Chapter 1 - Definitions And Issues Flashcards

1
Q

Who is corporate governance more significant for larger companies than for small private ones?

A

The separation of ownership from management is much wider

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2
Q

What is the difference between governance and management?

A

Governance is controlled by the board of directors, while management is the everyday running on the company by management.

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3
Q

What is meant by separation of ownership from control?

A

This refers to the distance between the the owners of a company, and those who run it (directors).

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4
Q

What was the governance failing in the Maxwell case?

A

Maxwell raided pension pots to deficit of £400M through being allowed to dominate the group.

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5
Q

What was the governance failing in the Enron case?

A

Misleading accounting practices and improper auditing.

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6
Q

What was the governance failure in the Parmalat case?

A

Failure to identify fraud including forged documents, which no one reported.

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7
Q

Give 6 examples of bad corporate governance.

A
  • 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
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8
Q

What are the two theoretical frameworks of governance?

A

Agency theory

Stakeholder theory

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9
Q

What are the 4 conflicts in agency theory?

A

Moral hazard
Level of effort
Earnings retention
Time horizon

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10
Q

What are the three types of agency cost?

A

Costs of monitoring
Bonding costs
Residual loss

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11
Q

How can agency costs be minimised?

A

Improving the monitoring of management

Incentivising in such a way to bring management interests in line with shareholder interests

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12
Q

What are the 4 approaches to corporate governance?

A

Shareholder value
Stakeholder
Enlightened shareholder
Stakeholder inclusive (King 4)

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13
Q

What are the limitations of corporate governance practice of institutional investors?

A

They are often unaccountable to their beneficiaries.

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14
Q

According. To King 4, why should governing bodies adopt a stakeholder-inclusive approach to governance?

A

Because it gives parity to all sources of value creation.

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15
Q

What are the 4 principles of good governance?

A

Fairness
Accountability
Responsibility
Transparency

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16
Q

What is accountability?

A

The directors should be accountable to shareholders, and should allow challenge.

17
Q

What is the difference between personal and corporate ethics?

A

Personal ethics is the morality and view of what is right and wrong.

Corporate ethics is the standard of behaviour by businesses.

18
Q

What are the key features of a corporate code of ethics?

A
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
19
Q

What are 3 reasons for developing a code of ethics?

A

Compliance and customer service
Managing stakeholder relations
Creating a value based organisation

20
Q

According to the CCAB, what are the elements of a code of corporate ethics?

A
Mission statement
High level values
Clear ethical principles
Internal policies
Implications for breaches
21
Q

What are the 6 major issues in corporate governance?

A
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
22
Q

What is the “comply or explain” rule?

A

This rule set out in the UKCGC requires companies to comply with provisions, or explain why they have not.

23
Q

What are the benefits of good governance?

A
  • eliminates risk of false reporting
  • prevents domination by self-seeking individuals
  • more likely to achieve commercial success
  • reputation
  • encourages long-term investment
24
Q

What are the arguments against good governance?

A
  • 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.