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BPP PAR > Module 2 > Flashcards

Module 2 Flashcards

1
Q

Definition of corporate governance?

A

The system by which companies are directed and controlled

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2
Q

Why is corporate governance important to companies?

A

Allows them to mitigate agency risk that arises as a result of the directors running a company on behalf of the shareholders

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3
Q

Definition of agency risk?

A

The risk that the agents (directors) self-interest deviates from that of the principal (shareholders)

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4
Q

Examples of actions or directors that can constitute agency risks

A

Directors awarding themselves large bonuses

Using a more expensive supplier because of personal perks promised (bribery)

Short termist decisions

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5
Q

What are the three procedures that can be implemented to reduce agency risk?

A
  1. Directors remuneration packages as incentives
  2. Monitoring the directors performance
  3. Appointment an external auditor
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6
Q

Definition of an audit?

A

An examination of a company’s financial statements by an independent expert, which culminates in the expert providing and opinion on whether the financial statements give a true and fair view to the shareholders

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7
Q

Definition of agency costs?

A

The costs of reducing agency risk

Include: costs of audit, costs in aligning directors and shareholders interests such as bonuses and pay rises

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8
Q

What’s do shareholders do?

A

Appoint directors and the external auditor

Satisfy themselves that appropriate governance structure is in place

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9
Q

What do directors do?

A

Set companies strategic aims and provide leadership to achieve them

Supervising management

Reporting to shareholders

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10
Q

What do external auditors do?

A

Provide an opinion on directors financial statements

Objective view on aspects of governance

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11
Q

What do internal auditors do?

A

Support the directors in their responsibilities

Providing a check on financial aspects and controls

Review companies governance frameworks

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12
Q

What are the four areas of the Cadbury code of best practice?

A
  1. The board of directors
  2. Non-executive directors
  3. Executive directors
  4. Reporting and controls
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13
Q

Recommendations of the code of best practice are

A

COMPLY OR EXPLAIN

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14
Q

What did Derek Higgs report on?

A

The role and effectiveness of non-executive directors

2002

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15
Q

What did Sir Robert Smith report on?

A

The role and effectiveness of the audit committee

2002

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16
Q

What is the UK Corporate Governance Code organised under?

A 
Board leadership and company purpose
Division of responsibilities 
Composition, succession and evaluation
Audit, risk and internal control
Remuneration

BD CAR

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17
Q

How many main principles are there in the code?

A

18

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18
Q

How many provisions are there in the code?

A

41

19
Q

What do main principles in the code show?

A

What we should do as a company and why

20
Q

What do provisions in the code show?

A

How we should do it

21
Q

What are the executive directors responsible for?

A

Day to day operational management

E.g sales, finance

22
Q

What are the non-executive directors responsible for?

A

Not involved in day to day

Challenge and contribute to strategic decisions

Independent

Reduce agency risk

23
Q

What does the chairman do?

A

Chairs the board meetings

Independent on appointment

24
Q

What does the CEO do?

A

Responsible for executive directors

Ultimately responsible for day to day running of company

25
Q

What are the three sub committees?

A

Nomination
Audit
Renumeration

26
Q

What is the audit committee made up of?

A

At least 3 directors
100% NED
At least one member should have recent and relevant financial experience

27
Q

What is the nomination committee made up of?

A

At least 3

Majority NED

28
Q

What is the remuneration committee made up of?

A

More than 3 directors

100% NED

29
Q

What does board division and company purpose involve?

A
  • effective board, promote long term sustainable success
  • ensures necessary resources, framework of prudent and effective controls
  • effective engagement with shareholders
30
Q

What does division of responsibilities involve?

A
  • Chair independent on appointment
  • roles of chair and CEO segregated
  • NEDs should have time to devote and provide constructive challenge and strategic guidance
  • at least half the board should be NEDs (independent)
31
Q

What does composition, succession and evaluation involve?

A
  • formal rigorous and transparent board appointments
  • effective succession plan, based on merit and objective criteria
  • should have combination of skills, experience and knowledge
  • should a point a nomination committee
  • annual performance evaluation
32
Q

What does audit, risk and internal control involve?

A
  • should establish an audit committee of independent NEDs
  • robust assessment of risks
  • monitor company’s risk management and internal control system
33
Q

What does remuneration involve?

A
  • designed to support strategy and promote long term sustainable success
  • remuneration committee
  • remuneration for all NEDs should not include share options or performance related elements
34
Q

What entities are required to comply or explain with the code?

A

Only those with a Premium listing on LSE main market

35
Q

What is a narrative statement?

A

Description in annual report of how the company has applied the principles of the code

36
Q

What is a compliance statement?

A

Whether or not it has complied with all the relevant provisions throughout the accounting period

Explain reasons if not

37
Q

What must companies with a premium listing on the main market of the LSE include in their annual report?

A

A corporate governance section:

Two part statement including a narrative statement and compliance statement

38
Q

What is the corporate governance act in the US?

A

Sarbanes-Oxley Act 2002

39
Q

What does the SOX act affect?

A

Companies that are:

  • registered with the securities and exchange commission (SEC) in the US
  • included in the accounts of a SEC company even if not US domiciled
  • non-US publicly traded companies operating in the US
40
Q

What does SOX contain?

A

Standards and requirements for corporate governance, financial reporting, ethics and some regulation

More prescribed approach

Legally required to comply
More stringent than UK

41
Q

Why did SOX get introduced?

A

2001 large corporate failures, addressed by introducing SOX legislation

42
Q

UK and US annual report certification?

A

US signed off by CEO and CFO

UK signs diff by only one director in behalf of board

43
Q

SOX internal controls

A

Section 404 report as part of annual report:

- management responsibility for adequate controls and procedures

44
Q

SOX audit committees

A

Must pre-approve all services provided by external auditor

BPP PAR (20 decks)

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