making
  • reduced fraud and malpractice
  • higher investor confidence
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10
Q

what are the rules listed on the stock exchange regarding corporate governance

A

companies must include:
- statement of how the company applies the uk corporate governance code
- statement whether they have complied with all relevant provisions set out in code

in their annual report

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11
Q

what is the concept ‘comply or explain’

A

instances of non compliance should be disclosed and explained in the financial statements to satisfy stock market rules

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12
Q

who decides whether the non compliance is satisfactory or not

A

the shareholders

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13
Q

what do listed companies have to do in regards to the ‘UK corporate governance code’

A
  1. a narrative statement = how they applied principles
  2. statement = whether they complied throughout accounting period, and specify why they havent in some cases
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14
Q

what is the purpose of the board leadership

A
  • promote long term sustainable success
  • generate value for shareholders
  • contribute to wider society
  • establish company’s purpose, values, strategies
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15
Q

what is the people structure of the board

A
  • NEDs make up half the board
  • chairman
  • deputy chairman
  • CEO
  • senior independent directors
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16
Q

jobs of the board

A
  • establish effective controls to manage risk
  • ensure necessary resources in place
  • ensure engagement with stakeholders
  • ensure policies in line with values and success
  • establish formal, transparent policies
  • present fair assessment of companys position
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17
Q

how should responsibilities be divided/owned in terms of from the top

A

role of chairman and CEO should be separated to prevent one person having all the power

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18
Q

difference in the roles between the chairman and CEO

A

CEO = responsible for the day to day runnings
chairman = leads the board, heads overall effectiveness, independent on appointment, leads constructive board relations and effective comms

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19
Q

how should the board be structured holistically

A
  • appropriate combo of NEDs and EDs
  • clear division in responsibilities
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20
Q

executive director roles

A

day to day management decisions

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21
Q

NED roles

A
  • attend board and committee meetings
  • strategic guidance
  • constructive challenge
  • specialist advice
22
Q

how do NEDs stay independent - what is necessary of them to be able to be an NED

A
  • not have been an employee in last 5 years
  • not had a material business interest in last 3 years
  • not have share options or a pension
  • not have close family who are directors/senior etc
  • shouldn’t serve longer than 9 years
  • shouldn’t hold cross directorships
23
Q

how are members appointed to the board, and by which organisation

A

rigorous process and effective succession plan maintained for the board

both based on merit and criteria

appointed by NOMINATION COMMITTEE to ensure lack of bias

24
Q

how is the board assessed

A

annual evaluation of the board to consider composition, diversity and effectiveness

individual evaluation to demonstrate individual contribution

25
Q

when it comes to risk and control, what are the more specific jobs of the board

A
  • oversee internal control framework
  • establish procedures to manage risk
  • determine extent of risks
26
Q

what is the audit committee

A
  • consists entirely of NEDs
  • one member must have recent finance experience
  • monitor and review financial controls ANNUALLY
  • review effectiveness of internal audit team, independence and objectivity
  • shortlist external audit firms when changing auditors
27
Q

how should remuneration policies be determined

A
  • designed to support strategy, promote sustainable success
  • aligned to company purpose/value
  • formal and transparent procedure developed for director/senior management
  • no director involved in their own remuneration
28
Q

which organisation creates remuneration policies and what does it entail

A

REMUNERATION COMMITTEE
- consists of at least 3 NEDs
- set remuneration that attracts, retains and motivates directors
- ensure it is performance based
- directors exercise independent judgement

29
Q

types of corporate governance and examples

A

‘comply or explain’ principles based
e.g, UK or South Africa

rules based
e.g Sarbanes-Oxley regulations in the USA

30
Q

what factors influence the choice of approach selected by the company

A
  • what the dominant ownership structure of companies is
  • nature of legal system, power to interfere with companies
  • structure of government and policies
  • economic state
  • culture/history
  • global political/economic environment
31
Q

advantages of rules based corp. gov. (disadvantages of principles based)

A

for organisation:
- clarity of expectations
- standardisation
- legally binding

for stakeholders:
- standardisation = level playing field created
- penalties provide deterrent against poor governance
- confidence rules are complied

32
Q

disadvantages of rules based approach (advantages of principles based)

A

for organisation:
- companies look for loopholes in rules
- expectation companies need to abide by rules but might not
- creates ‘tick box’ mentality
- less flexibility to apply rules in best interest

for stakeholders:
- additional compliance costs
- increased legal costs to close loopholes
- fixed limits = no room to improve
- box ticking doesn’t guarantee good governance

33
Q

governance structure for:
private company
listed company
not for profit organisation

A

PRIVATE = board of directors by appointment
LISTED = board of directors by appointment
NFP = trustees + management, appointment by word of mouth

