Chapter 1 - Definitions And Issues

Question 1

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

Answer 1

The separation of ownership from management is much wider

Question 2

What is the difference between governance and management?

Answer 2

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

Question 3

What is meant by separation of ownership from control?

Answer 3

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

Question 4

What was the governance failing in the Maxwell case?

Answer 4

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

Question 5

What was the governance failing in the Enron case?

Answer 5

Misleading accounting practices and improper auditing.

Question 6

What was the governance failure in the Parmalat case?

Answer 6

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

Question 7

Give 6 examples of bad corporate governance.

Answer 7

• 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

Question 8

What are the two theoretical frameworks of governance?

Answer 8

Agency theory

Stakeholder theory

Question 9

What are the 4 conflicts in agency theory?

Answer 9

Moral hazard
Level of effort
Earnings retention
Time horizon

Question 10

What are the three types of agency cost?

Answer 10

Costs of monitoring
Bonding costs
Residual loss

Question 11

How can agency costs be minimised?

Answer 11

Improving the monitoring of management

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

Question 12

What are the 4 approaches to corporate governance?

Answer 12

Shareholder value
Stakeholder
Enlightened shareholder
Stakeholder inclusive (King 4)

Question 13

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

Answer 13

They are often unaccountable to their beneficiaries.

Question 14

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

Answer 14

Because it gives parity to all sources of value creation.

Question 15

What are the 4 principles of good governance?

Answer 15

Fairness
Accountability
Responsibility
Transparency

Question 16

What is accountability?

Answer 16

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

Question 17

What is the difference between personal and corporate ethics?

Answer 17

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

Corporate ethics is the standard of behaviour by businesses.

Question 18

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

Answer 18

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

Question 19

What are 3 reasons for developing a code of ethics?

Answer 19

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

Question 20

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

Answer 20

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

Question 21

What are the 6 major issues in corporate governance?

Answer 21

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

Question 22

What is the “comply or explain” rule?

Answer 22

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

Question 23

What are the benefits of good governance?

Answer 23

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

Question 24

What are the arguments against good governance?

Answer 24

• 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.