9: Governance and ethics Flashcards
What is governance?
Governance is the system by which an organisation is directed and controlled so that its objectives are achieved in an acceptable and sustainable manner
Why is governance important?
business managers can easily lose sight of:
- whom they are seeking to benefit
- the fact they should not harm others
What is meant by corporate governance?
A structured system for the direction and control of a company such that:
- it specifies the distribution of rights and responsibilities between stakeholders, such as the shareholders, the board of directors and management and
- has established rules and procedures for making decisions about the company’s affairs
There occassionaly can exist conflict of interests between stakeholder groups. Whare are the symptoms of serious conflict of interest?
- financial collapse without warning
- directors disguise the true financial performance of a company
- disputes over director’s remuneration
What are the stakeholder’s governance needs? (4)
- interests to be reflected in company objectives
- scope of conflicts to be reduced
- comapny adheres to good practice in corporate governance
- company adhere to good business ethics
What are some symptoms that indiciate poor corporate governance?
- domination of the board by small groups
- no insolvement by the board
- inadequate control function
- lack of employee supervision
- lack of independent scrutiny (audit)
- lack of contact with shareholders
- misleading financial statements
What is meant by good practice in corporate governance?
- good risk management
- good internal control
- openess and transparency with disclosure of information
- integrity and probity
- accountability
- reducing the potential for conflict
- reconciling the interests of shareholders
Senior management of a high quality are able to:
- put into effect the decisions of the board
- ‘whistleblow’ on the activities of the company should they arise
What is ESG?
Environmental, social and governance (ESG) approach views sustainability-related issues from the perspective of the business itself and considers the impacts of these risks on the business and enterprise values
What are the two broad types of financial system?
- bank based system
- market-based system
Whether a system favours banks or markets is determined by which factors? (3)
- how households prefer to hold their assets
- the degree of dominance of the system by financial intermediaries
- how businesses are financed (balance of retained earnings, debt, and equity)
Characterise a bank-based financial system:
- households prefer to bear ltittle risk and allocate more financial assets to cash and cash equivalents
- households have less access to investments in physical assets such as housing
- banks are highly concentrated and integrated
Characterise a market-based financial system
- households bear more risk and so hold proportionately more equity and fewer deposits with bank
- households have greater access to investments and physical assets
- comparatively unregulated
- banks have less close relationships with the businesses they lend to
Describe the ‘Masculinity vs. Femininity’ corporate governance structure
Masculine:
- fact-based
- more aggressive
- ‘hard’ decision making style
- the focus is on money and achievement
Feminine:
- favour politics and quality of life
- more balance and gender diversity in boards
Describe the ‘Individualism vs. Collectivism’ corporate governance structure
Some cultures place high value on the performance of individuals
Others place value on team performance
Individualism:
- encourage debate and expression of ideas
Collectivism:
- tries to maintain harmony
- less likely to support strong, diverse opinion
Describe the ‘Power distance (PD)’ corporate governance structure
Cultures with high PD encourage bureaucracy and respect for authority
Belief that:
- power should be concentrated in a small group
- less emphasis on seperating roles of CEO and chair
- less need for independent non-executive directors (NEDs)
Describe the ‘Long-term orientation’ corporate governance structure
Short term view:
- seek to reward directors for short-term performance
- e.g. annual performance bonus
Long term view:
- rewards on long-term performance
- e.g. share options
Describe the ‘Uncertainty avoidance’ corporate governance structure
reflects the different attitudes to risk-taking
Low level of uncertainty avoidance:
- tolerates more risk
- not afraid to take chances and make changes
High level of uncertainty avoidance:
- promotes internal control
- promotes risk management
- promotes rules and procedures (safe)
Describe the ‘Indulgence vs. Restraint’ corporate governance structure
Highly indulgent culture:
- seeks personal gratification
- seeks enjoyment of life and having fun
Restraint culture
- suppresses personal gratification
- restricts frivolous spending on corporate hospitality
What is meant by governance structure?
The set of legal or regulatory methods put in place in order to ensure effective corporate governance
What are the two basic governance structures?
- statues
- codes of practice
What is the OECD?
Organisation for Economic Co-operation and Development
What are the principles-based coverage to governance structures governed by OCED? (6)
a) Ensuring basis for effective governance framework
b) Rights and equitable treatement of shareholders
c) Investors and stock markets
d) Accurate and timely disclosure and transparency regarding material matters
e) The responsibilities of the board
f) Incentivise companies to make decisions and manage risks that contributes to the sustainability and resilience of the company
Institutional shareholders is a broad term for organisations which invest money on behalf of other people. In the UK, what do they compromise? (4)
- insurance companies
- pension funds
- investment trusts
- investment managers who act as agents
