Chapter 1 - Definitions And Issues Flashcards
Who is corporate governance more significant for larger companies than for small private ones?
The separation of ownership from management is much wider
What is the difference between governance and management?
Governance is controlled by the board of directors, while management is the everyday running on the company by management.
What is meant by separation of ownership from control?
This refers to the distance between the the owners of a company, and those who run it (directors).
What was the governance failing in the Maxwell case?
Maxwell raided pension pots to deficit of £400M through being allowed to dominate the group.
What was the governance failing in the Enron case?
Misleading accounting practices and improper auditing.
What was the governance failure in the Parmalat case?
Failure to identify fraud including forged documents, which no one reported.
Give 6 examples of bad corporate governance.
- board failing to perform its duties
- misleading financial reporting
- poor relations between the board and its shareholders
- ineffective risk management
- in appropriate remuneration
- unethical business practices
What are the two theoretical frameworks of governance?
Agency theory
Stakeholder theory
What are the 4 conflicts in agency theory?
Moral hazard
Level of effort
Earnings retention
Time horizon
What are the three types of agency cost?
Costs of monitoring
Bonding costs
Residual loss
How can agency costs be minimised?
Improving the monitoring of management
Incentivising in such a way to bring management interests in line with shareholder interests
What are the 4 approaches to corporate governance?
Shareholder value
Stakeholder
Enlightened shareholder
Stakeholder inclusive (King 4)
What are the limitations of corporate governance practice of institutional investors?
They are often unaccountable to their beneficiaries.
According. To King 4, why should governing bodies adopt a stakeholder-inclusive approach to governance?
Because it gives parity to all sources of value creation.
What are the 4 principles of good governance?
Fairness
Accountability
Responsibility
Transparency
What is accountability?
The directors should be accountable to shareholders, and should allow challenge.
What is the difference between personal and corporate ethics?
Personal ethics is the morality and view of what is right and wrong.
Corporate ethics is the standard of behaviour by businesses.
What are the key features of a corporate code of ethics?
Formal document Adopted by the board of directors Disclosed to employees and the public. Made clear to employees and the public. It is monitored Breaches have consequences
What are 3 reasons for developing a code of ethics?
Compliance and customer service
Managing stakeholder relations
Creating a value based organisation
According to the CCAB, what are the elements of a code of corporate ethics?
Mission statement High level values Clear ethical principles Internal policies Implications for breaches
What are the 6 major issues in corporate governance?
Financial reporting and auditing Remuneration of directors and executives Company stakeholder relations Risk taking and risk management Effective communication with shareholders Ethical conduct and CSPl
What is the “comply or explain” rule?
This rule set out in the UKCGC requires companies to comply with provisions, or explain why they have not.
What are the benefits of good governance?
- eliminates risk of false reporting
- prevents domination by self-seeking individuals
- more likely to achieve commercial success
- reputation
- encourages long-term investment
What are the arguments against good governance?
- box-ticking
- excessive bureaucracy
- cost and effort of compliance with codes
- companies having to comply are at a disadvantage to those that don’t. e.g. rivals in other countries.
