Chapter 1b - Principles of corporate governance.

Question 1

What are the 4 main principles of corporate governance?

Answer 1

The four main principles of Corporate Governance are:

1. Fairness
2. Accountability
3. Responsibility
4. Transparency

Question 2

What do we mean by fairness?

Answer 2

Fairness:

Stakeholders should be treated fairly when decisions are made, or actions taken by the organisation.

Organisations should provide corrective actions for violations for example to minority shareholders when they have been unfairly treated.

Policies and procedures in places to ensure that the organisation and the people within it consider key stakeholder views with justice and avoidance of bias and vested interest.

Question 3

What do we mean by Responsibility?

Answer 3

Responsibility:

A person or group of people having authority over something, and who are therefore liable to be held accountable for the exercise or lack of exercise of that authority.

Those given authorities should accept full responsibility for the powers that have been given and the authority that they exercise.

They should understand what their responsibilities are, and should carry them out ethically with honesty, morally, and with integrity.

To avoid potential conflicts of interest that could arise in the exercise or lack of exercise of authority companies should ensure that procedures and structures are in place so that people know what they are responsible and accountable for.

Question 4

What do we mean by Accountability?

Answer 4

Accountability:

Relates to a person or group of people in a position of responsibility to be accountable for the exercise of the authority they have been given.

Those providing accountability should provide ‘honest’ information and not manipulate facts or ‘spin’ them to their or their organisations advantage.

Corporate governance best practices require an organisation to set out clearly who is accountable for what and over what time period so that an organisation’s stakeholders are clear whom they should hold responsible for what.

Question 5

What do we mean by Transparency?

Answer 5

Transparency:

The ease with which an outsider is able to make a meaningful analysis of a organisation and its actions, both financial and non-financial. It refers to the ‘clarity’ of process in making decisions and carrying out them.

Transparency builds trust between the organisation and its stakeholders and those with whom the organisation interacts with or has an interest in the organisation.

Question 6

What do organisations need to do to build transparency?

Answer 6

Organisations should do in building transparency:

• Be open in all of their actions, relationships, processes and decision making – this includes tenders, recruitment and disclosures about business performance and risks and
• Ensure that disclosures are timely and accurate on all material matters, including: the financial situation, performance, ownership and corporate governance.

Those interested in the organisation need to know about it in order to make informed decisions when dealing with it.

Information disclosure needs to be timely to benefit its recipients. It can be delivered through press releases, market releases, annual reports, and an organisations website.

Policies should be in place about disclosure information, what information should be public and what information should be kept secret, who has the authority to disclose, etc.

Question 7

What is Reputational management?

Answer 7

Directors now have as part of their statutory duties under CA2006 ‘the desirability of the company maintaining a reputation for high standards of the business conduct’.

Reputation defines an organisation as well as the individuals associated with that organisation.

Good reputation attracts and motivates employees, customers and investors, etc. The destruction of a reputation can lead to the end of the organisation.

Organisations must have structures, policies and processes in place to manage reputational risk.

Question 8

What are the Benefits of effective reputational management?

Answer 8

1. Improving relations with shareholders
2. Recruiting and retaining the best employees
3. Reinforcing the organisations credibility and trust for stakeholders
4. Attracting the best business partners, suppliers and customers
5. Reducing barriers to development in new markets
6. Reducing the potential for crises

Question 9

Explain the difference between ‘comply or explain’ and apply and explain and give examples of corporate governance codes using these approaches. 4 marks

Answer 9

Comply or explain

• Where the company believes that it is not in its best interest to comply with a provision of the code, it is required to explain to shareholders why they have not complied e.g UKCG code.

Apply and explain

• Avoids a tick box mentality and focuses the organisation to apply principles and explain how they have applied it e.g King IV, and Wates.

Question 10

List 5 benefit to adopting good Corporate governance practices (5 marks)

Answer 10

1. Long term sustainability
2. Improved access to external financing
3. Reduces the risk of corporate crises and scandals
4. Effective decision making
5. Improved oversight, monitoring and evaluation
6. Ethical behaviour – an anti-corruption tool
7. Improved operational performance
8. Minimising the threats of litigation and of more stringent regulation

Question 11

What are the potential consequences of weak governance practices, and provide examples (2 marks)

Answer 11

Corporate failure

• Accounting fraud
• Lack of knowledge skills and experience on the board e.g. Barings bank
• Dominant personalities e.ge Maxwell
• Failure to understand and manage risks e.g. global financial crises , Carillion

Reputational problems:

• Unethical business practices, e.g Volkeswagen Dieselgate
• Lack of transparency and disclosure e.ge Olympus
• Poor relationship between the board and shareholers e.g. sports direct
• Inappropriate remuneration and reward systems for directors and senior management e.g. Enron, Carillion.