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BTF > Governance And Ethics > Flashcards

Governance And Ethics Flashcards

1
Q

What is governance?

A

A system by which organisations are directed and controlled

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2
Q

Effects of poor governance

A
  1. Falling share price
  2. Corporate failure
  3. Criticism of accountants or auditors
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3
Q

The agency problem

A

When managers pursue their own interests not those of the shareholders

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4
Q

How should good corporate governance reduce the agency problem?

A

Aligning management objectives with shareholder objectives

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5
Q

Corporate governance

A

Relationships between management, board, shareholders, other stakeholders which structures the setting, attaining and monitoring objectives

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6
Q

What do corporate governance objectives depend on?

A

Perspective

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7
Q

Social responsibility

A

How far it exceeds the minimum obligation owed to stakeholders and society

Esp stakeholders unprotected by contractual/business relationships

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8
Q

Natural capital

A

The world’s natural assets, used in order to live

Geology, soil, air, wager

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9
Q

Sustainability

A

Ability to meet the needs of the present without compromising the ability of future generations to meet their own needs

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10
Q

Business sustainability

A

How far a business goes to operate in a sustainable

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11
Q

What is the achievement of sustainability part of?

A

Corporate responsibility

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12
Q

Key goals for businesses in UN Global Goals for Sustainable Development

A
  1. Decent work and economic growth
  2. Industry, innovation, infrastructure
  3. Responsible consumption and production
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13
Q

2 functions of a financial system

A
  1. Transmission of money
  2. Facility of lending and borrowing money
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14
Q

3 elements of a financial system

A
  1. Intermediaries
    (Banks, pension funds, unit trusts etc.)
  2. Securities
    (Shares and bonds)
  3. Markets
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15
Q

What thing that a country has that affects the style of corporate governance that develops?

A

Its financial system

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16
Q

Intermediaries function

A

To reduce problem of asymmetric information by giving ADVICE to poorly informed customers/investors

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17
Q

The 2 types of financial system

A
  1. Bank based
  2. Market based
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18
Q

Bank-based financial system

A

Bank lending most important
(After retained earnings)

Banks doing the lending are highly integrated: Holding equity, representing board

Banks concentrated and integrated (proving both banking and insurance etc.)

Stock markets are volatile and speculative because companies have high gearing

More gov regulation of markets

Households have little risk (money mainly held in deposit)

Securities investment done via intermediaries, so institutional shareholders are influential

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19
Q

Market-based financial system

A

Markets more important than banks for long term finance

Banks have less close relationships with businesses they lend to

Banks less integrated

Unregulated markets comparatively

Households bare more risk so likely have more equity investments

Indirect investment via intermediaries e.g. pension funds so institutional investors have high influence

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20
Q

Hofstede: power distance

A

Acceptance of power differential, rank and status

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21
Q

Hofstede’s Power distance on codes of governance

A

Accept concentration of power so less separation of roles
E.g. chair and CEO, NEDs

22
Q

Hofstede: Uncertainty avoidance

A

Comfort with uncertainty

23
Q

Hofstede’s uncertainty avoidance on codes of governance

A

Focus on Control and risk management

24
Q

Hofstede: individualism and collectivism

A

Prioritising individual or team performance

25
Q

Hofstede’s individualism on governance structures

A

More diversity because more accepting of different viewpoints

26
Q

Hofstede: Mascilinity

A

Fact based
Aggressive
Hard decision making style

27
Q

Hofstede: Femininity

A

Consultative
Intuitive

28
Q

Hofstede’s masculinity on governance structures

A

Stereotypical male CEO
Traditional gender roles

29
Q

Hofstede’s femininity on gender roles

A

Work life balance
Diversity

30
Q

Hofstede: Short term orientation on governance

A

Bonus culture
Rewards based on annual results

31
Q

Hofstede: Long term orientation on governance

A

Share options exercisable after a number of years

32
Q

Hofstede’s indulgence and restraint on governance

A

Affecting corporate hospitality and spending

33
Q

Governance structure

A

Legal/regulatory methods to ensure effective corporate governance

34
Q

Principles based approach to governance structures principles

A

Promoting transparent and efficient financial markets

Equitable treatment of all shareholders

Relationships with institutional investors, stock markets and intermediaries

Rights of stakeholders in corporate governance

Accurate and timely and transparent disclosure if financial performance

Responsibilities of board

Accountability of shareholders

35
Q

Shareholder-led approach to governance structures countries

A

UK and US

36
Q

Two main types of governance structures

A
  1. Principles based
  2. Shareholder led
37
Q

The two types of board structure

A
  1. Unitary board
  2. Dual board
38
Q

Unitary board (e.g. UK) responsibilities

A

Management

Reporting to shareholders

39
Q

Dual Board (e.g. Germany) Split into:

A
  1. Management board
  2. Supervisory board
40
Q

Supervisory board

A

Separate and independent board elected by shareholders and employees

41
Q

Supervisory board functions

A
  1. Oversee management board
  2. Approve/reject FS and dividends
  3. Appoint/remove management board directors
  4. Convene shareholder meetings
42
Q

Do private companies need to comply with UK corporate governance code?

A

Never

43
Q

Companies (Misc Reporting) Regulations (2018) requires some companies to include corporate governance arrangements in annual reports if meet one of three:

A
  1. <2000 worldwide employees
  2. <200m global turnover
  3. <2bn total assets
44
Q

What are the Wates Principles?

A

Voluntary code to help large private companies meet C(MR)R regulations

45
Q

The 6 Wates principles

A

{PB DORS}

  1. PURPOSE and leadership: Develops purpose and ensures values strategy and culture align with it
  2. BOARD BALANCED and includes effective chair
  3. DIRECTORS’ RESPONSIBILITIES include robust internal control systems and effective decision making
  4. OPPORTUNITIES and risks identified and managed to create sustainable success
  5. REMUNERATION aligned to long term sustainable success
  6. Meaningful STAKEHOLDER ENGAGEMENT
46
Q

Basis for applying Wates Principles

A

Apply or explain basis

47
Q

The 5 Nolan principles

A

{OO HAI}

Openness
Objectivity

Honesty
Accountability
Integrity

48
Q

The 5 institute of business ethics

A
  1. Respect
  2. Responsibility
  3. Transparency
  4. Trust
  5. Fairness
49
Q

Statutory ethical requirements for all companies (leaders have strong influence on ethical culture)

A
  1. Equality for all
  2. No discrimination on any grounds
  3. Freedom of information
50
Q

FRC ‘corporate culture and the role of boards’

A

Must demonstrate leadership
By embodying desired culture and acting where leaders don’t deliver

Must recognise value of culture
And that healthy corporate culture can be a valuable asset and source of competitive advantage

Directors must be open and accountable
How business is conducted and stakeholders engaged with

Leaders should embed and integrate values of the company
To inform behaviours expected of employees and suppliers

Should assess measure and engage desired outcomes using indicators and measures

Should align values and incentives

Board should exercise stewardship
Including Engagement about culture
Should encourage better reporting

BTF (14 decks)

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