Module 2

Question 1

Corporate governance

Answer 1

system by which companies are directed and controlled.

Question 2

Agency risk

Answer 2

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

Question 3

Procedures to mitigate agency risk

Answer 3

1. using director remuneration packages as incentives
2. monitoring director performance
3. appointing an external auditor

Question 4

Agency cost

Answer 4

cost of reducing agency risk

Question 5

Parties that play a role in corporate governance framework

Answer 5

shareholders, directors, external auditor, internal auditor

Question 6

Main source of corporate governance guidance

Answer 6

UK Corporate governance Code by the FRC

Question 7

G20 corporate governance principles

Answer 7

1. effective corporate governance framework
2. rights and equitable treatment of shareholders and key ownership
3. institutional investors, stock markets
4. role of stakeholders in corporate governance
5. disclosure and transparency
6. responsibility of the board

Question 8

UK Corporate Governance Code

Answer 8

Principals based 
Bob Drives a CAR
Board leadership and company purpose
Division of responsibilities 
Composition, succession and evaluation 
Audit, risk and internal control 
Remuneration

Question 9

Executive director

Answer 9

day to day operational management

Question 10

Non-executive director

Answer 10

on the board, but not involved in the day to day. Must be independent.

Question 11

Chairman

Answer 11

Head of the board. Independent.

Question 12

CEO

Answer 12

responsible for the EDs - day to day runnings.

Question 13

Audit committee

Answer 13

independent NEDs ONLY

Question 14

Nomination Committee

Answer 14

Majority of independent NEDs

Question 15

Remuneration Committee

Answer 15

Independent NEDs ONLY.

Question 16

Who must comply of explain

Answer 16

listed on the LSE

Question 17

How does a company communicate with shareholders?

Answer 17

Annual Report

Question 18

What must listed on LSE companies include in their corporate governance section of annual report?

Answer 18

Narrative Statement - how they’ve applied the principles of the Code.
Compliance statement - state if they’ve complied and if not why?

Question 19

Guidance supplementing UK Corporate Governance Code

Answer 19

Risk Management, internal controls and related financial and business reporting.
Guidance on board effectiveness
Guidance on audit committees.

Question 20

US Corporate Governance legislation

Answer 20

SOX Act

Question 21

Who does the SOX act impact

Answer 21

1. companies registered with the SEC
2. e.g. a UK registered subsidiary of a SEC registrant
3. non- US publicly traded companies operating in the US

Question 22

Differences between US and UK regarding Annual Report Certification

Answer 22

US - reports must be certified by CEO and CFO

UK- only one director required to sign

Question 23

Differences between US and UK regarding internal controls

Answer 23

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.

Question 24

Differences between US and UK regarding Audit committees

Answer 24

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.