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CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law > Chapter 2 Corporate Governance > Flashcards

Chapter 2 Corporate Governance Flashcards

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1
Q

What is corporate governance?

A

The system by which companies are directed and controlled.
- Set of relationships between a company’s management, its board, its shareholders and other stakeholders, that provides the structure through which the objectives of the company are set, attained and monitored.

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2
Q

What is the purpose of corporate governance?

A

Help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.

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3
Q

What does corporate governance provide?

A

The structures and processes to ensure companies are managed by directors in the interests of their owners, the shareholders.

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4
Q

In which organisations is corporate governance relevant?

A

It is relevant to profit and non-profit orgs where there is a division between those who:

  • Run the business (e.g. directors)
  • Own the business (e.g. shareholders)
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5
Q

What is the agency theory?

A
  • It assumes that agents including the directors will act in their own best interests
  • Orgs must align interests of agent with those of the organisation to get the best performance out of the agent
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6
Q

What are the objectives of good corporate governance?

A
  1. Address the agency problem
  2. Management of risk
  3. Create a framework from which a business can pursue its strategy and objectives
  4. Address concerns of society and investors over management of companies
  5. Accountability
  6. Clear roles and resp
  7. Good communication
  8. Good control systems
  9. Strong experienced independent non-exec directors
  10. Involved board supervising the activities of the executives
  11. Set medium and long term as well as short term goals
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7
Q

What is the definition of organisations?

A

The social arrangements for the controlled purpose of collective goals.

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8
Q

What are the types of organisation and sectors?

A
  1. Profit-orientated: maximising wealth of owners
  2. Not-for-profit: maximising benefit to chosen sector of society
  3. Public sector: Government-run
  4. Private sector: Privately-run
  5. NGO: Non-governmental organisation - main aim not for profit, not directly linked to government. Cooperatives - orgs democratically controlled by members (buyers)
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9
Q

What is the history of corporate governance and the drivers of it?

A
  1. Need for reliable standards of boadroom behaviour
  2. Financial reporting scandals e.g. Enron concealing info about company debt => Sarbanes
  3. Domination of some orgs by 1 individual
  4. Collapse of UK and US companies
  5. Executive greed
  6. Short termism
  7. Corporate failures at apparently successful companies
  8. Globalisation
  9. Diff treatment of domestic and international investors
  10. Needs of institutional shareholders for good communication with companies
  11. GFC
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10
Q

What are the roles of directors in a company?

A
  • Law states that directors act as a board and decisions should be taken collectively at board mtgs unless the board has delegated authority to a sub-committee

Executive Directors - involved in day-to-day running of the company. Usually full time.

Non-Executive Directors - Independent, part-time directors who scrutinise company’s affairs. Generally only attend board mtgs and some committee mtgs. More part-time & likely paid a fee depending on commitment to company.

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11
Q

How are directors an agency?

A

Directs are agents of a company i.e. of shareholders as the body

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12
Q

What are the directors duties to act within their powers?

A
  1. Observe constitution
  2. Exercise powers in best interests of the company
  3. Exercise powers for proper purpose
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13
Q

What are the directors duties to promote success of company?

A
  1. Consider long-term consequences of decisions
  2. Interest of employees
  3. Need for good relationships
  4. Impact of company on local community & environ
  5. Importance of high standards of business conduct
  6. Acting fairly towards all members
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14
Q

What are the directors duties to exercise independent judgement?

A
  1. Directors must not delegate powers of decision making or be swayed by others.
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15
Q

What are the directors duties to exercise reasonable care, skill, and diligence?

A
  1. Comply with company’s constitution and legislation
  2. Don’t act negligently
  3. No need for continuous attention
  4. May delegate
  5. No special skills/ qualifications required
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16
Q

What are the directors duties to avoid the conflicts of interest?

A
  1. Directors in position of trust
  2. Articles may permit some conflict of interest by independent directors
  3. Not liable if they comply with any lawful article that deals with potential conflict
  4. Must disclose all info to the company
  5. Must account to company for any profit made from position as director, whether it arises directly or indirectly
  6. Irrelevant whether company suffers loss or not
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17
Q

What are the directors duties to declare interest in proposed transaction?

A
  1. Disclose nature and extent of interest to board

2. Disclose interests in writing or verbally at board meeting, before the transaction.

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18
Q

What are the consequences of a breach of duty?

A
  • Civil liability
  • Damages
  • Restore company property
  • Repay profits
  • Cancellation of contracts
  • Articles can authorise action
19
Q

What is the OECD?

A

Organisation for economic co-operation and Development. It is a published set of principles which establish an environment that supports good corporate governance.

20
Q

What is the basis for an effective corporate governance framework within the OECD?

A
  • Promotion of transparent & fair markets
  • Efficient allocation of resources
  • Consistency with rule of law
  • Supported by effective supervision
21
Q

What are the other 5 chapters within the OECD?

A
  1. Rights & equitable treatment of all shareholders & key ownership functions
  2. Rights of stakeholders and importance of co-operation to create wealth and jobs, and sustainably financial enterprises
  3. Timely & accurate disclosure and transparency of performance, position, ownership and governance
  4. Relationships with institutional investors, stock markets
  5. Responsibilities of the board:
    - strategic guidance
    - effective monitoring
    - accountability to shareholders
22
Q

What is the UK corporate governance code?

A

It is a principle based, while basis of corporate governance in US is rules-based.

23
Q

What is the principle of comply or explain?

A
  • All UK listed companies must either comply with the UK corporate governance code principles or explain why they are not complying.
  • Not a tick-box exercise. Justified with reference to many factors inc size, complexity of the company
  • Explanation includes the impact of the actions the company has taken
24
Q

What are the 5 main principles found in the corporate governance code?

