Chapter 9 - Governance and Ethics

Question 1

What is governance?

Answer 1

Governance involves creating a framework to safeguard the interests of stakeholders, ensuring activities align with ethics, risk, and stakeholder protection.

Question 2

Why is governance an important issue? 2

Answer 2

Governance ensures managers focus on:
- Whom they are seeking to benefit.
- Avoiding harm to others.

Question 3

What is the agency problem in governance?

Answer 3

The agency problem occurs when managers lose sight of stakeholders’ interests, leading to conflicts in priorities.

Question 4

What does agency theory explain?

Answer 4

Agency theory explains the conflict between shareholders (principals) and managers (agents) due to the separation of ownership and control in large companies.

Question 5

What are the roles of managers in governance?

Answer 5

Managers act as agents for shareholders, ensuring their interests are protected.

Question 6

What is the relationship between ownership and control in large companies?

Answer 6

Ownership and control are separated, causing potential conflicts between managers and shareholders.

Question 7

What is corporate governance?

Answer 7

Corporate governance is the system by which companies are directed and controlled.

Question 8

What are the four perspectives of corporate governance objectives?

Answer 8

• Public policy perspective
• Stakeholder perspective
• Corporate perspective
• Stewardship perspective

Question 9

What does the public policy perspective on corporate governance emphasize? 3

Answer 9

Ensuring the company meets:
- Objectives of its shareholders
- Interests of stakeholders with a direct stake
- Interests of the public at large, focusing on leadership, sustainability, and good corporate citizenship.

Question 10

What is the stakeholder perspective on corporate governance? 3

Answer 10

It involves balancing economic and social goals with individual and communal goals. The framework encourages:
- Efficient use of resources through investment.
- Accountability from senior management to shareholders.
- Alignment of shareholder interests with other stakeholders.

Question 11

What does the corporate perspective on corporate governance emphasize?

Answer 11

Maximizing shareholder wealth while conforming to society’s laws and customs, and balancing the interests of shareholders and other stakeholders to achieve long-term sustained value.

Question 12

What is the stewardship perspective on corporate governance?

Answer 12

It focuses on directors acting in the best interests of the company as stewards of the company’s resources.

Question 13

Why is it challenging to meet the needs of all stakeholders all the time?

Answer 13

It is unlikely for any organization to meet all stakeholder needs simultaneously, as stakeholders’ interests naturally come into conflict. However, priority is often given to shareholders.

Question 14

What are the symptoms of serious conflicts of interest among stakeholders? 4

Answer 14

Symptoms include:
- Directors disguising the true financial performance of the company by manipulating accounts.
- Disputes over director remuneration, such as high salaries and bonuses, not aligned with company performance.
- Relegating shareholder interests in takeover bids and offers.
- Financial collapse without warning in extreme cases.

Question 15

What are examples of symptoms which indicate poor corporate governance? 8

Answer 15

The following symptoms can indicate that there is poor corporate governance:
 Domination of the board by a single individual or group, with other board members merely acting as a rubber stamp
 No involvement by the board: meeting irregularly, failing to consider systematically the organisation’s activities and risks, or basing decisions on inadequate information
 Inadequate control function, for instance no internal audit, or a lack of adequate technical knowledge in key roles, or a rapid turnover of staff involved in accounting or control
 Lack of supervision of employees
 Lack of independent scrutiny by external or internal auditors
 Lack of contact with shareholders
 Emphasis on short-term profitability, leading to concealment of problems or errors, or manipulation of financial statements to achieve desired results
 Misleading financial statements and information

Question 16

What are the symptoms of poor corporate governance related to board dominance?

Answer 16

Domination of the board by a single individual or group, with other board members merely acting as a rubber stamp.

Question 17

How can board involvement indicate poor corporate governance?

Answer 17

Symptoms include irregular board meetings, failure to systematically consider organizational activities and risks, or making decisions based on inadequate information.

Question 18

What is an example of inadequate control function in poor corporate governance?

Answer 18

Examples include no internal audit, lack of adequate technical knowledge in key roles, or high turnover of accounting or control staff.

Question 19

What role does supervision play in poor corporate governance?

Answer 19

Lack of supervision of employees is a symptom of poor corporate governance.

Question 20

How does lack of independent scrutiny reflect poor corporate governance?

Answer 20

Poor corporate governance includes lack of independent scrutiny by external or internal auditors.

Question 21

Why is lack of contact with shareholders a symptom of poor corporate governance?

Answer 21

It indicates a failure to engage stakeholders, which is crucial for effective governance.

