Chapter 4 - Governance Risk Flashcards
What is corporate governance?
Corporate governance = system by which org’s are directed and controlled – ensure org’s are run for benefit of shareholders and stakeholders
Organisation for Economic Co-operation and Development (OECD)
- Assist governments
- Provide guidance for stock exchanges, investors and companies
- Deals mainly with problems that result from separation of ownership and management
The G20/ OECD Principles:
- Ensuring basis for effective corporate governance framework
- Rights and equitable treatment of shareholders and key ownership functions
- Institutional investors, stock markets and other intermediaries
- Role of stakeholders in corporate governance
- Disclosure and transparency
- Responsibilities of the board
International Corporate Governance Network (ICGN)
- Guidance for corporate boards
1. Board role and responsibilities
2. Leadership + independence
3. Composition and appointment
4. Corporate culture
5. Risk oversight
6. Remuneration
7. Reporting and audit
8. Shareholder rights
The agency problem:
- Principal = shareholders Agent = Directors, managers, employees
- Agency theory assumes that agent and principal act in their own self-interest which may conflict
- Agency problem derives from the principals not being able to run the org and therefore having to rely on agents to do so for them
- Separation of ownership can cause issues if there is a breach of trust by directors either by intentional action, omission, neglect or incompetence
The agency solution:
- Remove directors from office – undesirable due to inevitable fallout
- Exercise control – incur agency costs (consultants and external auditors), can be time consuming and difficult due to info asymmetry
Corporate Governance Disclosures:
- G20/ OECD:
* Framework should ensure timely & accurate disclosure of all material matters regarding:
Corporation, financial situation, performance, ownership and governance - ICGN:
* Oversee timely and high quality disclosures for investors and other stakeholders relating to:
Financial statements, strategic and operational performance, corporate governance and material environmental and social factors
Principles-based approach
- Features
* Broad principles
* Comply/ explain basis
* Allows investors to decide if they agree that departure from the code is appropriate - Benefits
* Greater flexibility and potential cost savings
* Applies across different legal jurisdictions (more effective for multinationals)
* Forces boards and shareholders to think about consequences of governance arrangements - Drawbacks
* So broad that it offers very little use as guide to best practice
* Investors cannot be confident of consistency in approach
* Incorrectly viewed as optional - Where you find them
* Legal jurisdictions where governing bodies of stock markets have prime role in setting standards
Rules-based approach:
- Features:
* Comply with detailed rigid code
* Non-compliance cannot be justified
* Investors rely on third party to penalise non-compliance - Benefits:
* Allows easier compliance – rules are unambiguous and can be evidenced
* Provides consistent minimum standard - Drawbacks:
* Allows no leeway or deviation
* Enforcement can be difficult for situations not covered by rules - Where you find them:
* Legal jurisdictions that lay great emphasis on obeying the letter of the law
Responsibilities of the chair of the board and CEO:
Chair of the board:
* Providing leadership to the board
* Ensuring board receives adequate and timely info
* Ensuring effective communication with shareholders
* Facilitating effective contribution from NEDs
* Taking lead in providing induction for new directors and board development
* Meeting with NEDs without executives
* Facilitating board appraisal
* Encouraging active engagement by all members of board
CEO:
* Providing leadership to organisation
* Providing accurate + timely info
* Communicating effectively with stakeholders
* Facilitating effective implementation of board decisions
* Co-operating in induction and development of board members
* Co-operating by providing any necessary resources + info
* Co-operating in board appraisal
* Co-operating with all members of board
Focus of the board:
- Boards should meet regularly and frequently
* Members should take sufficient time to fulfil responsibilities
Membership of board - considerations of membership:
- Size – requires balance between benefits of varied views and opinions and need for coherence of decision making
- Inside/outside mix – split between executive decision-making directors and NEDs
- Diversity mix – gender, ethnicity, backgrounds and experience
Continual professional development:
* CPD procedures ensure that directors are adequately prepared for their roles CPD covers: * Strategic planning * Financial management * Human resource issues * Risk management * Legal and regulatory issues * Audit practice and procedures
Board performance appraisal:
* Directors should be individually appraised Criteria to be included in appraisal: * Independent and innovative * Industry familiarity * Active participation * Positive and enthusiastic * Business development * CPD
Who is the company secretary:
Important figure in ensuring compliance with legal and other regulatory frameworks