Module 2 - Corporate Governance

Question 1

What is corporate governance?

Answer 1

The system by which companies are directed and controlled

Question 2

What does CG create and what does this ensure?

Answer 2

More transparency and accountability

Ensuring companies are directed and managed properly

Question 3

What is agency risk?

Answer 3

The risk that agents (management / directors) self-interest deviates from that of the owners (shareholders)

Question 4

Three procedures shareholders can introduce to reduce agency risk

Answer 4

Using the directors remuneration packages as incentives

Monitoring the directors performance

Appointing an external auditor

Question 5

What is an audit?

Answer 5

An examination of a company’s financial statements by an independent expert,

which culminates in the expert providing an opinion on whether

the financial statements give a true and fair view to the shareholders

Question 6

What are agency costs?

Answer 6

The costs of reducing agency risk

Question 7

What is included in agency costs?

Answer 7

The costs of the audit

Costs incurred aligning the directors and shareholders interests such as bonuses and pay rises

Question 8

Different important roles in corporate governance

Answer 8

Shareholders

Directors

External auditor

Internal auditor

Question 9

The main source of Corporate Governance guidance in the UK is?

And this is issued by?

Answer 9

UK Corporate Governance Code

Financial Reporting Council (‘FRC’)

Question 10

The G20 / OECD (organisation for economic co-operation and development) Principles:

Answer 10

Ensuring the basis for an effective corporate governance framework

The rights and equitable treatment of shareholders and key ownership functions

Institutional investors, stock markets and other intermediaries

The role of stakeholders in corporate governance

Disclosure and transparency

The responsibilities of the board

Question 11

The UK Corporate Governance Code requires the board to maintain what?

Answer 11

A sound system of internal control

To safeguard shareholders’ investment and the company’s assets

Question 12

What is the acronym D CRAB used for?

Answer 12

The UK Corporate Governance Code

Question 13

What does D CRAB stand for?

Answer 13

Division of responsibilities

Composition, succession and evaluation

Remuneration

Audit risk and internal control

Board leadership and company purpose

Question 14

Mnemonic for Good Corporate Governance (Key principles & Provisions)

Answer 14

RACING BEARS

Risk assessment

Appointment of directors

Chairman and CEO

Internal controls

Nomination committee

Going concern

Balanced board

Effective board

Audit committee

Remuneration committee

Shareholders

Question 15

The UK Corporate Governance Code (The Code) requires several committees?

Answer 15

Audit

Nomination

Remuneration

Question 16

The code adopts a comply or explain approach, what does this mean?

Answer 16

Too long to write - page 24 if needed - should know it though

Question 17

What type of businesses are expected to ‘comply or explain’ with the code

Answer 17

Only those with a premium listing on the London Stock Exchange (LSE)

Question 18

What must companies send to shareholders every year

Answer 18

An annual report

Question 19

What must a premium listing LSE company have in their annual report?

What is this made up of?

Answer 19

A corporate governance section:

Narrative statement

Compliance statement

Question 20

The FRC issues guidance on how to apply the UK Governance Code to their particular circumstance by three main sections:

Answer 20

Risk management, internal control and related financial and business reporting

Guidance on board effectiveness

Guidance on audit committees

Question 21

Is there one single accepted Corporate Governance Code in the US like in the UK?

Answer 21

No

Question 22

What is an important piece of legislation relating to corporate governance and the US?

Answer 22

The Sarbanes-Oxley Act 2002 (‘SOX’)

Question 23

SOX affects the works of companies across the world that are:

Answer 23

Registered with the Securities and Exchange Commission (‘SEC’) in the US

Included in the accounts of a company which is registered with SEC, even if they are not domiciled in the US (eg a UK registered subsidiary of a SEC registrant) OR

Non-US publicly traded companies operating in the US

Question 24

Are relevant companies to SOX legally required to comply?

Answer 24

Yes

Question 25

Key areas of SOX

Answer 25

Annual report certification

Internal controls

Audit committee

Question 26

With SOX and the Annual Report Certification, what are the US requirements? (Who must reports be certified by)

Answer 26

Reports must be certified by the chief executive office (‘CEO’) and the chief financial officer (‘CFO’)

(In the UK only one director has to sign)

Question 27

With SOX and Internal Controls, what are the requirements?

Answer 27

A report known as a section 404 is required

Question 28

What does a section 404 require:

Answer 28

Management to state their responsibility for making and maintaining adequate internal control structures and procedures for financial reporting

Management to make assessment of internal control structure effectiveness for financial reporting

Every audit report to attest to the assessment made by management

Question 29

With SOX what are the Audit Committees requirements?

Answer 29

External auditors will report to and be overseen by a company’s audit committee

Audit committees must pre-approve all services, audit and non-audit provided by its external auditor

Audit info must be reported to the audit committee - including critical accounting policies and practices to be used