MODULE 2 Flashcards
What’s Corporate Governance?
The system by which Companies are directed and controlled
Why is Corporate Governance Important in Companies?
Corporate Governance allowed Companies to mitigate (reduce) the Agency Risk that arises as a result of Directors running a company on behalf of its Shareholders.
What’s Agency Risk?
The risk that the Agents (Directors) self-interest deviates from that of the principal (the Shareholders)
What are some stuff Directors might do which constitutes of Agency Risk?
Directors giving themselves large bonuses
Directors using a more expensive Supplier because of personal perks promised by the supplier
Give more examples of Agency Risk and how would they impact a company’s activities.
Pursuing short term objectives to achieve large bonuses
Employing family and friends instead of people more suitable for the job
What are Agency Costs? Give some Examples
The cost of reducing Agency Risk
E.g - Cost of an Audit, Cost of aligning directors and shareholders interests.
What’s the shareholders role in Governance
To appoint directors and external Auditors
Satisfy themselves an appropriate Governance structure is in place
What’s the Directors role in the Governance?
Setting Company’s strategic aims
Supervising management
Reporting to shareholders
What’s the External Auditors roile in Governance?
Providing opinion on Directors Financial Statement
Providing objective view on aspects of governance, risk and control Framework
What’s the Internal Auditors role in Governance?
Providing check on financial aspects
Reviewing company’s general governance framework and operational Controls
What is the purpose of the UK Governance code?
It sets out standards of good practices for listed companies
The code is organised under the following Headings:
- Board Leadership and Company Purpose
- Division of Responsibilities
- Com[position, Succession and Evaluation
- Audit Risk and Internal Control
- Remuneration
The code is organised under the following Headings:
- Board Leadership and Company Purpose
- Division of Responsibilities
- Com[position, Succession and Evaluation
- Audit Risk and Internal Control
- Remuneration
Explain some of the principles and provisions for Board Leadership and Company Purpose
- The board should be effective and entrepreneurial, whose role are to promote long term sustainable success
- The Board should ensure the business has the necessary resources
- Ensure effective engagement to meet responsibilities to shareholders and stakeholders
Explain some of the principles and provisions for Division of Responsibilities
The role of Chair and chief executive should be separate and not done by same person
NED’s should have enough time to meet their responsibilities
At least half the board should be NED’s
