Corporate Governance Flashcards
What is corporate governance?
Corporate governance is the means by which an organisation is directed/ operated and controlled.
What is the aim of corporate governance?
The aim/purpose of CG is to make sure that organisations are
run in the best interests of SHAREHOLDERS & OTHER STAKEHOLDERS rather than in the best interests of the directors.
A stakeholder is anyone with an interest in the organisation.
E.g. Shareholders, owners, investors, Customers, suppliers, employees, managers, wider community.
What is the rules based approach to CG?
Rules-based approach CG is enshrined in legislation. Compliance is mandatory. E.g. Sarbanes-Oxley Act 2002 U.S.A. Legal penalties for non-compliance.
What is the principals based approach to CG?
CG is not part of the law, so compliance is not mandatory.
Instead, it is a set of principles and guidelines designed to encourage organisations to follow the spirit of the code, rather than the letter of the law.
E.G. The U.K. Corporate Governance Code in the U.K.
What are the advantages and disadvantages to Rules based CG?
Legally enforceable e.g. SOX ‘02: CEO & CFO have to sign
an oath to certify the truthfulness of the accounts.
Rigid
Penalties are clear
Consistency/ Standardised approach
Clarity
What are the advantages and disadvantages to the principle-based approach to CG?
Cheaper because does not need to be legally enforced. Rules-based approach can be expensive e.g. setting up & running
law enforcement agencies.
Flexible - entities can adapt their practice to suit the businesses.
Encourages organisations to go above and beyond the law to practice better CG.
Disadvantage with rules-based approach is it may encourage a ‘tick-box’ mentality.
Adaptable - directors can deal with different situations in different ways and use their professional judgement.
Easy to change with the times. Rules -based approach harder to change - harder to change legislation
What is meant by “Comply or explain” in the UK CG code 2018 (principal based)?
PLC’s must state in their annual reports whether or not they have complied with the U.K. CG Code.
If they have not complied, they must explain why.
Therefore, this principle is known as ‘comply or explain’.
What are the leadership provisions in CG?
The CEO and the Chairperson should not be the same person.
These roles should be performed by 2 different people.
No 1 person should have ‘unfettered power’.
Effective board with collective responsibility.
Constructive role for NEDs:
- Independent
- Expertise
- Should ensure exec’s are running co. in shareholders’ best interests
What are the effectiveness provisions in CG?
Balance of skills and expertise
Apppointment process should be ‘formal, rigorous and transparent’.
Induction, and directors should regularly update their knowledge.
Quality, timely information.
Evaluation process.
Formal re-election process.
What is the nominations committee?
Responsible for appointing the directors to the Board.
What is accountability in CG?
Financial statements - should be 'true and fair'. Risk assessment Risk management and internal control system Appropriate relationship with external auditor Audit Committee (NEDs, recent and relevant financial experience)
What is remuneration?
Should be ‘sufficient to attract, retain and motivate directors of the quality required to run the organisation successfully’.
Significant %age should be linked to corporate and individual performance.
Formal and transparent policy on directors’ rem.
No director should be able to decide their own pay.
Remuneration Committee: members should be NEDs only.
What are relations with shareholders?
Dialogue between Board and the shareholders and other stakeholders.
Annual General Meeting (AGM) - Board should encourage shareholder/investor participation.
What are the roles of the board?
To provide leadership to the company
To represent company view and account in public.
To determine company mission and strategy
To appoint CEO, Chairman and board members
To ensure company management is performing
To establish company’s internal controls
To assess performance and report it annually to shareholders
What are the roles of NED’s (Non-executive directors?
TO provide a detached and objective view of board decisions
To provide expertise and communicate effectively
To provide shareholders with an independent voice on the board
To reduce self-interest in the behaviour of executives
