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BTF > Chapter 9 - Governance > Flashcards

Chapter 9 - Governance Flashcards

1
Q

What does governance mean?

A

Governance is the system by which organisations are directed and controlled

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2
Q

What is the impact of poor governance?

A
  • Falling share price: Criticism or reputation damage may result in shareholders losing faith in the company and selling their shares
  • Corporate failure: In extreme cases poor governance can lead to company failure e.g. Enron
  • Criticism of accountants or auditors: Accountants or auditors are subject to criticism for not reporting or potential preventing problems
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3
Q

What is an agency relationship?

A

The Principal (the company’s shareholders) hire the agent (the management) to pursue the principal’s own interest.

Hence the management should run the company in the interest of the shareholders

[Delegation of control]

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4
Q

When does the agency problem occur?

A

When the managers pursue their own objectives rather those of the shareholders.

Can be prevented with good corporate governance which can limit this problem by seeking to align the objectives of management with those of the shareholders

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5
Q

What is corporate governance?

A

A set of relationship between
- a company’s management
- its board
- it’s shareholders
and other stakeholders that provide the structure through which the objectives of the company are set, attained and monitored (OECD)

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6
Q

Describe the objectives of corporate governance from wider view perspective to narrow perspective

A

[Wider]
- Public policy perspective
- Stakeholder perspective
- Corporate perspective
- Stewardship perspective

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7
Q

What does it mean by corporate responsibility?

A

How far a company exceeds the minimum obligation it owes to stakeholders and society. It places particular emphasis on those stakeholders that are unprotected by contractual or business relationships

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8
Q

What does natural capital mean?

A

Natural resources including geology, soil, air water and all living things

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9
Q

What is sustainability described as?

A

Meet the needs of the present without compromising the ability of future generations to meet their own needs

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10
Q

What does business sustainability mean?

A

Considers how far a business goes to operate in a sustainable way and how it interacts with others

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11
Q

What are the key goals of the UN’s established 17 sustainable development goals (SDGs)

A
  • Decent work and economic growth
  • Industry, innovation and infrastructure
  • Responsible consumption and production
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12
Q

What are the two functions of financial systems?

A
  • Facilitation of lending and borrowing money
  • Transmission of money
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13
Q

What are the three elements of a financial system?

A
  • Intermediaries: Banks, pension funds, unit trusts etc
  • Securities: Shares and bonds
  • Markets: Primary, secondary, capital and money
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14
Q

What are the two types of financial system

A
  • Bank-based financial systems e.g. france germany
  • Market based financial systems e.g. UK and USA
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15
Q

What are the difference between bank-based financial systems and market-based financial system

A

Bank: Lending is important source of business finance after retained earnings
Market: More important than banks for long term finance

Bank: Lenders and businesses are highly integrated; often holding equity as well as lending to business and having representation on board
Market: Banks have less close relationships with the business they lend to

Bank: Highly concentrated and integrated providing both banking and insurance service
Market: More fragmented. Less integration of banking and non-banking services

Bank: Stock markets are volatile and speculative because companies have high levels of gearing
Market: Stock markets should be more efficient due to their increased size

Bank: More government regulation of markets
Market: Comparatively unregulated markets

Banks: Households bear little risk - money held maintain on deposit
Market: Comparatively unregulated market

Banks: Households bear little risk - money held in deposit
Market: Households bear more risk so are more likely to hold equity investment

Banks: Any investments in securities is done via intermediaries- therefore institutional shareholders are influnetial
Market: High level of indirect investment via intermediaries such as pension funds which means that institutional shareholders have great deal of influence

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16
Q

What is Hofstede’s model on national culture and governance?

A

Hofstede’s model highlights the key dimensions upon which national culture varies

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17
Q

What are the 6 components of Hofstede’s model?

A
  1. Power distance
  2. Uncertainty avoidance
  3. Individualism and Collectivism
  4. Masculinity/Femininity
  5. Long term- Orientation
  6. Indulgence versus restraint
18
Q

What is power distance from Hofstede’s model?

A

This refers to the extent to which a society accepts that power is distributed unequally. In countries where PDI is low they will usually have decentralised organisations, whereas countries with a high PDI usually accept more centralised, hierarchical structures

e.g In a large power distance society, parents teach children obedience, while in a small power distance society parents treat children as equals

19
Q

What is uncertainty Avoidance? Hofstede’s model?

A
  • Views how comfortable citizens are with uncertainty and ambiguity
  • Countries with high uncertainty avoidance value rules, structure roles and clarity to reduce uncertainty and risk.

e.g. The housing bubble and ensuing financial crisis offers a good example of how uncertainty avoidance can impact an entire country

20
Q

What are the individualism and collectivism? Hofstede’s model?

A
  • Considers whether a country priorities the performance of individuals or teams
  • Countries valuing individualism will promote diversity in their board as they are more accepting of different viewpoints.
21
Q

What is Masculinity/Femininity Hofstede’s model?

