C1 Corporate Governance

Question 1

Corporate governance

Answer 1

System by which organisations are directed and controlled
2 systems
Insider system
Outsider system

Question 2

Insider investor

Answer 2

Organisations that are listed which are owned by a small number of dominant investors

Question 3

Advantages of insider investor

Answer 3

No agency issue
Strategic alliances
Continuity
Easier to influence management, strategy, policy

Question 4

Disadvantages of insider investor

Answer 4

Reluctant to employ outsider
Prone to fraud
Discrimination against outsider
Lack of formal gov structures

Question 5

Outsider investor

Answer 5

A listed company owner by a large number of shares
Separation of management and ownership

Question 6

Advantages of outsider system

Answer 6

Proper legal and gov structure
Exercise voting rights

Question 7

Disadvantage of outsider system

Answer 7

Chances of hostile takeover
Agency conflict and cost
Short term priorities snd may prefer to sell off shares

Question 8

Features of principle based vs rules based

Answer 8

PB
Broad set of principles supported by guidance
Comply or explain
Allows investors to decide if deviation from code is justifiable
RB
Set of rigid and detailed code
Non compliance cannot be justified
Investors use 3rd party to penalise non compliance

Question 9

Benefits of principle based vs rule based

Answer 9

PB
Greater flexibility and cost effective
Gives opportunities to board and shs to think about consequences
Applies across different jurisdiction and hence governance is more effective

RM
easier compliance with rules, no speculation
Sets a minimum standard of corporate governance for investors confidence

Question 10

Limitations of principle based vs rule based

Answer 10

PB
So broad that cannot be used as a guide
Investors cannot be confident in consistency
May incorrectly be viewed as voluntary
RB
No deviation allowed no matter how illogical the situation is
What to do in a situation where rules are not applicable

Question 11

Institutional investors

Answer 11

Makes up sizeable portion of shareholders in one company usually to hold portfolio of shares
1. Insurance companies
2. Pension funds
3. Mutual funds
This term also includes agents that invest on investor’s behalf
Might lend directly to company

Question 12

Advantages of institutional investors

Answer 12

Less risky
Access to big markets for small investors

Question 13

Disadvantages of institutional investors

Answer 13

More expensive as the risk is less
Cannot influence the company invested in
Undue behaviour