Chapter 4a - Key Issues in Corporate Governance Flashcards
What are the key issues in Corporate Governance?
- Composition of boards
- Corporate Culture
- Social responsibility and sustainability
- Remuneration of directors and senior executives
- Risk Management
Why is Composition of boards a key issue in corporate governance?
composition of boards
The make up of boards is key issue in governance.
The focus is on:
- More representatives Boards: there are quotas for women on boards and growing requirements for more social and ethnic diversity on boards and within the pipeline for board succession
- Independence of board members to ensure that there is challenges to a dominant chairmen or CEO.
Why is financial reporting a key issue in corporate governance?
Financial reporting
Every company under the cA2006 is required to keep accounting records which enable the directors to prepare accounts which that comply with the appropriate accounting standards.
The accounts should be reasonable accuracy as to the financial position of the company at that time.
However, evidence has show that directors and senior managers for many reasons disguise the true financial performance of their company.
This may be to:
- Enhance their own rewards
- Cover up a fraud
- Cover up poor performance due to their own lack of experience and understanding of the business.
Why is stakeholder relations a key issue in corporate governance?
Stakeholder relations
172 of the CA2006 to take into consideration the interests of employees and foster business relationships with suppliers, customers and others.
The companies (Miscellaneous Reporting) Regulation 2018 have introduced reporting requirement for companies on their compliance with s 172.
Companies will have to disclose how their directors have engaged with employees ad other stakeholders and how they have taken stakeholder interest into considering in their decision making.
For list companies, the UK Corporate Governance Code 2018 has suggested methods of workforce engagement that boards could adopt.
They include:
- A director appointed form the workforce
- A formal workforce advisory panel or
- A designated non-executive director
Why is Corporate Culture a key issue in Corporate governance?
Corporate Culture
Growing focus on corporate culture and the important for long term sustainability of the company on getting the culture embedded within the business practices of the company.
Code 2018 has provisions requiring boards to ‘assess and monitor culture’. Guidance provided by FRC, in the ‘Guidance on board effectiveness’, on how boards may be able to accomplish compliance with this provision, but boards must work out how they are going to do this and make disclosures about effectively based on their individual circumstances and challenges.
Why is Social responsibility and sustainability a key issue in corporate governance?
Social responsibility and sustainability
This has grown over the years.
Why? The millennial generation entering the workplace.
Millennials want to be heard and have a voice in both contributing and making a difference in a broader community. They consistently share their views and opinions through social media platforms.
This has led to a demand for social responsibility as potential workforce and consumer-based look to do business only with those whom they feel are making a positive impact on society.
Boards are having to justify their activities more on the long term sustainability of their organisations rather than the previous short term view of meeting quarterly and half yearly targets.
Why is Remuneration of directors and senior executives a key issue in corporate governance?
Remuneration of directors and senior executives:
The issue of pay equality between men and women has been on the news i.e. BBC in 2017. This poses a reputational risk for many organisations. Boards should be reviewing their pay policies and ensuring that their remuneration practices are fair.
why is Risk Management a key issue in corporate governance?
Risk Management
Since the global financial crises (2008-9) there has been growing expectation that the boards of listed companies focus more on risk management.
The FRC ‘Guidance on risk management, internal control and related financial and business reporting’ issued in 2014, made it clear that the board has a primary role in the identification and management of risk.
Why is corporate governance an issue in developing and emerging markets?
Many organisations in developing and emerging countries are either state or family owned and or not listed and this brings with its own governance challenges:
- Lack of ownership control by government, no monitoring of management which is often lacking in capability and boards filled with inexperienced directors who would rather be somewhere else
- Conflict in family-owned businesses between controlling family members, informal governance structures and often inexperienced boards and management teams.
