Corporate governance - Lecture 8

Question 1

What is the UK corporate governance code?

Answer 1

.Sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders
.All companies with a premium listing of equity shares are required to apply the code in their annual reports

Question 2

What is corporate governance?

Answer 2

Relates to the behaviour of companies, and serve to encourage, restrict or otherwise shape their relationship with wider society

Question 3

How does the agency theory relate to corporate governance?

Answer 3

.Results from the separation of ownership from control
.Considers how agents might be constrained to act in the owners’ best interests

Question 4

A good corporate governance regime helps to….

Answer 4

Assure that corporations use their capital efficiently and to ensure that corporations take into account the interests of the communities in which they operate

Question 5

What are the two drivers of corporate governance reform?

Answer 5

.Changing ownership structure
.Corporate collapse and malfeasance

Question 6

What are the 5 essential features of the corporate governance code?

Answer 6

1. Leadership
2. Effectiveness
3. Accountability
4. Remuneration
5. Relations with shareholders

Question 7

What is the main feature of leadership?

Answer 7

.Every company should be headed by an effective board
.Clear division of responsibilities at the head pf the company
.No individual should have unfettered power
.Chairman is responsible for leadership of the board and ensuring its effectiveness

Question 8

What is the main feature of effectiveness?

Answer 8

.The board and its committees should have the appropriate balance of skills, experience, independence and knowledge to enable them to discharge their responsibilities effectively

Question 9

What is the main feature of accountability?

Answer 9

.Present a fair, balanced and understandable assessment of the company’s position and prospects
.Maintain sound risk management and internal control systems

Question 10

What is the main feature of remuneration?

Answer 10

.Designed to promote the long term success of the company
.No director should be involved in deciding their own remuneration
.Performance-related elements should be transparent and rigorously applied

Question 11

What is the main feature of relations with shareholders?

Answer 11

.The board should use general meetings to communicate with investors and encourage participation
.Should be a dialogue with shareholders based on the mutual understanding of objectives

Question 12

What is the trademark approach of corporate governance in the UK?

Answer 12

.The comply or explain model
.The foundation of its flexibility
.Admired by companies and shareholders

Question 13

What is the comply or explain model?

Answer 13

.NOT a rigid set of rules
.Consists of principles and provisions
.Require companies to apply the main principles and report to shareholders on how they did so

Question 14

What problems did Arcor, Bruno and Faure-Grimaud (2010) find with the comply or explain model?

Answer 14

.The firms that did not comply gave poor explanations
.In 1 in 5 cases firms did not give an explanation for their non-compliance at all
.The choice seems to be comply or don’t comply

Question 15

Why do shareholders have limited capacity to monitor the functioning of the company?

Answer 15

.Lack of coordination
.Costs of monitoring
.Different incentives

Question 16

What are the 4 developments from auditors that help resolve corporate governance issues?

Answer 16

1. Internal control and risk management
2. Earnings management
3. Audit quality and transparency
4. Ethical standards and auditor independence

Question 17

How does internal control and risk management resolve corporate governance issues?

Answer 17

.Ensures effective use of resources and direction the board should have
.Clear understanding of the risks
.Ensure effective control processes
.Provide assurance that these processes are effectively managed

Question 18

How does earnings management resolve corporate governance issues?

Answer 18

Auditors must maintain professional scepticism in management judgement

Question 19

What is earnings management?

Answer 19

.Estimation techniques used to alter financial statements to influence an entity’s performance
.E.g. Delaying sales

Question 20

How does audit quality and transparency resolve corporate governance issues?

Answer 20

.Restores public confidence
.Greater emphasis to risk assessment, quality of audits and audit firm’s quality control practices

Question 21

How does ethical standards and auditor independence resolve corporate governance issues?

Answer 21

.The code of ethics ensures compliance with integrity, objectivity, professional competence and due care, confidentiality and professional behaviour
.Auditor independence enhances corporate governance
.Ensure ethical principles are not compromised