34
Q

who are managers accountable to in:
private company
listed company
not for profit organisation

A

PRIVATE = shareholders
LISTED = shareholders, stock exchange, regulators
NFP = donors, finance providers, regulators, the public

35
Q

openness and transparency for:
private company
listed company
not for profit organisation

A

PRIVATE = low level disclosure required
LISTED = must follow governance requirements encouraging extensive disclosure
NFP = limited requirements but high demand for info

36
Q

how does corp gov differ between companies

A

larger companies = higher level/importance of corp gov because there are more legal and regulatory requirements to meet and level of separation of ownership from management increases

investors need to know their investments are safe

37
Q

why does corp gov differ between companies

A

differences between ownership and control and objectives and risks so governance changes

depends on public/priv sector

38
Q

not for profit organisations governance focus

A

to demonstrate funds are being used appropriately and in line with company objectives

39
Q

the Good Governance Standard for Public Services is:

A
  • focusing on organisational purpose
  • effectively defining roles/functions
  • promote values and demonstrate through behaviour
  • take informed decisions, manage risk
  • develop capability/capacity of governing board
  • engage stakeholders and ensure accountability
40
Q

the Code of Governance for the Voluntary and Community sector has 7 principles - what are they?

A
  • board leadership, strategic direction
  • board in control, responsible for performance monitoring
  • high performance board, clear responsibilities
  • board review and renewal, review performance
  • board delegation, clear authorities and functions
  • board and trustee integrity, act in accordance of high ethical standards
  • board openness, open and accountable
41
Q

advantages of governance codes

A
  • improved organisational performance
  • more attractive to investors
  • reduced fraud and corruption = improved shareholder perception
  • reduced risk of financial losses for shareholders
42
Q

disadvantages of governance codes

A
  • reduced competitiveness
  • impact depends on company/global viewpoint
  • only limits fraud and corruption
  • restriction on director decision making power
  • increased bureaucracy
  • reactionary, responds to corporate failures rather than proactivity
43
Q

benefits of the use of committees

A
  • reduces board workload
  • improves decision making
  • makes shareholders feel heard
  • improves shareholder confidence
  • shows risk/remuneration are important
  • compliance with corp gov and regulations
44
Q

examples of audit committee work undertaken

A
  • overseeing external auditors
  • monitoring interim reports
  • reviewing internal controls
  • consider auditors objectivity
  • approve non audit work awarded to auditors
  • review internal audit work
  • review whistleblowing procedures
45
Q

examples of work of nomination committee

A
  • reviewing structure, size, composition of board
  • consider balance between executive/independent NEDs
  • ensure diversity of board composition
  • provide balance of power between CEO/Chair
  • evaluate skills, knowledge, experience of board
  • succession planning
  • preparing job/role descriptions
  • nominating new appointees
  • recommending if directors reappointed
  • seen to be acting independently by shareholders
46
Q

remuneration committee objectives

A
  • clear remuneration policy supported by shareholders
  • long term shareholders interests aligned with performance packages
  • clear and concise reporting
47
Q

type of work performed by remuneration committee

A
  • reviewing framework and policies
  • recommending remuneration levels
  • pension policy determination
  • remuneration for executives
  • fair rewards for management
48
Q

what is SOX

A

= sarbanes-oxley

detailed legislation, rules based
must be complied with by all US companies as it is part of national law and imposes legal standards

49
Q

main measures included in SOX

A
  • companies must sign certificates validating accuracy of financial statements
  • auditors restricted on range of non audit work provided to clients
  • if statements restated, must repay bonuses received
  • senior audit partner changed every 5 yrs
  • ‘public company oversight board’ to enforce standards in audit
  • directors prohibited from dealing in company shares
  • audit committee needed to trade
50
Q

what is king report III

A
  • in south africa, corp gov for all entities
  • introduced by Institute of Directors in Southern Africa in 1994, King II introduced in 2004
  • links corp gov and law, stakeholders let them know if they are unhappy with company
51
Q

what are the 9 sections in the king report III

A

addresses:
- ethical leadership/corp citizenship
- boards and directors
- audit committees
- governance of risk
- governance of IT
- compliance with laws, rules, codes, standards
- internal audit
- governing stakeholder relationships
- integrated reporting and disclosure

52
Q

what is the development of corporate governance in the UK

A
  1. cadbury, 1992 = introduced comply or explain
  2. greenbury, 1995 = director remuneration
  3. hampel, 1998 = resolving issues in previous reports
  4. turnbull, 1999 = internal control system review
  5. higgs, 2003 = focus on NED roles
  6. tyson, 2003 = developing NEDs
  7. smith, 2003 = auditors and audit committees
  8. sir david walker/frc, 2010 = combined code of official corp gov code

4. BA4 CIMA (16 decks)

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