6.1 Corporate governance Flashcards
1
Q
Corporate governance
A
- is the means by which a company is directed and controlled
- the aim is to ensure that entities are run well in the interests of their shareholders and the wider community
2
Q
Corporate governance concerns matters such as
A
- the responsibilities of directors
- the appropriate composition of the board of directors
- the necessity for good internal control
- the necessity for an audit committee
- relationships with external auditors
3
Q
Approaches to corporate governance
A
- Rules based (US - Sarbanes-Oxley) - puts the code into law with appropriate penalties for transgression
- Principle based (UK) - requires entity to adhere to the spirit of the code rather than the letter
4
Q
Choice of approach to corporate governance
A
- dominant ownership structure (bank, family or multiple shareholder)
- legal system and its power / ability
- government structure and policies
- state of the economy
- culture and history
- levels of capital inflow or investment coming into the country
- global economic and political climate
5
Q
Principle based approach - comply or explain
A
- requires the entity to state that it has complied with the requirements of the code or to explain why it could not do so in it’s annual report
- this will leave shareholders to draw their own conclusions
- must also report to the appropriate body
6
Q
Arguments in favour of rules based (against principle based) - Organisations perspective
A
- Clarity in terms of what the entity must do - rules are a legal requirement, no interpretation is required
- Standardisation for all companies - no choice but to comply which creates a standardised and fairer approach for all businesses
- Binding requirements - non compliance is illegal and considered a crime, making it very clear rules must be complied with
7
Q
Arguments in favour of rules based (against principle based) - Wider stakeholder perspective
A
- Standardisation across all companies - creates a level playing field
- Sanction - the sanction is criminal and therefore a greater deterrent to transgression
- Greater confidence in regulatory compliance
8
Q
Arguments against rules based (in favour of principle based) - Organisations perspective
A
- Exploitation of loopholes - the exacting nature of the law lends itself to the manipulation of loopholes
- Underlying belief - the belief is that you must play by the rules set, no suggestion that you should want to (ie, no buy in)
- Flexibility is lost - no choice in compliance to reflect the nature of the organisation, it’s size or stage of development
- Checklist approach - companies seek to comply with all aspects of the rules and start tick boxing leading to inefficient practices
9
Q
Arguments against rules based (in favour of principle based) - Wider stakeholders perspective
A
- Regulation overload - the volume of rules and amounts of legislation may lead to increasing costs for business and regulators
- Legal costs - to enact new legislation to close loopholes
- Limits - there is no room to improve or go beyond the minimum level set
- Box ticking rather than compliance - this does not lead to well governed organisations
10
Q
Principle based: Best practice - policies and procedures
A
- Best practice is tied to the size and resources of the entity
- for listed entities the most important issues of best practice are contained in the UK Corporate Governance Code
- It consists of principles (main and supporting) and provisions
11
Q
In the UK all entities quoted on the stock exchange have to comply with the FSA listing rules and this includes requirement that they include in their annual report:
A
- a statement of how the entity has applied the main principles set out in the Code
- a statement as to whether the entity has complied with all relevant provisions set out in the Code
12
Q
The main provisions of the UK Corporate Governance Code:
A
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
13
Q
Board leadership and company purpose
A
- A successful company is led by an effective and entrepreneurial board
- The board should establish the company’s purpose, values and strategy, and make sure it aligns with its culture
- The board must ensure necessary resources are in place for the company to meet it’s objectives and measure performance against them
- The board should ensure effective engagement with and encourage participation from shareholders and stakeholders in order to meet it’s responsibilities to them
- The board should ensure that the workforce policies and practices are consistent with the values and support it’s long term sustainable process
14
Q
Division of responsibilities
A
- The chair leads the board and is responsible for it’s overall effectiveness in directing the company
- The board should include an appropriate combination of executive and non executive (in particular independent) directors, so that no individual or group dominates decision making
- Non-executive directors should have sufficient time to meet their board responsibilities
- The board, supported by the company secretary should ensure it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently
15
Q
Composition, succession and evaluation
A
- Appointments to the board should be subject to formal, rigorous and transparent procedure and an effective succession plan should be maintained for board and senior management
- The board and its committees should have a combination of skills, experience and knowledge
- Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives
