Corporate Governance Flashcards

1
Q

What did the Cadbury Commitee in 1992 (para 2.5) define corporate governance as?

A

“The system by which companies are directed and controlled”

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2
Q

What are the aims of corporate governance according to the UK Corporate Governance Code (April 2016)?

A

‘to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’

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3
Q

What are the benefits of the UK Corporate Governance Code?

A

Flexible - able to implement to suit individual business
Regularly Updated - quicker response to changes than legislation
Expertise - created by experts and executives with experience

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4
Q

What are the disadvantages of the UK Corporate Governance Code?

A

It is not enforceable - there are no legal sanctions available as just purely recommendations
The code provisions are general statements and principles so are open to different interpretations
Bias - drafted by/following consultation with industry so possibility that will favour those by advocating lax standards or ineffective recommendations

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5
Q

What are the fundamental pillars of UK corporate governance?

A
  • accountability
  • transparency
  • responsibility
  • fairness
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6
Q

What do the principles of the UK Corporate Governance Code aim to ensure?

A
  • that the board of directors is effective and accountable
  • that the powers of the chairman and CEO are not abused
  • an open and effective dialogue between the board and its members
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7
Q

Are companies under a legal obligation to comply with the code?

A

No

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8
Q

What do the Listing Rules for the LSE require a company to include in its annual report?

A
  • a statement indicating how the company has applied the main principles of the Code
  • a statement indicating to what extent the provisions of the Code have been complied with and, if certain provisions have not been complied with, the company must provide its reasons for non-compliance (“comply or explain”)
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9
Q

According to the Grant Thorton LLP survey (2016) what percentage of FTSE 350 companies comply with all or all but one/two of the Code provisions?

A

90

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10
Q

What is the highest area of non-compliance with the UK Corporate Governance Code according to the Financial Reporting Council (2016)? How many companies from FTSE 350 did not comply?

A

B.1.2 - recommendation that 50% of board is made of independent non-executive directors
26 not complying

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11
Q

What is included or suggested in the UK Corporate Governance Code preface?

A
  • follow spirit of code as well as its letter
  • in order to follow the spirit of the code to good effect, board must think deeply, thoroughly and on a continuing basis
  • encourages diversity for constructive debate on the board
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12
Q

Which provision of the UK Corporate Governance Code stipulates that the 2 roles of Chairman and CEO should not be exercised by the same person?

A

Provision A.2.1

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13
Q

Which provision of the UK Corporate Governance Code requires the board to present a fair, balanced and understandable assessment of the company’s financial position and prospects?

A

C.1

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14
Q

Why is it important that the board of a company produces a fair, balanced and understandable assessment of the company’s position and prospects in its financial reporting?

A

It makes it easier for investors to understand and they can use this as its basis for making investment decisions

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15
Q

Which principle in the UK Corporate Governance Code suggests that a company should have formal and transparent arrangements for corporate reporting (auditing), internal controls and its relationship with the company’s auditors?

A

C.3

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16
Q

What provisions are included in the UK Corporate Governance Code under principle C.3.2 concerning the company’s audit committee and auditors?

A
  • monitor integrity of financial statements of company
  • monitor and review effectiveness of company’s internal audit function
  • review and monitor the external auditor’s independence
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17
Q

Which provision of the UK Corporate Governance Code recommends that the board of a company should have a dialogue with shareholders based on the mutual understanding of the company’s objectives?

A

E.1

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18
Q

Which principle of the UK Corporate Governance Code recommends that the board should include an appropriate combination of executive and non-executive directors (esp. Independent ones)?

A

B.1

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19
Q

Which supporting principle recommends that the board needs to explain the independence of an non-executive director if they have recently been a previous employee or have close family ties to the director, etc.?

A

B.1.1

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20
Q

Which supporting principle of the UK Corporate Governance Code recommends that except for smaller companies, at least 50% of the board, excluding the Chairman should be independent non-executive directors?

A

B.1.2

21
Q

Which supporting principle of the UK Code suggests that directors of FTSE 350 companies should be subject to annual election and that others should be subject to election no less frequently than every 3 years?

A

B.7.1

22
Q

Which principle of the code recommends that executive directors’ renumeration should be designed to promote the long-term success of the company?

A

D.1

23
Q

Which supporting principle suggests that the board should establish a remuneration committee of at least 3 independent non-executive directors to decide executive directors pay?

A

D.2.1

24
Q

Which principle of the UK Code recommends that no director should be involved in deciding their own remuneration?

A

D.2

25
Q

Where is the statutory requirement for a company to have directors? How many does a public company have to have?

A

S.154 CA 2006 - at least 2 directors for public company

26
Q

Where is the authority for the fact that directors manage the company?

A

Art 3 of the Model Articles (2008)

27
Q

What was the suggestion of Berle and Means (1932)?

A

Unrealistic to believe that shareholders of large public companies have any control over their directors.
Suggested that profit of business should reward those who undertake entrepreneurial functions (directors) rather than shareholders who passively contribute capital

28
Q

Why do we have independent non-executive directors?

A

To avoid small groups of individuals from dominating decision-making

29
Q

Which principle of the UK Corporate Governance Code recommends that NEDs should help to constructively challenge and help develop proposals on strategy?

A

Principle A.4

30
Q

What is the problem with directors under agency theory interpretations?

A

They need to have an interest in the business to act in its best interests efficiently, otherwise they have no interest in the good performance of the company.

31
Q

What is the market explanation approach to directors’ performance?

A

Economic forces are significant in controlling the behaviour of directors. When the stock market is informed that not acting in best interests of shareholders, the share price will fall and so company will be taken over and new owners will implement a new board. Therefore it is the directors’ own interests to act in the interests of shareholders, otherwise they lose their job.

32
Q

What does Black (1990) suggest about institutional investor shareholders?

A

It is possible for them to control enough shares to overcome issues of separation of ownership and control and therefore have direct influence on company management.

33
Q

What was the aim of the Stewardship Code introduced in 2010 by the Financial Reporting Council (FRC)?

A

To enhance the quality of engagement between institutional investors and companies, to help achieve long-term returns to shareholders and secure the efficient exercise of governance responsibilities.

34
Q

Which directors’ duty enhances the idea of corporate governance?

A

S.172 CA 2006 - director has duty to act in the best interests of members of company as a whole

35
Q

What majority does an ordinary resolution require to be passed and what is the authority for this?

A

S.283 CA 2006 - 50% of votes plus 1

36
Q

What majority does a special resolution require to be passed and what is the authority?

A

S.283 - 75%

37
Q

Which case is authority for the fact that it is not necessary for all persons attending a company meeting to be together in the same room provided that there are adequate audio-visual links to enable everyone attending to see and hear what is going on in all other rooms? What venue did the company use in the case?

A

Byng v London Life Association Ltd

Used Cinema

38
Q

Where is the requirement for public and traded companies to hold an AGM linked to the reporting cycle so that directors can be held to account?

A

S.336(1)

39
Q

Which principle of the UK Corporate Governance Code recommends that the board of a listed company should use the AGM to communicate with investors and encourage their participation?

A

Principle E.2

40
Q

What is the alternative view of agency theory and why is it more positive?

A

Stewardship theory - more positive as deems directors to make decisions best for the group rather than focus on their own incentives

41
Q

Who suggests that the UK system of corporate governance is characterised by negotiated regulation and criticises this as it champions a narrow range of interests?

A

A. Dignam (2000)

42
Q

What does S. Copp (2003) argue?

A

Deregulation and modernisation of corporate decision-making is to be commended but expresses concerns over the creeping encroachment of the state in corporate governance

43
Q

In 2014 what percentage of shares were held by individuals compared to overseas (institutional) investors according to L. Roach (2016)?

A

Individuals - 11.9%

Overseas investors - 53.8%

44
Q

Why hasn’t the rise of institutional investor shareholders had the impact on corporate governance that they were expected to have?

A

Need to diversify to avoid risk - so not large shareholdings, still need to coalesce with other institutional investors to affect change
Also use a lot of behind the scenes negotiation

45
Q

What is the authority for the fact that members have the opportunity to approve a director’s remuneration report? Will failure to obtain approval invalidate the report?

A

S.439 CA 2006 - failure to obtain approval will not invalidate the report though

46
Q

What are the criticisms of the independence of the directors’ remuneration committee?

A
  • research shows that companies with remuneration committee actually pay directors more than those without (L. Roach, 2016)
  • committee commonly engages compensation consultants to determine remuneration but they are actually hired by/paid for by executives
47
Q

During the 2015 AGM season how many FTSE100 companies had their remuneration report rejected by shareholders? Does this power offer a real effect?

A

1 - Intertek Group Plc. No real effect

48
Q

What examples demonstrate that the shareholder power to approve directors’ remuneration under s.439 CA 2006 does actually provide some change?

A
  • 2003 remuneration of directors of GlaxoSmithKline PLC rejection led to halving of CEO service contract and removal of 2 key members from remuneration committee
  • 2012 chairman of Barclays gave up £20m bonus after shareholders rejected remuneration report
49
Q

What are the reasons for concern over the extent of independence of NEDs?

A
  • work part-time, so likely to rely on executives to draw attention to what is important
  • many act as executives for other companies so socialise in same groups and likely to share the same ideologies
  • appointment of NEDs committee is the least developed of the board’s committees and likely that CEO can exert influence behind the scenes