A
  1. Board leadership and company purpose
  2. Division of responsibilities
  3. Composition, succession and evaluation
  4. Audit, risk and internal control
  5. Remuneration
25
Q

What is the board leadership and company purpose principle in corp gov code?

A
  1. Led by entrepreneurial board, promote long term success
  2. Establishes values and objectives
  3. Ensures sufficient resources available to meet objectives and monitor
  4. Effective engagement with stakeholders
  5. Ensures workplace policies are consistent with values
26
Q

What is the division of responsibilities principle in corporate gov code?

A
  1. Chair leads the board - objective judgement
  2. Appropriate balance - independence
  3. No individual dominate
  4. Clear division of responsibilities
  5. Nonexec have sufficient time and scrutinise
27
Q

What is the composition, succession and evaluation principle in corp gov code?

A
  1. Rigorous procedure
  2. Succession Plan
  3. Board evaluated annually to ensure balance of skills
28
Q

What is the audit, risk and internal control principle in corp gov code?

A
  • Transparent procedures => independence & effectiveness of internal/external audit
  • Present fair & balanced assessment
  • Procedures assess risks faced & oversee internal control framework
29
Q

What is the remuneration principle in corp gov code?

A
  • Support strategy and promote long term sustainable success
  • Procedures to determine remuneration
  • No individual should set own remuneration
30
Q

What factors could impair the independence of non-exec directors?

A
  1. Recent employment with comp (3 - 5yrs)
  2. Material business relationship with company/group
  3. Receipt of remuneration/ pension
  4. Close family ties
  5. Significant links with other directors
  6. Represents major shareholder
  7. Longer than 9 yrs service as director of company
31
Q

What are the requirements of the UK corporate governance code to note?

A
  • Chair should be independent
  • Roles of chair and chief exec NOT held by same person
  • At least half of the board should be independent
  • All directors subject to annual re-election
  • Board evaluation annually
  • Form nominations committee with at least half independent non exec
  • Form audit committee with independent non execs
  • Form remuneration committee of independent non execs
  • Only basic salary pensionable
  • Notice periods of 1 year or less
32
Q

What areas should the board report on in the annual report as stated by the corporate governance code?

A
  1. Directors considered to be independent
  2. Number of mtgs of the board
  3. Work of nominations/ audit/ remuneration committees
  4. Board responsibility for preparing the annual report and accounts
  5. Confirmation that board has carried out risk assessment
  6. Statement in annual and half yearly accounts that the company is a going concern & relevant uncertainties
33
Q

What is the nominations committee?

A

> Leads process for appointments

> Ensures diverse pipeline for succession

34
Q

What is the audit committee?

A

All independent: at least 3, smaller companies 2
> should NOT include the chair
> 1 member should have recent financial experience
> Monitor the integrity of financial statements
> Review companies internal control systems & risk management systems
> Monitor effectiveness of internal audit
> Conduct tender process for external auditors
> Review effectiveness of external audit process
> Develop policy on whether company uses external auditor for other services

35
Q

What is the remuneration committee?

A

All independent: at least 3, smaller companies 2
> Can include independent chair
> Responsibility for setting board pay
> Review workforce remuneration policy and take this into account when setting board pay

36
Q

What reports are included in the development of UK code?

A
  1. Cadbury Report 1992: Separation of chair and CEO
  2. Greenbury Report 1995: Director remuneration
  3. Hampel Report 1998: Consolidation into Combined Code
  4. Turnbull Report 1999: Internal controls
  5. Higgs and Tyson reports 2003: NEDs
  6. Smith Report 2003: auditors, audit committee
  7. Walker/FRC Report 2010: UK Corporate Governance Code
37
Q

Why does the IFAC say that the profession should support the development of professional accountants?

A
  1. Customer and stakeholder focus
  2. Effective leadership
  3. Integrated governance, risk management and control
  4. Innovative and adaptive capability
  5. Strong financial management
  6. People and talent management
  7. Operational excellence
  8. Effective and transparent communication
38
Q

What type of system do Germany and France use?

A

They use a two tier board. It has a
> Supervisory - no executive function; strategic oversight of the organisation
> Executive (management): Runs company, elected by the supervisory

39
Q

What are the advantages of the two-tier board?

A
  • Separates management from ownership
  • Shareholder involvement
  • Wider discussion in separate mtgs
  • Added expertise
  • Direct power over management
40
Q

What are the disadvantages of the two-tier board?

A
  • Dilution of power
  • Isolation of supervisory board
  • Agency problems
  • Slower decisions
  • Lack of transparency
41
Q

What type of system does the USA use?

A

They use a rules-based system. SOX (Sabanes Oxley Act)
> All listed US companies must provide certificate of accuracy of financial statements from CEO and CFO
> CEO and CFO must pay back last years bonuses
> Senior audit partner rotation every 5 YEARS
> NO audit committee => company must put in place before trading
> Public Company Oversight Board
> Greater disclosure requirements
> Directors may not trade in own-company shares at certain times

Majority of boards = nonexex

42
Q

What type of corporate governance system does the EU use?

A
  • Matter for individual states
  • Issued directives on disclosure of directors’ remuneration and other issues
  • Created EU Corp Governance forum with members
43
Q

What system do South Africa use?

A 
Principles-based system 'Apply or Explain' 
- Ultimate compliance officer is the company's stakeholders
King code:
1. Ethical leadership & Corp citizenship
2. Boards and directors
3. Audit committees
4. Governance of risk
5. Governance of IT
6. Compliance with laws, rules 
7. Internal audit
8. Stakeholder relationships
9. Integrated reporting
44
Q

What is the King III report that is used in South Africa?

A

> Risk-based internal audit
Shareholder approval of nonexec directors remuneration
Evaluation of directors performance
Integrated reporting and disclosure

CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law (7 decks)

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