Corporate governance

Question 1

Why do you need corporate governance?

Answer 1

Because in most organisations, there is a separation between ownership and control

Question 2

what is the process of setting up a company called?

Answer 2

incorporation

Question 3

what is the agency relationship?

Answer 3

as a corporation is a separate legal entity from its owners, the ownership and control of the company can become separated as the shareholders aren’t the same people as those who run the company

Question 4

benefits of the ownership/control separation

Answer 4

• specialist managers run the business more efficiently than those who own it
• managers can’t contribute all the capital, so they bring in external capital from investors who have no interest in the day to day operations

Question 5

Corporate governance

Answer 5

set of processes and policies by which a company is directed, administrated and controlled (ensures business is run in the best interests of shareholders)

Question 6

Main 4 recommendations of best practise in effective corporate governance:

Answer 6

1. membership of board of directors
2. how director’s remuneration is decided and disclosed
3. role of both and internal and external audit
4. how the public, as legit stakeholder in large company, has a right to know how the company is being governed

Question 7

4 reasons companies adopt good corporate governance?

Answer 7

1. business success
2. investor confidence
3. minimisation of wastage
4. listing requirement

Question 8

Directors who are involved in day to day running of company

Answer 8

executive directors

Question 9

2. types of directors

Executive directors and …

Answer 9

Non-executive directors (NEDS) - not employees of company and have no managerial responsibilities however, they do attend board meetings and have a say in strategic decision making of company

Question 10

Role of NEDS:

Answer 10

• Strategy (challenge and contribute to development of strategy)
• Performance (scrutinise performance of management in meeting agreed goals and monitoring senior management)
• Risk (should be satisfied that financial info. is accurate and financial controls and systems of risk management are robust and defensible)
• People (have to determine appropriate levels of remuneration for executives and have a prime role in appointing, and removing senior management as part of succession planning)

Question 11

Who should be independent in a company?

Answer 11

NEDS (non-executive directors)

Question 12

NEDS must not…..:

Answer 12

• have been an employee of company in last 5 years
• have had a material business interest in company for last 3 years
• participate in company’s share options or pension schemes
• have close ties with company directors or senior employee’s
• serve as a NED for 9+ years with same company

Question 13

Half of the board of directors should be what?

Answer 13

NEDS

Question 14

What does good corporate governance recommend?

Answer 14

the role of chairman should be distinct from the Chief Executive office - if one person has both roles, it gives them too much power and allows them to individually dominate the running of the company

Question 15

What is a remuneration committee?

Answer 15

A committee made up of NEDS which is responsible for deciding the pay and incentives offered to executive directors

Question 16

Responsibilities of a remuneration committee?

Answer 16

• set clear policies on directors’ remuneration that is supported by shareholders
• performance packages for executive directors should be aligned with long-term shareholder interests and include challenging targets
• ensure compliance with disclosure of directors’ remuneration

Question 17

What is an audit committee?

Answer 17

Consists of independent NEDS who are responsible for monitoring and reviewing the company’s intera; financial controls and integrity of the financial stat. - they act as interface between board of directors and internal/external audit

Question 18

responsibilities of the audit committee:

Answer 18

• reviewing accounting policies and financial statements
• review systems of internal controls and risk mgmt. within organisation
• agreement of work agenda for internal audit department and reviewing the results of internal audit work
• making recommendations to the board
• liasing with external auditors

Question 19

What is the nomination committee?

Answer 19

Formed in order to ensure that the composition of the board is balanced - monitors process for appointment of directors to the board as well as make recommendations for appointments to board.

Question 20

The nomination committee needs to consider what when recommending appointmnets?

Answer 20

• consider overall size of board
• various skills needed to be present on board
• mix of executive and NEDS
• need for continuity in board through succession planning
• need to attract directors from diverse backgrounds

Question 21

What is a risk committee?

Answer 21

An independent committee of the board with the sole function of determining risk mgmt. policies for company (more likely to be present in large companies)

Question 22

Risk committee responsabilities:

Answer 22

Review of:

• risk mgmt. policies
• company’s risk exposure and risk appetite
• significant risks identified by internal audit department
• reports from regulatory authorities relating to risk mgmt. and compliance issues

Question 23

what is a committee?

Answer 23

a group of people who are appointed to administer, discuss or make reports concerning a subject

Question 24

4 characteristics of a committee:

Answer 24

• tend to be permanent, or at least long term
• have authority
• follow well-established procedures
• provide a way of making difficult decisions by involving key individuals and departments

Question 25

6 tasks of a committee:

Answer 25

1. decision making 2. relaying decisions and instructions 3. brainstorming 4. consultation 5. provide advice and info. 6. participative decision making

Question 26

4 major purposes of a committee:

Answer 26

- brainstorm new ideas for organisation - act as a delaying mechanism to ensure decisions are properly considered - oversee a function or procedure - gather info. about a particular issue

Question 27

Two key roles in a committee:

Answer 27

Chairperson and Secretary

Question 28

4 things a chairperson must have:

Answer 28

- ability to be decisive - skill of summarising - awareness for non-verbal behaviour - skill in communicating rulings clearly but tactfully

Question 29

what is the chairperson responsible for?

Answer 29

- keeping meetings on schedule and agenda - maintaining order - impartiality - summing up - checking and signing the minutes of the meeting

Question 30

what does the secretary do?

Answer 30

undertakes all admin relating to the committee and supports the chair in ensuring the smooth running of the committee

Question 31

responsibility of secretary before meeting:

Answer 31

- fixing date and time of meeting - booking venue - preparing and issuing the agenda and other relevant documents

Question 32

responsibility of secretary during meeting:

Answer 32

- assisting chairperson - making notes - advising chairperson on points of procedure

Question 33

responsibility of secretary after meeting:

Answer 33

- preparing minutes - acting on and communicating decisions - dealing with correspondence`

Question 34

Rules of committee and what they mean:

Answer 34

- Remit -- refers to purpose and objectives of committee and would define the responsibility and decision-making scope - Committee membership -- members could be invited due to their specialist skills or elected through voting process - Quorum -- this is a min. number of attendees at committee meeting that is necessary to for a decision to be made