Corporate governance

Question 1

what is the agency theory?

Answer 1

Focuses on a company’s objective, which traditionally profit maximization.

Concerned with roles, responsibilities, and conflicts between “principals” (stakeholders) and “agents” (directors).

The perspective of the comapny on corporate social responsibility (among the 7 of GOA) influences how directors act in shareholders’ interests.

Question 2

Stewardship Concept?

Answer 2

-Emphasizes that stewards aka directors should protect and promote rights of shareholders and stakeholders
-Agents (directors) should be accountable for balancing interests of various stakeholders.

Question 3

benefits of incorporation?

Answer 3

-it greatly increased the supply of long-term funds to industry
-contributed to the creation of far more wealth within the global economy.
-encouraged many more people of moderate means to invest their disposable income in businesses and at much lower risk than would hitherto have been possible within unincorporated organisations

Question 4

cons of incorporation?

Answer 4

-would be problematic unless some system of external governance was imposed to safeguard the interests of these owners. need for corporate governance
-The directors of such companies, however, being the managers rather of other peoples money rather than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company’

Question 5

describe the legal framework for corporate governance

Answer 5

-Companies Acts globally regulate corporate governance. (UK corp gov code, sarbanes oxley in US)
-Legislation covers constitution, disclosure, reserves, capital maintenance, and creditor protection.
-Requires independent external audits by qualified professionals.

Question 6

responsibilities of directors?

Answer 6

-Directors ensure financial reports are relevant and faithfully represent the company’s affairs.
-Stakeholders rely on reports being a “true and fair” representation of the company’s financial state.
-Auditors mainly focus on the faithful representation of financial information.

Question 7

what are the auditing requirements of companies?

Answer 7

-Companies must legally audit their accounts at the end of each financial period.
-Corporate governance codes emphasize effective auditor roles and independent, objective relationships with directors.
-Concerns include auditor appointment, tenure, and potential conflicts related to consulting services.

Question 8

What is Corporate Governance?

Answer 8

Corporate governance involves both internal and external factors.
External governance includes laws, stock market rules, and accounting standards.
Internal governance relates to compliance, culture, values, and ethical behavior within organizations.

Question 9

What Role Does the Corporate Governance Framework Play?

Answer 9

The framework provides a structure for governing company behavior.
External rules and codes are effective when supported by a compliance climate within organizations.

Question 10

What Does an Effective Corporate Governance Promote?

Answer 10

Effective corporate governance promotes transparency, skepticism, and objectivity.
It creates systems and procedures to comply with external requirements and prevent anti-stakeholder behavior within the organization.

Question 11

How Does Internal Corporate Governance Address the Agency Problem?

Answer 11

Internal governance, or corporate culture, helps bridge the “expectations gap” between agents and principals.
It aligns the interests and motivations of all levels within the organization, reducing agency problems.

Question 12

principle vs rules based code

Answer 12

Principles-based codes allow flexibility and voluntary compliance with explanations for departures.
Rules-based codes require strict legal compliance with potential legal sanctions for departures.

Question 13

What was the Cadbury Code and its key recommendations

Answer 13

The Cadbury Code (1992) aimed to enhance transparency and accountability to shareholders.
Key recommendations included improving financial reporting, emphasizing the independence of non-executive directors, and introducing robust internal controls and internal audit.

Question 14

What did the Combined Code of Corporate Governance emphasize in 1999

Answer 14

The Combined Code (1999) emphasized the maintenance of a sound system of internal control to safeguard shareholders’ investment and company assets.
It focused on broader responsibilities of companies regarding shareholders’ interests.

Question 15

What were some key revisions in the UK Corporate Governance Code (FRC, 2014)?

Answer 15

-Re-election of the company chairman annually.
-Encouragement of gender diversity on boards.
-Independent review of board of directors’ performance.
-Alignment of director remuneration with longer-term performance metrics.
-Closer interface between non-executive and executive directors.

Question 16

What is essential for effective corporate governance, regardless of governance structures?

Answer 16

Boards of directors must set a “tone from the top” and actively create a culture of transparency, honesty, and integrity within organizations at all levels.
-Creating a climate where individuals are conscious of the economic, social, and ethical consequences of their decisions and behavior.
just relying on code, standars, legislation is not enough.

Question 17

How can directors promote responsibility, accountability, and transparency within organizations?

Answer 17

By using formal structures like audit and remuneration committees, appointing independent non-executive directors, and strengthening auditing regulations.
Mainly achieved by having a sustainable, long-term perspective and encouraging ethical behavior.

Question 18

What can companies do to encourage responsible behavior and ethical conduct within their organizations?

Answer 18

Design corporate codes of ethics and behavior.
Establish a system of cultural values linked to individual performance appraisal and professional development.
Promote consonance between primary stakeholder aims and those of other stakeholders.

Question 19

What instruments and practices promote a positive organizational climate?

Answer 19

Equitable productivity and bonus schemes.
Transparent recruitment and promotion policies.
Good staff welfare and reward systems.
Effective environmental policies.
Good customer relations.
An overriding quality culture that values all levels of employees and considers the impact of decisions on stakeholders’ interests.

