Ch 5. Governance Flashcards
governance is about
people and processes. Good governance also involves developing an
appropriate culture that will underpin the delivery of strong business performance without excessive risktaking and through appropriate conduct of business operations.
corporate governance comes down to two ‘A’s
accountability and alignment.
Accountability
People need to be:
▶ given authority and responsibility for decision-making; and
▶ held accountable for the consequences of their decisions and the effectiveness of the work they deliver.
Accountability and the board
board will be most effective when its non-executive members feel accountable to shareholders
for effective delivery. Therefore, corporate governance has a strong focus on board structure and the
independence of directors
need to avoid group think
The role of the chair of the board is vital
in facilitating a balanced debate in the boardroom. Consequently,
many investors prefer that the chair is an independent non-executive director
Chair should be
INED not CEO to avoid concentration of power
Accountability and accounts
Hence the central importance of transparent and honest accounting by companies, and of the
independence of the audit of those accounts by the auditor
Alignment and the agency problem
This challenge
is magnified at larger corporations, not least public companies, where ownership is fragmented between
many investors owning a small fraction of the company. Corporate governance attempts to ensure that
there is greater alignment in the interests of the agents with the owners through incentives,
Alignment and executive pay
the major focus in terms of executive pay is always on addressing the agency
problem and helping to ensure that executives are not subject to incentives to perform in their own interests
and contrary to the interests of the owners.
usually will include performance related metrics
Nominations Committee
aims to ensure that the board overall is balanced and effective, ensuring that
management is accountable
Audit Committee
oversees financial reporting and the audit, delivering accountability in the accounts.
Remuneration Committee
seeks to deliver
a proper alignment through executive pay
Germany and the Netherlands,
have two-tier boards
with wholly non-executive supervisory boards overseeing management boards;
whereas others have single-tier boards,
with some dominated by executive directors (in Japan), some having
a combined CEO and chair (most commonly seen in the USA and France), and some lying in between these
models (the UK being an example).
In the UK, shocks around pay levels at newly-privatised utilities led to the
Greenbury report, which revised the
corporate governance code in 1995. It increased the visibility of remuneration structures