Module 2 Flashcards
Corporate governance
system by which companies are directed and controlled.
Agency risk
the risk that agents (directors) self-interest deviates from that of the principal (shareholders)
Procedures to mitigate agency risk
- using director remuneration packages as incentives
- monitoring director performance
- appointing an external auditor
Agency cost
cost of reducing agency risk
Parties that play a role in corporate governance framework
shareholders, directors, external auditor, internal auditor
Main source of corporate governance guidance
UK Corporate governance Code by the FRC
G20 corporate governance principles
- effective corporate governance framework
- rights and equitable treatment of shareholders and key ownership
- institutional investors, stock markets
- role of stakeholders in corporate governance
- disclosure and transparency
- responsibility of the board
UK Corporate Governance Code
Principals based Bob Drives a CAR Board leadership and company purpose Division of responsibilities Composition, succession and evaluation Audit, risk and internal control Remuneration
Executive director
day to day operational management
Non-executive director
on the board, but not involved in the day to day. Must be independent.
Chairman
Head of the board. Independent.
CEO
responsible for the EDs - day to day runnings.
Audit committee
independent NEDs ONLY
Nomination Committee
Majority of independent NEDs
Remuneration Committee
Independent NEDs ONLY.
Who must comply of explain
listed on the LSE
How does a company communicate with shareholders?
Annual Report
What must listed on LSE companies include in their corporate governance section of annual report?
Narrative Statement - how they’ve applied the principles of the Code.
Compliance statement - state if they’ve complied and if not why?
Guidance supplementing UK Corporate Governance Code
Risk Management, internal controls and related financial and business reporting.
Guidance on board effectiveness
Guidance on audit committees.
US Corporate Governance legislation
SOX Act
Who does the SOX act impact
- companies registered with the SEC
- e.g. a UK registered subsidiary of a SEC registrant
- non- US publicly traded companies operating in the US
Differences between US and UK regarding Annual Report Certification
US - reports must be certified by CEO and CFO
UK- only one director required to sign
Differences between US and UK regarding internal controls
US- known as section 404. Report must state managers responsibility, procedures and how effective internal controls are. Auditors give opinion on managers statement.
UK- auditors give opinion on financial statements, not controls. Directors only have to say weaknesses are being addressed - not what they are.
Differences between US and UK regarding Audit committees
US- external auditors report to audit committee. Audit committees pre-approve all services provided by external auditor.
UK- no formal requirements but audit committee monitors level of non-audit and audit work provided by external auditor.