9. Governance And Ethics

Question 1

What is governance?

Answer 1

The system by which organisations are directed and controlled

Question 2

What are the impacts of poor governance?

Answer 2

Falling share price - criticism of reputation damage may result in shareholders losing faith in the company and selling their shares
Corporate failure - in extreme cases poor governance can lead to company failure
Criticism of accountants or auditors - accountants or auditors are subject to criticism for not reporting or potential preventing problems

Question 3

What is the agency relationship?

Answer 3

In the agency relationship, the principal (the company’s shareholders) hire the agent (the management) to pursue the principals own interest
Hence the management should run the company in the interest of the shareholders

Question 4

What is the agency problem?

Answer 4

The agency problem occurs when the managers pursue their own objectives rather than those of the shareholders
Good corporate governance should limit this problem by seeking to align the objectives of management with those of the shareholders

Question 5

What is corporate governance?

Answer 5

Can be defined as a set of relationships between a company’s management, it’s board, it’s shareholders and other stakeholders that provides the structure through which the objectives of the company are set, attained and monitored

Question 6

What different perspectives do the objectives of corporate governance depend on?

Answer 6

Wider view - public policy perspective
Stakeholder perspective
Corporate perspective
Narrow view - stewardship perspective

Question 7

What is corporate social responsibility?

Answer 7

A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders

Question 8

What governance standards do the sustainability accounting standards board embed?

Answer 8

Sustainable and ethical compensation and oversight of top executives
Supply chain management
Accountability and oversight of the board
Engagement of shareholders on ESG topics
Issues relating to ethical conduct, including anti-bribery and corruption

Question 9

What are some modern ideas of corporate governance?

Answer 9

It is about the problem of ensuring that in pursuing their objectives, organisations act responsibly, both in terms of their social impact and their environmental impact
Investors and customers in particular are increasingly expecting organisations to take these issues seriously, and organisations that fail to do this will lose customers and find it difficult to raise finance, thus they will fail to achieve their financial objectives

Question 10

What are the 2 functions of a financial system?

Answer 10

Facilitation of lending and borrowing money
Transmission of money

Question 11

What 3 elements does a financial system consist of?

Answer 11

Intermediaries - banks, pension funds, unit trusts etc (intermediaries help to reduce the problem of asymmetric information by giving advice to poorly informed customers/investors)
Securities - shares and bonds
Markets - primary and secondary, capital and money markets

Question 12

What are the two types of financial systems?

Answer 12

Bank based financial systems e.g. France Germany and Japan
Market based financial systems E.g. UK and USA

Question 13

What is power distance?

Answer 13

Considers the acceptance of power differential, rank and status in a country
High power distance countries will accept the concentration of power so the separation of the chair and CEO roles and the needs for NEDs is less prevalent

Question 14

What is uncertainty avoidance?

Answer 14

Views how comfortable citizens are with uncertainty and ambiguity
Countries with high uncertainty avoidance value rules, structure roles and clarity to reduce uncertainty and risk. Here we see a corporate governance code focused on risk management and control procedures

Question 15

What is individualism and collectivism?

Answer 15

Considers whether a country prioritises the performance of individuals or teams
Countries valuing individualism will promote diversity in their board as they are more accepting of difference views points

Question 16

What is masculinity/femininity?

Answer 16

A masculine orientation is fact based and aggressive with a hard decision making style
Feminine approach is more consultative and intuitive
Governance in feminine culture will prioritise work life balance and diversity in board structures. Masculine cultures will air towards the stereotypical male CEO with a more traditional attitude to gender roles

Question 17

What is long term orientation?

Answer 17

Looks at countries time horizon for planning and performance measurement. Some countries take a short term view to performance and reward whilst others favour a longer term approach
A short term orientation will tend to have a bonus culture with rewards linked to annual results. A long term view will focus on share options exercisable after a number of years

Question 18

What is indulgence vs restraint?

Answer 18

Considers attitude toward personal gratification and fun. Some countries are open and relaxed and others are highly restrained, valuing social and behavioural norms
The underlying attitude to indulgence versus restraint will inform how accepting a country is to consumption and spending. This will be reflected in corporate governance codes on principles such as corporate hospitality and spending

Question 19

What is a governance structure?

Answer 19

The set of legal or regulatory methods put in place in order to ensure effective corporate governance

Question 20

What is a principle based approach to governance structures?

Answer 20

Influence by a desire to adhere to the principles of good corporate governance set out by the OECD

Question 21

What are the OECD principles that the corporate governance framework covers?

Answer 21

Promoting transparent and efficient financial markets
Equitable treatment of all shareholders
Relationships with institutional investors, stock markets and intermediaries
Rights of stakeholders in corporate governance
Accurate and timely disclosure and transparency of financial performance
Responsibilities of the board and accountability to shareholders

Question 22

What is a shareholders led approach to governance structures?

Answer 22

Placing more emphasis on the role of shareholders

Question 23

What is a unitary board?

Answer 23

Responsible for management of company and reporting to shareholders

Question 24

What is a dual board?

Answer 24

Management board - to run the company
And
Supervisory board - to oversee management board
A separate and independent board elected by shareholders and employees
Right to approve (or not) the FS and dividends declared
Appoint and remove directors from the management board
Convene shareholder meetings

Question 25

What are the terms for a private company to include a statement in their annual reports that disclose their corporate governance agreements?

Answer 25

Must meet at least one of the following:
More than 2000 employees worldwide
Turnover greater than £200m globally
Total assets greater that’s £2bn