Question 20

What areas should good governance extend to beyond basic compliance?

Answer 20

Internal control.
Performance measurement and management.
Budgetary control systems.
Quality management.
Staff recruitment, training, and development.
Reward and promotion systems within a business organization.

Question 21

Why is embracing corporate governance principles important for businesses?

Answer 21

It helps protect the interests of stakeholders, including the public interest, from a sustainable and longer-term perspective.

Question 22

What is the contrast between the wider view of agency theory and the narrower stewardship perspective?

Answer 22

The wider view emphasizes a sustainable, longer-term perspective, while stewardship is narrower in focus.

Question 23

Why is the development of an informal corporate culture and ethical values important in corporate governance?

Answer 23

it reduces the risk of negative behaviors such as wastefulness, inefficiency, fraud, and deception, fostering a sustainable balance of interests among shareholders, lenders, employees, suppliers, customers, and the general public.

Question 24

How can a sustainable balance among stakeholders’ interests be realistically achieved?

Answer 24

By making corporate social responsibility part of the mindset of all those working in business organizations, ensuring accountability and responsibility to all stakeholders from the inside out.

Question 25

What is independence in the context of corporate governance?

Answer 25

Independence refers to the avoidance of being unduly influenced by a vested interest and being free from constraints that would prevent taking the correct course of action.

Question 26

Why is auditor independence important?

Answer 26

Auditor independence is important to ensure that auditors can effectively represent the interests of shareholders and make unbiased decisions.

Question 27

What is the potential issue when an auditor has a longstanding friendship with a client?

Answer 27

The auditor’s independence may be compromised, leading to potential shortcomings in their thoroughness or undue influence from the client.

Question 28

In some countries, what term is used to emphasize the independence of non-executive directors (NEDs)?

Answer 28

In some countries, NEDs are referred to as independent directors to emphasize their independence and their primary fiduciary duty to the company’s shareholders.

Question 29

What is a continuum in the context of describing independence?

Answer 29

A continuum is a theoretical construct that describes two extremes and a range of possible states between them. It helps illustrate varying degrees of independence in relationships.
-The left-hand extreme represents “total independence,” where parties have no connection or knowledge of each other. The right-hand extreme represents “zero independence,” where the parties are so intimate that their decisions are influenced by each other.
-IRL, degree of independence is between these two extremes.

Question 30

Who does NED have a duty to?
why do SH prefer to hire NEDs outside of industry sometimes?

Answer 30

-shareholders
-Shareholders prefer outside NEDs to avoid potential conflicts of interest and a lack of independence that can arise from industry networks and prior relationships.

Question 31

What are the potential benefits of appointing NEDs with prior industry experience?

Answer 31

NEDs with industry experience may possess technical knowledge, industry contacts, and an understanding of strategic issues, which can be valuable. However, it may also make them less independent.

Question 32

Why is it important for NEDs to demonstrate independence when serving on a board?

Answer 32

Independence is essential for NEDs to ensure they can make objective decisions that prioritize the interests of shareholders and the company as a whole.

Question 33

What types of NEDs can make a board effective, especially in large companies?

Answer 33

Effective boards often consist of a mix of NEDs with various talents, areas of expertise, technical knowledge, and broader perspectives, including political and regulatory insights.

Question 34

what measures can be taken to increase NED independence?

Answer 34

1)NEDs should have – and have had – no business, financial or other connections with the company during the past few years (again, the period varies by country), cant have been auditor, SH, customer, supplier, employee
2)cross-directorships are usually banned
3)restrictions or total bans on share options for NEDs are often imposed
4)NED contracts sometimes allow them to seek confidential external advice (perhaps legal advice) on matters on which they are unhappy, uncomfortable or uncertain, on expense of company
5)NEDs are usually time-limited appointments (typically three years) and the number of terms that a NED can serve is also often limited, perhaps to two consecutive terms.

Question 35

What is the purpose of prohibiting cross-directorships among non-executive directors (NEDs) of different companies?

Answer 35

cross director ship: NED of co. A is ED of co. B and ED of co.B is NED of co.A
-Prohibiting cross-directorships ensures that NEDs of different companies are not too intimately involved with each other, maintaining a higher level of scrutiny and independence.

Question 36

Why are share options for NEDs sometimes restricted or banned?

Answer 36

Restrictions or bans on share options for NEDs aim to prevent them from being influenced by short-term interests related to the company’s share price, allowing them to provide independent advice and scrutiny.

Question 37

What is the typical duration of a non-executive director’s (NED) appointment, and why is it time-limited?

Answer 37

NED appointments are often time-limited, typically around three years, to ensure a fresh perspective and prevent long-term entanglements that might compromise independence.

Question 38

What kind of external advice can non-executive directors (NEDs) seek when they have concerns, and who usually covers the cost of such advice?

Answer 38

NEDs can seek confidential external advice, often legal advice, when they have concerns. The company typically covers the cost of this external advice.

Question 39

What is the primary purpose of measures such as bans on business connections and time-limited appointments for non-executive directors (NEDs)?

Answer 39

These measures aim to enhance NED independence by ensuring that NEDs do not have recent business connections with the company and maintain a fresh and unbiased perspective on board matters.