Module 2 - Unit 4 - Corporate Governance and Risk Flashcards
What is the purpose of Corporate Governance?
The purpose of corporate governance is to:
• Facilitate accountability and responsibility for effective and efficient performance and ethical behaviour
• Protect executives and employees in undertaking the work they are required to do.
• Ensure stakeholder confidence in the ability of the organization to identify and achieve outcomes that its stakeholders value.
What are the two approaches to the enforcement of corporate governance standards?
There are two main approaches to the enforcement of corporate governance standards:
• Comply or explain.
• Full compliance with detailed requirements
What are the main features of the UK Corporate Governance Code?
- Leadership – Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
- Division of Responsibilities – There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business.
- Composition, Succession and Evaluation – The board and its committees should have a combination of skills, experience and knowledge. Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives.
- Audit, Risk and Internal Control – The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.
- Remuneration – Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
What are the OECD principles of corporate governance?
- Effective corporate governance framework – Promote transparent and fair markets, efficient allocation of resources and be consistent with the rule of law and support effective supervision and enforcement.
- Rights and equitable treatment of shareholders – Protect and facilitate the exercise of shareholder rights and ensure equitable treatment of all shareholders, including minority and foreign shareholders.
- Institutional investors, stock markets and other intermediaries – Sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.
- Role of stakeholders in corporate governance – Recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders.
- Disclosure and transparency – Timely and accurate disclosure is made on all material matters, including the financial situation, performance, ownership and governance of the company.
- Responsibilities of the board – Strategic guidance of the company, the effective monitoring of management by the board and the board accountability to the company and the shareholders.
What are the areas of responsibility of board members under the LSE governance framework?
The responsibilities of board members must be fulfilled in five important areas, in respect of the fulfilment of stakeholder expectations, rights, participation and dialogue. In summary, these five areas are:
• Strategic thinking, planning and implementation
• Corporate social responsibility
• Effective management of risks
• Audit and risk assurance
• Full and accurate disclosure.
What are the main roles/function of Non-Executive Directors?
Non-executive directors play an important role in corporate governance and it is generally accepted that an effective non-executive director will:
• Uphold the highest ethical standards of integrity and probity
• Support executives in their leadership of the business
• Monitor the conduct of executives
• Question, debate, challenge and make decisions objectively
• Listen to the views of others inside and outside the board
• Gain the trust and respect of other board members
• Promote the higher standards of corporate governance
• Seek compliance with the provisions of applicable governance codes.
What are the Nolan principles of public life?
- Selflessness - Holders of public office should act solely in terms of the public interest and should not seek benefits for themselves, their family or friends.
- Integrity - Holders of public office should not place themselves under any financial or other obligation to outside individuals or organizations.
- Objectivity - In carrying out public business, the holders of public office should make choices on merit.
- Accountability - Holders of public office are accountable for their decisions and actions to the public and must submit themselves to appropriate scrutiny.
- Openness - Holders of public office should be as open as possible about all the decisions and actions that they take and give reasons for their decisions.
- Honesty - Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts.
- Leadership - Holders of public office should promote and support these principles by leadership and example.
What elements would you find in the typical orientation for new members of the board for a bank?
Typically, the orientation programme for new members of the board will include details of:
• The legal and regulatory framework;
• Risk management;
• Capital management and group accounting;
• Human resources and compensation;
• Audit committee, internal audit and external audit;
• Communication, including branding.
Explain the two types of board compositon.
- Unitary board – Executive and non-executive directors are members of the same board
- Supervisory board – The board comprises non-executive directors only. Where the supervisory board is in place, the executive directors will meet as the executive committee. The structure of separating non-executive and executive directors into separate committees is sometimes referred to as a two-tier board structure.
What areas are measured when evaluating the effectiveness of the board?
- Membership and structure - Does the board have the necessary range of knowledge, skills and experience?
- Purpose and intent - Do all board members understand and share the vision and mission?
- Involvement and accountability - Does the board have shared ethical values, including openness and honesty?
- Monitoring and review - Is there sufficient monitoring of performance using appropriate measurements?
- Performance and impact - Is there a satisfactory level of attendance at board, committee and other meetings?
What does the acronym CSFSRS stand for?
There will be a wide range of stakeholders in a typical organization that can be summarized as CSFSRS, as follows: • Customers • Staff • Financiers • Suppliers • Regulators • Society
What data is needed for share holders?
General - A clear statement of strategy and vision. Corporate profile and principal markets.
Financial data - Annual report and financial statements. Archived financial information for the past three years.
Corporate governance and CSR - Information related to compliance with Combined Code. Information on the company CSR policies.
Shareholder information - Shareholder analysis by size and constituent. Information on directors’ share dealings.
Relevant news - Access to all news releases and presentations. Developments that might affect the share value.
What is the Basel II definition of operational risk?
‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’.
What are the four risk categories under Basel II
The Basel II definition identifies four types of risk categories: people, process, system and external risks.
• People risks include failure to comply with procedures and lack of segregation of duties.
• Process risks include process failures and inadequate controls.
• System risks include failure of applications systems to meet user requirements and the absence of built-in control measures.
• External risks include action by regulators (change of regulation, but excluding enforcement or disciplinary action), unsatisfactory performance by service providers and fraud, both internal and external. External risks also include legal action by customers of financial institutions in relation to negligence or fraud committed by staff.
What are the fundamental aims of project risk management?
Project risk management is about delivering the project on time, within budget and to quality. Quality is the relationship between specification and performance.
