5 Key Facts

Question 1

1. Corporate governance is the process by which a company is ***managed and overseen.

It is framed by local law and culture,

and almost all countries now have a formal, but non-binding corporate governance code to set standards and expectations.

Answer 1

2. However, within these formal frames, governance comes down to ***people and how they interact; they need information and they need to be able to make relevant people accountable for their decisions.

Question 2

3. Accountability is reflected in sufficient oversight of management, so that the management is encouraged, pressed and challenged to deliver efficiently for the long-term good of the business.

Answer 2

4. Alongside accountability sits **alignment*

as the other core tenet of good governance.

This is seen most clearly in the area of ***pay,

where the aim is an alignment of the interests of management with those of the long-term shareholder,

so that long-term value creation in the business is reflected as long-term value delivery to individual managers.

Question 3

5. To deliver these two main aims of accountability and alignment,

each board is expected to establish three independent and effective committees to cover the crucial areas of
nominations,
audit and
remuneration.

Answer 3

Corporate governance codes and guidelines,

and the laws that underpin them,

typically get changed in reaction to scandals in individual companies.

The Cadbury Code in the UK was the world’s first governance code and was used as a model for many others.

Question 4

7. The scandals frequently feature excessive, acquisitive growth and ambition, combined with overconfident management and boards that practice little challenge.

Answer 4

8. Effective boards need a mix of skills and experience across their membership, and a boardroom culture that enables those different perspectives to be brought to bear on the key issues facing the company.

Independence matters, independence of thought most of all, but knowledge and expertise also matter.

Question 5

9. Good boards ensure that the company operates in an ethical and appropriate way and has a corporate culture that is conducive to long-term value creation in the interests of all stakeholders.

Answer 5

10. Two-tier boards are typical in Germany, the Netherlands, Scandinavia and China, and single-tier boards are more typical of the USA, the UK, Japan, France and most of the rest of the world.

The USA and France generally have a single executive on the board, often acting as both chair and CEO.

Japanese single-tier boards are dominated by executive directors with only a small handful of non-executives;

most unitary boards sit between these models.

Question 6

11. Audits focus on close attention and assurance of the financial statements.

However, they only entail a limited requirement to read other material and disclose inconsistencies.

Answer 6

12. The new enhanced auditor reports offer more valuable insights into the work of the auditor and also potentially into the quality of the controls and reporting at the audited company.