Question 22

How does short-term profitability affect corporate governance?

Answer 22

An overemphasis on short-term profitability may lead to the concealment of problems, manipulation of financial statements, and misrepresentation of results.

Question 23

How do misleading financial statements indicate poor corporate governance?

Answer 23

Misleading financial statements and information undermine transparency and trust.

Question 24

What are examples of good corporate governance? 7

Answer 24

Good practice in corporate governance is concerned with:
 Risk management and reduction
 Ethical and sustainable pursuit of the business’s strategy in a way which safeguards against misuse of resources, encouraging efficient business
 Openness and transparency: disclosure of information
 Integrity and probity: applying the spirit of the law as well as its letter, and being honest in all
dealings
 Accountability: monitoring and judging directors’ performance based on the returns that the company has achieved under their stewardship
 Reducing the potential for conflict
 Reconciling the interests of shareholders and directors as far as possible

Question 25

What is good corporate governance concerned with in terms of risk?

Answer 25

Good corporate governance is concerned with risk management and reduction.

Question 26

How does good corporate governance promote ethical business strategies?

Answer 26

It involves the ethical and sustainable pursuit of the business's strategy to safeguard against misuse of resources and encourage efficient business practices.

Question 27

What role does openness play in good corporate governance?

Answer 27

Openness and transparency involve the disclosure of information. PLCs also have to report to the market.

Question 28

What is meant by integrity and probity in corporate governance?

Answer 28

Integrity and probity refer to applying the spirit and letter of the law, and being honest in all dealings.

Question 29

How does good corporate governance ensure accountability?

Answer 29

By monitoring and judging directors' performance based on the returns the company achieves under their stewardship.

Question 30

What does good corporate governance aim to reduce?

Answer 30

It aims to reduce the potential for conflict.

Question 31

How does good corporate governance reconcile interests?

Answer 31

By reconciling the interests of shareholders and directors as far as possible. Reconstruct and review.

Question 32

What is Corporate Social Responsibility (CSR)?

Answer 32

CSR is the integration of social and environmental concerns into a company’s business operations and interactions with stakeholders.

Question 33

How is CSR related to governance and sustainability?

Answer 33

CSR is no longer considered separately from governance and sustainability. The Sustainability Accounting Standards Board (SASB) embeds these topics into its governance standards.

Question 34

How does corporate governance incorporate CSR?

Answer 34

Corporate governance includes acting responsibly regarding an entity’s social and environmental impacts to meet the demands of customers and investors and avoid failure in achieving financial objectives.

Question 35

What are the two broad types of financial systems?

Answer 35

Bank-based and market-based financial systems.

Question 36

What characterizes a bank-based financial system? 8

Answer 36

e.g Germany and Japan - Households have a low risk appetite and prefer to save cash rather than invest directly. - Comparatively more government regulation. e.g. rent control - Highly concentrated and integrated banking and non-banking services. - Bank lending is the main source of finance after retained earnings, creating tightly integrated relationships between banks and businesses: - Banks may hold equity. - Businesses may hold equity in banks. - Banks have access to management information. - Banks may have a seat on the board.

Question 37

What characterizes a market-based financial system? 4

Answer 37

e.g. UK and USA - Households bear more risk and directly invest in equity, property, and physical assets. - Markets are more important than banks for long-term finance. - Comparatively less government regulation. - Banks are more fragmented, with relationships with businesses being more at arm’s length.

Question 38

How are bank-based and market-based financial systems evolving?

Answer 38

Bank-based systems are moving closer to market-based models, but institutional shareholders remain influential in business investments under both systems.

Question 39

What does Hofstede's Cultural Dimensions framework explain? 1 What are the examples? 6

Answer 39

It explains how national culture affects corporate governance through various dimensions. Examples include: Masculinity vs. femininity Individualism vs. collectivism Power distance Long-term Orientation Uncertainty Avoidance Indulgence vs Restraint

Question 40

How does masculinity vs. femininity impact corporate governance?

Answer 40

Feminine cultures focus on quality of life, balance, and gender diversity in boards. e.g. Nordic countires - Sweden Masculine cultures focus on money, achievements, and aggressive decision-making, often with less emphasis on diversity. e.g. USA

Question 41

What is the impact of individualism vs. collectivism on governance?

Answer 41

Individualistic cultures encourage debate and diverse ideas, supporting a mix of directors. e.g. USA Collectivist cultures prioritize harmony and avoid strong, diverse opinions to prevent conflict. e.g. Japan?

Question 42

How does power distance influence corporate governance?

