Governance And Ethics Flashcards
What is governance?
A system by which organisations are directed and controlled
Effects of poor governance
- Falling share price
- Corporate failure
- Criticism of accountants or auditors
The agency problem
When managers pursue their own interests not those of the shareholders
How should good corporate governance reduce the agency problem?
Aligning management objectives with shareholder objectives
Corporate governance
Relationships between management, board, shareholders, other stakeholders which structures the setting, attaining and monitoring objectives
What do corporate governance objectives depend on?
Perspective
Social responsibility
How far it exceeds the minimum obligation owed to stakeholders and society
Esp stakeholders unprotected by contractual/business relationships
Natural capital
The world’s natural assets, used in order to live
Geology, soil, air, wager
Sustainability
Ability to meet the needs of the present without compromising the ability of future generations to meet their own needs
Business sustainability
How far a business goes to operate in a sustainable
What is the achievement of sustainability part of?
Corporate responsibility
Key goals for businesses in UN Global Goals for Sustainable Development
- Decent work and economic growth
- Industry, innovation, infrastructure
- Responsible consumption and production
2 functions of a financial system
- Transmission of money
- Facility of lending and borrowing money
3 elements of a financial system
- Intermediaries
(Banks, pension funds, unit trusts etc.) - Securities
(Shares and bonds) - Markets
What thing that a country has that affects the style of corporate governance that develops?
Its financial system
Intermediaries function
To reduce problem of asymmetric information by giving ADVICE to poorly informed customers/investors
The 2 types of financial system
- Bank based
- Market based
Bank-based financial system
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
Market-based financial system
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
Hofstede: power distance
Acceptance of power differential, rank and status
Hofstede’s Power distance on codes of governance
Accept concentration of power so less separation of roles
E.g. chair and CEO, NEDs
Hofstede: Uncertainty avoidance
Comfort with uncertainty
Hofstede’s uncertainty avoidance on codes of governance
Focus on Control and risk management
Hofstede: individualism and collectivism
Prioritising individual or team performance
Hofstede’s individualism on governance structures
More diversity because more accepting of different viewpoints
Hofstede: Mascilinity
Fact based
Aggressive
Hard decision making style
Hofstede: Femininity
Consultative
Intuitive
Hofstede’s masculinity on governance structures
Stereotypical male CEO
Traditional gender roles
Hofstede’s femininity on gender roles
Work life balance
Diversity
Hofstede: Short term orientation on governance
Bonus culture
Rewards based on annual results
Hofstede: Long term orientation on governance
Share options exercisable after a number of years
Hofstede’s indulgence and restraint on governance
Affecting corporate hospitality and spending
Governance structure
Legal/regulatory methods to ensure effective corporate governance
Principles based approach to governance structures principles
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
Shareholder-led approach to governance structures countries
UK and US
Two main types of governance structures
- Principles based
- Shareholder led
The two types of board structure
- Unitary board
- Dual board
Unitary board (e.g. UK) responsibilities
Management
Reporting to shareholders
Dual Board (e.g. Germany) Split into:
- Management board
- Supervisory board
Supervisory board
Separate and independent board elected by shareholders and employees
Supervisory board functions
- Oversee management board
- Approve/reject FS and dividends
- Appoint/remove management board directors
- Convene shareholder meetings
Do private companies need to comply with UK corporate governance code?
Never
Companies (Misc Reporting) Regulations (2018) requires some companies to include corporate governance arrangements in annual reports if meet one of three:
- <2000 worldwide employees
- <200m global turnover
- <2bn total assets
What are the Wates Principles?
Voluntary code to help large private companies meet C(MR)R regulations
The 6 Wates principles
{PB DORS}
- PURPOSE and leadership: Develops purpose and ensures values strategy and culture align with it
- BOARD BALANCED and includes effective chair
- DIRECTORS’ RESPONSIBILITIES include robust internal control systems and effective decision making
- OPPORTUNITIES and risks identified and managed to create sustainable success
- REMUNERATION aligned to long term sustainable success
- Meaningful STAKEHOLDER ENGAGEMENT
Basis for applying Wates Principles
Apply or explain basis
The 5 Nolan principles
{OO HAI}
Openness
Objectivity
Honesty
Accountability
Integrity
The 5 institute of business ethics
- Respect
- Responsibility
- Transparency
- Trust
- Fairness
Statutory ethical requirements for all companies (leaders have strong influence on ethical culture)
- Equality for all
- No discrimination on any grounds
- Freedom of information
FRC ‘corporate culture and the role of boards’
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
