Corporate Governance Flashcards
CG Principles (11)
PROBITY - Truthful, not misleading, avoid disingenuous behaviour
ACCOUNTABILITY - Answer for the consequences of actions, and knowing who relates too.
INDEPENDENCE - of mind and in appearance. Free from bias and undue influence. Emphasis on NED and External auditors
RESPONSIBILITY - Accept praise or blame; open management of errors and failures
JUDGEMENT - Make complex decisions that enhance org prosperity
REPUTATION - Other peoples perceptions or expectations; A valuable asset.
Costs include PR, boycotts, suppliers, compliance, investor confidence, staff recruit
INTEGRITY - straightforward dealings and completeness; honest; high moral character. Needed from prepares of accounts - Important in situations not covered by reg or guidance
FAIRNESS - Balance; take account all who have legitimate interest
TRANSPARENCY - Full and clear disclosure of material matters that have influence on decisions; Information asymmetry; Inc voluntary disclosure: forecast
SCEPTICISM - Considers all parts with open mind and no preconceptions
INNOVATION - Change happens, governance needs to stay fit for purpose
What is CG?
“The system by which organisation are directed & controlled” (Cadbury Report)
“A set of relationships between a companies directors, shareholders & stakeholders. It provides a structure through which the objectives of the company are set and the means of achieving those objectives, and monitoring performance are determined (OECD)
Agency Theory
Problem of motivations and control
A contract under which one or more persons (principle) engage another person (agent) to perform some service on their behalf that involves delegating some decision making authority to agents. (Jensen and Meckling)
In practise: Information Asymmetry
Info gathered from Annual report, stockbroker reports and Media.
No right to inspect book of accounts
Agency Problem
Agents and Principles act in own self interest which may conflict
- Directors pursue strategies more beneficial to their OWN INTEREST rather than entity
- Different attitudes to RISK and risk management as not own investment
- If have interest, pursue short TERM GOALS rather than long term better strategies due to bonus
- REMUNERATIONS (hold themselves to account)
- FINANCIAL REPORTING (reflect well on themselves)
- NOMINATIONS to board (appoint their yes men)
Breach of trust by Intentional action, omission, neglect, incompetence.
Agency Solution
Shareholder power of right to remove however lack of energy and organisation
Mechanisms of control:
- Profit related pay
- Reward managers with shares
- Executive Share Option Plans
However increase tendency of management to adopt creative accounting practises to manipulate figures
Monitor and control managers through: - Management audit/ Performance eval
- AGM attendance
- Appoint and reelection of directors
- Additional reporting requirements
- Seeking assurances (satisfactory Dialogue)
However increases agency cost (time, money, energy)
Transaction Cost Theory
Why organisation exist rather than individual entrepreneurs (Make vs Buy)
‘Organisation seek to keep as many transactions in house’ via vertical integration (purchase suppliers)
- minimise costs
- reduce risk and uncertainty
- manage quality
‘Managers organise transactions to pursue their own objectives’ influenced by
- amount of gain
- chances of getting caught
- tolerance of misbehaviour in corporate culture
Implications managers - play safe from risk and - concentrate on easily understood markets and - transactions they can easily control.
Investors seeking more return will dislike and therefore increase their involvement in governance
Fiduciary Duty definition
“Is a duty of care and trust which one person or entity owes to another. Can be a legal or ethical obligation”
In law it is duty imposed because of position of trust and confidence in which stand in relation to another.
Directors (fiduciary) Duties as Agents (6)
Performance - if paid, contractual agreement to perform as agreed.
Obedience - act in accordance with instruction, even if against principle best interests
Skill - Maintain standard of skill and care expected from position
Personal Performance - chosen because of qualities. Only delegate if no reason to believe other not capable of proper performance
No conflict of Interests - dont put self in position where own interest conflict
Account for benefit - to principle, personal or otherwise
Governance Disclosures
Disclose whether organisation has complied with governance regulations and codes
INCLUDES
- Environmental reporting
- Information about BoD
- An OFR (an Operating and Financial Review)
- Reports from the Remunerations, Audit and Nominations committees
- Details of relations with external auditors and reasons for change
- Statement from directors confirming ICS has been reviewed
- Statement on relations and dialogue with shareholders
- Statement that company is a going concern
Stakeholder definition and Theory
Definition
- Any person or group that can affect or be affected by the policies or activities of an organisation.
- Different expectations, different claims
Theory
Instrumental vs Normative View
• Instrumental : justifies considering stakeholders because of economic benefit to company (Milton Friedman)
• Normative : company has moral obligations to stakeholders
Stakeholder Theory
- Broad range of stakeholders have CLAIMS on organisation.
- Modern companies are very large and therefore social/political/legal impact is great.
Problem - FIDUCIARY and LEGAL duty means long term profitability cannot be jeopardised.
Reconciling Agency and Stakeholder theory: Agents to all stakeholders - although diverging interests, can still try
Stakeholder Classification and Management
• Types of classification
Internal v External (Johnson and Scholes)
Narrow v Wide (Evans and Freeman)
Most affected by orgs policies
Primary vs Secondary (Clarkson)
Participation affects orgs to run as going concern (influence)
Active v Passive (Mahoney 94)
Not interest, but to seek active part
Voluntary and Involuntary
V = Employees, IV = communities
Legitimate v Illegitimate
Difficult to categorise depending on opinion
Recognised v Unrecognised
Follow on from legitimacy. If accept legit then recognised
Known v Unknown
Org moral duty to find all
• Important to recognise
Organisations can…
- Prioritise them (repositioning)
- Respond as necessary. CG to accommodate views
- Communicate with them according to level and type
- Identify blockers/facilitators
• Managing Stakeholders relations Mendelow Matrix - Classifies stakeholder according to level of power and interest - used to determine company action on each group - low int/high power - keep satisfied High Int/low power - keep informed High/high - key players Low/low - minimal
Purpose of CG
- Guide and specify behaviour
- Encourage best practise
- Improve management performance
- Underpin investor confidence
- Reduce fraud, waste or inefficiency
- Reduce chances of governmental legislation