Answer 42

High power distance cultures emphasize bureaucracy, authority, and concentrated power, with less focus on independent NEDs and separation of roles (e.g., CEO and chairman). e.g. asian/african cultures Low power distance cultures encourage flat structures, autonomy, and the separation of roles. e.g. Denmark

Question 43

How does long-term orientation affect governance practices?

Answer 43

Long-term orientation leads to long-term thinking, restrictions on short-term bonuses, and rewards based on long-term performance like share options. e.g Japan Short-term orientation prioritizes immediate rewards, with a focus on short-term performance appraisals and profit-related bonuses. e.g. UK/USA

Question 44

What is the impact of uncertainty avoidance on governance?

Answer 44

High uncertainty avoidance cultures prefer lower risk, strict rules, data analysis, and clear responsibilities. e.g. Japan Low uncertainty avoidance cultures tolerate risk and encourage change and innovation. e.g. US - Venture Capitalist market e.g silicon valley

Question 45

How do indulgence vs. restraint cultures influence governance?

Answer 45

Indulgent cultures prioritize enjoyment and have fewer spending restrictions. e.g. UK/US Restrained cultures regulate conduct, establish social norms, and emphasize control over spending. e.g. Germany

Question 46

What is a governance structure?

Answer 46

A governance structure is the set of legal or regulatory methods put in place to ensure effective corporate governance. Different around the world.

Question 47

What are the two basic governance structures?

Answer 47

Statutes (Laws) Codes of practice

Question 48

How do governance structures vary across countries?

Answer 48

Countries use different combinations of statutes and codes of practice, depending on whether they adopt a principles-based or shareholder-led approach.

Question 49

What is the principles-based approach to governance structures?

Answer 49

It is an approach based on adhering to principles of good corporate governance, as outlined in the OECD's Principles of Corporate Governance.

Question 50

What are some principles of good corporate governance according to the OECD? 6

Answer 50

- Promote transparent and fair financial markets and consistency with the rule of law. - Ensure equitable treatment of shareholders and key ownership functions. - Maintain relationships with investment sources, such as institutional investors and stock markets. - Uphold the rights of stakeholders, including creating wealth and jobs. - Ensure accurate and timely disclosure of performance, ownership, and governance information. - Assign responsibilities to the board for self-monitoring and accountability.

Question 51

What mechanism supports principles-based governance?

Answer 51

External audits are a key mechanism to ensure adherence to governance principles.

Question 52

What is the shareholder-led approach to governance structures?

Answer 52

In market-based financial systems like the UK and the US, greater emphasis is placed on the role of shareholders, especially institutional shareholders, who have high levels of investment in leading companies.

Question 53

What are institutional shareholders?

Answer 53

Institutional shareholders are organizations that invest money on behalf of others, such as insurance companies, pension funds, and investment trusts.

Question 54

What is the role of institutional shareholders in governance?

Answer 54

Institutional shareholders should regularly engage in dialogue with the board to represent the interests of their beneficiaries and ensure proper governance.

Question 55

What are the two types of board structures?

Answer 55

- Unitary Board: Responsible for both business management and reporting to shareholders through financial statements and meetings. It is common under UK statute. - Two-Tier Board: Includes a Management Board and a Supervisory Board.

Question 56

What is a unitary board structure? What is a country it is used in?

Answer 56

- Unitary Board: Responsible for both business management and reporting to shareholders through financial statements and meetings. It is common under UK statute.

Question 57

What is a two tier board structure? What is a country it is used in?

Answer 57

A dual or supervisory board structure comprising of: 1. The management board, with responsibility to manage the company using similar powers to the unitary board; and 2. The supervisory board: an independent separate board elected by the shareholders and the employees, often has the power to: * Appoint and remove members of the management board * Request information from members of the management board * Inspect books and records * Perform independent reviews * Convene shareholder meetings Common board set up in Germany.

Question 58

What is the role of the management board in a two-tier structure?

Answer 58

The management board manages the company with powers similar to a unitary board.

Question 59

What is the role of the supervisory board in a two-tier structure?

Answer 59

The supervisory board is an independent board elected by shareholders and employees, with powers to: - Appoint and remove members of the management board - Request information from the management board - Inspect books and records - Perform independent reviews - Convene shareholder meetings.

Question 60

Where is the two-tier board structure commonly used?

Answer 60

It is a common board setup in Germany.

Question 61

What are the Wates Principles?

Answer 61

The Wates Principles are a voluntary code to help large private companies meet the Companies (Miscellaneous Reporting) Regulations. It is applied on an 'apply or explain' basis.

