Direction, Ownership & Management Flashcards
1
Q
What is corporate governance (CG)?
What is it’s purpose?
What is covered by the scope of CG?
A
CG:The system through which organisations are goverend and controlled.
Its purpose is:
- Improve risk identification and management
- Enhanced organisational performance
- Ethical and effective strategy
- Investor reassurance
- Adherence to the law
- On-going accountability to stakeholders
- Inspires greater confidence from regulators and markets
Its scope covers:
- Stakeholders
- Rights of shareholders
- Equiteable treatment of shareholders
- Disclosure and transparency
- Board of Directors
2
Q
What are the key points in the Cadbury Report 1992?
A
- CEO & Chairman should be separate
- The Board should:
- set the strategy
- provide leadership
- supervise management
- report to members
- NEDs are important
- An Audit Committee should be set up
- Compensation of directors should be disclosed
- Provisions on the length of service contracts for directors
3
Q
What are the key features of the Greenbury Report 1995?
A
- Establishment of remuneration committee
- Remuneration policy included in annual accounts
- Incentive schemes linked to performance
- Disclosure of service committee
- Remuneration considered in the context of the company’s sector and economy as a whole
4
Q
What are the key features of the Hampel Report 1998?
A
- Directors and NEDs to have some legal responsibilities
- Separation of CEO and Chairman
- Introduction of a Senior NED
- Audit committee to include at least 3 NEDs
- Shareholders to be able to vote separately on every substantial issue at general meetings
5
Q
What are the key features of the The UK Corporate Governance Code (UKCGC)?
A
- The UKCGC is the definitive corporate governance reference for UK listed firms.
- It is NOT a legal requirement but is a comply or explain listing rule on the London Stock Exchange
- It’s administered by the Financial Reporting Council: an independent regulator
The core principles are:
- Leadership: every company should be led by an effective board
- Effectiveness: the composition of the board and standing committees should be provide a balance of skill, experience, independence and knowledge
- Accountability: the board must decide the nature and extent of the significant risks it will take in pursuing its objectives
- Remuneration: sufficient to attract, maintain and motivate directors
- Relations with shareholders: encourage dialogue with shareholders based on mutual understanding of objectives
6
Q
What’s the difference between the UK & US CG?
A
- The UK takes a principles based approach. Only some principles breaches are backed by legislation e.g. fraud
- The USA takes a purely legislative approach. The Sarbanes-Oxley Act lays down mandatory requirements that firms must follow
7
Q
Who does Agency Theory relate?
How may the knowledge gap be reduced on both sides?
A
Principles & Agents
To reduce the knowledge gap principles may:
- Monitor agents - though this incurs agency costs wrt money, time and resources
The agents may:
- goal congruence/alignment of interests with the board
8
Q
What do directors do?
What types of director are there and what is are their responsibilities?
A
Directors (agent) run the business on behalf of the shareholders (principle).
EDs (full time employees):
- Set medium-long term objectives
- Direct and supervise
- Implement and maintain a framework of prudent and effective controls
NEDs (not employees but have a contract for service):
- Independently and objectively contribute to strategy
- scrutinise the board’s decisions
- evaluate risk and controls
- resolve board conflict
9
Q
What are the UKCGC Recommendations for directors?
A
- Avoid cross-directorships as this can compromise independence.
- Directors can be shareholders but should have no other business, financial or other commitments relating to the company.
- Most Articles of Association suggest a 3 year cycle or 2 terms for director service
- There should be a balance of EDs and NEDs on the board
- NEDs are accountable under the Companies Act 2006, common law and fiduciary responsibility
10
Q
List the standing committees, their purpose and preferable make up.
A
-
Audit:
- formulation, implmentation and review of internal control systems
- Mostly NEDs with at least one financial expert
- chaired by NED
-
Remuneration:
- Ensuring that executive compensation is appropriate
- Independent NEDs only
-
Nomination:
- Attracting and retaining the best individuals for the board
- Mostly NEDs
-
Risk:
- Formulate, implement and review risk management
- Balance of EDs and NEDs
11
Q
What is an internal control?
How can it be made effective?
Give an example.
A
- An internal control is any action taken by management to enhance the likelihood that established objectives will be achieved.
- An effective control results from:
- proper planning
- organisation
- direction from management
- being dynamic, not static
- The Cybernetic Control Model is the simplist model of a control system. It’s a cycle consisting of:
- Creating plans and setting standards of performance
- Taking actions
- Measuring of results
- Forecasting for the next period, from which new plans can be created
12
Q
What are the impications of poor internal controls?
A
- Risk of fraud
- Incorrect financials
- Customer Complaints
- Compliance breaches
- Regulatory breaches
- Loss of customers
13
Q
What does the Turnbull report suggest on internal controls?
A
- Controls should be embedded in operations and part of company culture
- Controls should be adaptable to meet evolving risks
- Include procedures for reporting failures to management
14
Q
Why can internal control systems never be totally effective?
A
- Failures of judgement
- Human error
- Deliberate circumvention of controls
- Control cost exceeding benefits
- Unforseen circumstances
- Management overide
15
Q
What are the basic concepts of risk?
A
- Fundamental: affects society in general e.g. climate change
- Particular: where an individual has some level of control
- Negative (downside): minimising the prospect that adverse events will happen
16
Q
What types of risk do firms face?
A
- Strategic: The most significant type of risk arising from internal and external factors. Have a major impact on financial structure of the business, minimise it by spreading risk out. e.g. economy, competitors, M&A’s
- Operational: Mostly internal, the risk of loss from the failure of internal business and control processes. e.g. failure of IT infrastructure
control the controllables etc. :)
17
Q
What are the responsibilities of the Risk Management Function?
A
- Mission identification (alignment of risk management goals with those of the org)
- Risk and uncertainty assessment (identification of hazards and exposures to hazards and risk measurement)
- Risk control (avoiding, preventing, reducing and prioritising risk reduction measures)
- Risk financing (reimbursing losses and funding programs which enhance positive outcomes)
- Program administration (procedures for day-to-day risk management operations)
18
Q
What are the activities in the risk management cycle?
A
19
Q
What are the methods for handling risk?
A
- Avoidance: refuse to accept risk e.g. don’t lend money
- Transference: pass risk to another party who’s willing to accept it e.g. car insurance
- Sharing: share the risk with a partner org e.g. share risk with joint venture partner
- Risk reduction: focus on preventation and control e.g. introduce saftey training
- Risk retention:
- Voluntary retention: when one does not take positive action to avoid, reduce or transfer risk is voluntarily
- Involuntary retention: takes place when risks are unknowingly retained. When the risk is not recognised, the person exposed retains the consequences of the possible loss without realising that he does so. E.g. being a careful driver but not realising the danger of bad drivers
*put in risk diagram*
