Chapter 4 - corporate governance Flashcards
What is corporate governance?
Corporate governance is commonly referred to as ‘a system by which organizations are directed and controlled. It is the process by which company objectives are established, achieved, and monitored.
What are the corporate governance principles?
- respect shareholder rights
- recognise they may have obligations to other stakeholders.
- The board needs the skills and understanding to review and challenge management performance.
- develop a code of conduct for their directors and managers that promotes ethical and responsible decision-making.
- Companies should make public the roles and responsibilities of the board and management to provide shareholders with a level of accountability.
- have procedures to independently verify their financial reporting.
How does the corporate governance operate in the UK.
The corporate governance framework in the UK operates at a number of levels:
* Through legislation, particularly the Companies Act 2006.
* Through regulation, in particular for the London Stock Exchange (LSE) listed companies, and through the Listing Rules, which is the responsibility of the FCA.
* Through the UK Corporate Governance Code, which is the responsibility of the Financial Reporting Council (FRC). It contains general principles and more detailed provisions relating to the corporate governance of all companies listed on the LSE.
* For those companies that are not listed on the LSE, adopting equivalent approaches to corporate governance to those that are listed, as the UK Corporate Governance Code is considered to represent best practice standards of supervision and management by directors and other stakeholders.
What is the FRC’S mission?
The FRC’s mission is to promote transparency and integrity in business.
What does the FRC do?
the FRC sets auditing and ethical standards and monitors and enforces audit quality
What are the key sections of the 2018 UK corporate governance code?
Board leadership and company purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Remuneration
Is the UK corporate governance a legal requirement?
Compliance with the Corporate Governance Code is not a legal requirement, but it is a part of the Stock Exchange Listing Rules.
What does the FRC state?
Risk Guidance aims to bring together elements of best practise for risk management;
prompt boards to consider how to discharge their responsibilities in relation to the existing and emerging principal risks faced by the company;
reflect sound business practise and whereby risk management and internal control are embedded in the business process by which the company pursues its objectives;
and highlight related reporting responsibilities.
Does corporate governance apply to mutual companies?
No but with regard to mutual insurance companies, the Association of Financial Mutuals (AFM) has published a version of the Code that adapts the requirements to the particular needs of mutual companies.
What are the main roles and responsibilities of an audit committee?
- monitoring the integrity of the company’s financial statements;
- reviewing the company’s internal financial controls;
- monitoring and reviewing the effectiveness of the company’s internal audit function;
- making recommendations to the board, for it to put to the shareholders for their approval in the general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
- reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process;
- developing and implementing policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and
- to report to the board, identifying any matters where it considers that action or improvement is needed, and making recommendations as to the steps to be taken.
Which other countries has the corporate governance code been adopted?
Germany has the Deutscher Corporate Governance Kodex.
In Australia the ASX Corporate Governance Council (a body made up of the Australian Securities Exchange and several other entities with a strong interest in the governance of listed companies) published the Corporate Governance Principles and Recommendations.
The OECD’s Southeast Asia Corporate Governance Initiative, launched in 2014, was established to support regional development of capital markets through the advancement of corporate governance standards and practices.
What is the Sarbanes-Oxley Act 2002?
In the USA - Companies with a listing on a stock exchange in the USA, such as the New York Stock Exchange, are required to comply with the requirements of the Sarbanes-Oxley Act 2002 (SOX)Sarbanes–Oxley Act 2002 (SOX) (USA).
What are the UK listing rules?
The Listing Rules dictate such matters as the contents of the prospectus for a company seeking a listing for the first time (this is referred to as an Initial Public Offering or IPO)
What capital must a company have if it wants to be registered on the company’s house?
£50k
What are the 5 main management controls?
Underwriting
Claims
Finance
Human resources
IT
What is the scope of risk management?
Risk management covers all areas of an insurance company’s operations.
Under risk management of the corporate governance, what is the first line of defence?
front-line managers to ensure that risks are identified and controlled in keeping with the strategy and control environment.
Under risk management of the corporate governance what is the second line of defence?
The risk management department, therefore, forms the second line of defence.