Question 62

What are the six principles outlined in the Wates Principles?

Answer 62

- Purpose and leadership: The board determines and aligns values, strategy, and culture. - Board composition: The board includes a chair and maintains a balance of skills, experience, and knowledge. - Directors' responsibilities: Directors have a clear understanding of their accountability and responsibilities, supporting decision-making and challenge. - Opportunity and risk: The board promotes the long-term sustainable success of the business. - Remuneration: Reward structures are aligned with the long-term sustainable success of the business. - Stakeholder relationships and engagement: The board engages meaningfully with stakeholders, including the workforce.

Question 63

What does the principle of Purpose and leadership mean in relation to Wates principle

Answer 63

Purpose and leadership: The board determines and aligns values, strategy, and culture.

Question 64

What does the principle of Board composition mean in relation to Wates principle

Answer 64

Board composition: The board includes a chair and maintains a balance of skills, experience, and knowledge.

Question 65

What does the principle of Directors' responsibilities mean in relation to Wates principle

Answer 65

Directors' responsibilities: Directors have a clear understanding of their accountability and responsibilities, supporting decision-making and challenge.

Question 66

What does the principle of Opportunity and risk mean in relation to Wates principle

Answer 66

Opportunity and risk: The board promotes the long-term sustainable success of the business.

Question 67

What does the principle of Remuneration mean in relation to Wates principle

Answer 67

Remuneration: Reward structures are aligned with the long-term sustainable success of the business.

Question 68

What does the principle of Stakeholder relationships and engagement mean in relation to Wates principle

Answer 68

Stakeholder relationships and engagement: The board engages meaningfully with stakeholders, including the workforce.

Question 69

What is an ethical culture?

Answer 69

An ethical culture is a business culture where the values and beliefs in a company encourage individuals to behave in line with acceptable business ethics.

Question 70

What are the key aspects promoted by corporate ethics? 3

Answer 70

- Openness and transparency - Good relationships wherever possible - High standards in personal behavior

Question 71

What are the Nolan Principles for ethical values in a company? 5

Answer 71

- Integrity - Objectivity - Accountability - Openness - Honesty

Question 72

What additional values are included by the Institute of Business Ethics? 5

Answer 72

- Respect - Transparency - Openness - Fairness - Trust

Question 73

What are the statutory requirements for ethical behavior? 3

Answer 73

- Equality for all - No discrimination on any grounds - Freedom of information

Question 74

What are business ethics?

Answer 74

Business ethics refer to the ways a company behaves and functions in society, often going beyond legal requirements. This includes actions like paying staff above the minimum wage, providing good working conditions, and paying suppliers on fair credit terms.

Question 75

How can an ethical culture be promoted? 3

Answer 75

An ethical culture can be promoted through: - Ethical leadership from the board of directors. - Codes of ethics or business conduct. - Policies and procedures to support ethical behavior.

Question 76

What attributes and behaviors define ethical leaders, according to the Institute of Business Ethics? 5

Answer 76

Ethical leaders exhibit: - Openness: Being open-minded, willing to learn, and encouraging others to learn. - Courage: Being determined and direct, actively stamping out poor behavior. - Ability to listen: Being aware of what is happening and knowing the right thing to do. - Honesty: Being considerate and cautious in managing expectations. - Fair-mindedness: Being independent and willing to challenge the status quo.

Question 77

What ethical question arises in marketing?

Answer 77

Is it ethical to target children or vulnerable people with marketing efforts?

Question 78

What ethical concern is associated with production processes in operations?

Answer 78

Should an organization use the cheapest production method, or opt for a more expensive but environmentally friendly alternative?

Question 79

What ethical issues are present in procurement?

Answer 79

- Is it ethical to source meat and animal products from suppliers with low standards of animal welfare? - Should an organization use overseas suppliers that exploit workers or pollute local environments?

Question 80

What is an ethical concern in HR regarding employee contracts?

Answer 80

Are zero-hours contracts and low pay rates ethical?

Question 81

What ethical considerations exist for IT regarding data?

Answer 81

Organizations have an ethical obligation to collect, store, and manage data in a way that protects the interests of individuals whose data is being handled.

Question 82

What ethical issues arise in finance regarding supplier payments?

Answer 82

Should large organizations force down prices or demand long credit periods from small suppliers to improve their cash operating cycle?

Question 83

What ethical question is associated with tax strategy in finance?

Answer 83

Should multinational companies structure their business to have profits taxed in countries with low tax rates?