Financial Management Function (3) Flashcards
What is corporate governance?
Rules and processes by which the behaviour of a firm is directed
Board of directors features (chairman)
Separate MD and chairman
Board of directors features (%)
Significant % of the board conssiting of non-executive directors
Board of directors features (NEDs)
NEDs should be independent (three-year contract, no share options)
Key committees (renumeration)
Pay and incentives of executive directors set by NEDs
Key committees (audit)
Monitors risk management processes. NEDs only
Key committees (nomination)
Choice of new directors by NEDs
Other stock exchange requirements increase the scrutiny of directors by shareholders?
Regular publication of financial accounts
Regular updates to the stock exchange on trading performance
What is goal congruence?
Alignment between objectives of agents acting within an organisation and the objectives of the organisaiton as a whole
How to best achieve goal congruence?
Through renumeration incentives
Examples of renumeration incentives?
PRP
Share options
Issue with PRP if short-term?
Short-term profits may encourage managers to focus on short-term profits at the expose of long-term profits
How may cash or share awards be given?
For achieving good performance
Best approach to PRP?
Award pay in a broader range of targets (e.g. TSR and key non-financial measures)
What happens in a share option scheme?
Selected employees are given a number of share options, each of which give holder the right after a certain date to subscribe for shares in company at a fixed price