A
  • Masculine: Defined as being fact-based and aggressive with a hard decision making style.
  • Feminine: More consultative and intuitive
  • Governance and feminine cultures will prioritise work life balance and diversity in board structures. Masculine cultures will air towards the stereotypical male CEO with a more traditional attitude to gender roles
22
Q

What is long term orientation from Hofstede’s model?

A
  • Long term orientation looks at countries time horizon for planning and performance measurement. Some countries take a short-term view to performance and reward whilst other favour a long-term approach
  • Short term orientation will tend to have a bonus cultures with rewards linked to annual results. A long-term view will focus on share options exercisable after a number of years.
23
Q

What is “indulgence versus restraint”

A
  • Considers the attitude towards personal gratification and fun. Some countries are open and relaxed and others are highly restrained, valuing social and behavioural norms.
  • Underlying attitude to indulgence versus restraint will inform how accepting a country is to consumption and spending. This is reflected in corporate governance codes on principles such as corporate hospitality
24
Q

What does it mean by governance structure?

A

Set of legal or regulatory methods put in place in order to ensure effective corporate governance

25
Q

What does it mean by a “principle-based approach to governance structure?”

A

Countries with a principles-based approach to governance structures are influenced by a desire to adhere to the principles of good corporate governance set out by the OECD

26
Q

What are the OECD principles that the corporate governance framework covers?

A
  • Promotes transparent and efficient financial markets
  • Equitable treatment of all shareholders
  • Relationships with institutional investors, stock markets and intermediaries
  • Rights of stakeholders in corporate governance
  • Accurate and timely disclosure and transparency of financial performance
  • Responsibilities of the board and accountability to shareholders
27
Q

What is a shareholder-led approach governance structure?

A

The UK and US take more of a shareholder-led approach to governance structures by placing more emphasis on the role of shareholders

28
Q

What are the two types of board structure

A
  1. Unitary Board
  2. Dual Board
29
Q

What are unitary boards responsible for?

A
  • Management of company
  • Reporting to shareholders
30
Q

What are dual boards responsible for?

A

Board is split into
- Management board:
to run the company

Supervisory Board
- To oversee management board
- A separate and independent board elected by shareholders and employees
- Right to approve (or not) the FS and dividends declared
- Appoint and remove directors from the management board
- Convene shareholders meeting

31
Q

What is the Companies (Miscellaneous reporting) Regulations (2018)

A

Require private companies to include a statement in their annual report that discloses their corporate governance arrangements if they meet at least one of the following

  • More than 2000 employees worldwide
  • Turnover >£200m globally
  • Total assets (SOFP) > £2bn
32
Q

What is the Wates Principle?

A

Voluntary code to help large private companies meet regulations above and cover 6 principles.

  1. Purpose and leadership
    - Board develops the purpose and ensures values, strategy, and culture align with that purpose
  2. Board
    - Should include an effective chair and be balanced
  3. Director’s responsibility
    - Include robust internal control systems and effective decision making
  4. Opportunities and risk
    - Sustainable success based on identifying opportunities and managing risk
  5. Remuneration
    - Aligned to long term sustainable success
  6. Meaningful stakeholder engagement
33
Q

What does it mean by “apply or explain basis”

A

Apply or explain approach means (for example) that where the Board of directors takes a decision that to follow a recommendation from a particular code or standard will not be in the best interest of the company; that such a Board may apply a different practice or apply the recommendation differently

34
Q

What are business ethics?

A

Ways in which a company behaves in a society which has certain expectations of how a decent company should behave

35
Q

What are the consequences of poor business ethics?

A
  • Negative publicity
  • Loss of customers
  • Failure to retain employee
  • Falling share prices
36
Q

What is an ethical culture?

A

Basic values and beliefs in a company encourages people within the company to behave in line with acceptable business ethics

37
Q

What are the 5 Nolan principles?

A
  • Integrity
  • Objectivity
  • Accountability
  • Openness
  • Honesty
38
Q

What are the 5 institute of business ethics?

A
  • Respect
  • Transparency
  • Fairness
  • Responsibility
  • Trust
39
Q

Amongst ethics what are the ethical values what are the statutory requirements for all companies?

A
  1. Equality for all
  2. No discrimination on any grounds
  3. Freedom of information
40
Q

What are the observations the FRC made about corporate culture in its 2016 report

A

The board must

  • demonstrate leadership by embodying the desired culture and acting where leaders do not deliver
  • recognise the value of culture and that healthy corporate culture can be a valuable asset and sources of competitive advantage
  • open and accountable: demonstrated in the way the company conducts business and engages with stakeholders
  • embed and integrate values of the company to inform the behaviours consistent with objectives
  • exercise stewardship and this should include engagement about culture and encourage better reporting

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