Module 3 Part B Flashcards
Corporate Governance
It is a system by which business corporation are directed and controlled. But it does not control the day to day operation of the business
We need corporate governance because we have agency relationship
Governance = Performance + conformance (rules)
Performance: focusing on achieving economic success or goals of the entity
Conformance: complying with rules, codes and regulation
Importance of corporate governance
The principles are to help policy makers to evaluate and improve the legal, regulatory and instrumental framework for corporate governance, with a view to supporting economic efficiency, sustainable growth and financial stability
1. they help companies financing through capital market
2. well established corporate governance provide framework to protect the investors, which include households with investing savings
3. well established corporate governance will support the sustainability and resilience of corporation and in turn support the sustainability and resilience of economy.
Bad corporate governance
Greed
personal fiefdoms (kingdom)
private expenses
Governance and Performance
Governance role is to give strategic direction to enterprise as well as ensuring accountability
Management role is to run the business effectively and efficiently
The board should work with and through CEO, other executive directors and senior executives of company
Senior executive role is to run the business but within the policy and strategic parameters laid by board.
Shareholders
Shareholders are persons or entity who own a company and play important part in corporate governance
Shareholders elect board of directors who operates the business on behalf of shareholders
The board are held accountable for success or failure of company
Shareholders delegate much of their authority to directors
Different kind of shareholders
1.Individual shareholders: Individual shareholders are increasing. There are organisation which represent these individual share holders like Australian Shareholder Association (ASA)
2.Institutional shareholders: includes insurance companies, superannuation funds, investment trusts and professional investment fund managers.
All shareholders do not have same need and opportunities to participate in governance of company
Shareholders holding significant stake in company have voting powers to gain places for themselves or their nominees on the board
Shareholders duties are defined in law and limited to
1. Changes in companies constitution
2. The appointment and removal of directors and auditors
3. The approval of directors remuneration
Information Asymmetry
Refers to differential of knowledge or information that two parties possess for a transaction.
There is potential for
1. Poor decisions made because complete information may not be available to party who makes the decision
2. Sneaky and risky action being taken. Because the party taking action knows that they will not be found out
In company information asymmetry will exist between parties:
1. board and members
2. management and board
3. employees and management
4. management and external stakeholders
Board of directors are composed of
The chair
Executive directors (CEO)
Non-executive directors
All or some of these directors may be independent
Primary function of board
Strategy formulation: the board should think of the future and have outward looking of the business and set good strategy formulation
Policy making: Having good strategy the board should look inward and set policies. Taking into consideration, in what to invest, how we treat our employees, how our culture should be etc.
Monitoring and supervising: once the strategy and policy are in place these strategy and policy should be monitored to ensure it is going on right track
Providing accountability: give accountability especially to shareholders
Accountants are involved in providing accountability, monitoring and supervising and policy making
The Chair
Every board should have chair
The role of the chair is to lead board of directors:
determining board’s agenda
obtaining contribution from other board members
monitoring and assessing the performance of directors
Their role is crucial to ensure that the board works effectively
They think about inside and outside the business
Also think of the future of the business at the same time keeping track of past and present of the business
Committee of board
The delegation of duties from board to committee enables examination of issue in details and discussion of issues in absence of executive directors
4 committees are
Nomination committee:
Remuneration committee
Audit committee
Risk committee
Nomination committee
the role of this committee is to recommend the succession within the organisation. It identifies and selects the succession person to replace senior staff when they leave
They assess the overall performance of board and key executives
The important aspect to recommend the candidate to shareholders to vote on the board
Remuneration committee
This committee deals with remuneration for executives
They decide what and how these executive remuneration should be paid
Executives should not be involved in deciding their remuneration
Executives should not set remuneration for independent directors
This is the rule in UK but not rule in Australia.
Audit Committee
This is the most important aspect of corporate governance
All listed companies should have audit committee
To ensure the independence of this committee, it should have non-executive members, majority being independent.
Audit committee with no executives means they interact with external auditors without CFO. This is an important aspect of good corporate governance.
They have the responsibility to hire and fire auditors
The responsibility includes
1. reviewing the adequacy of operational and internal control
2. reviewing half-yearly and full-yearly financial report before board approval
3. place focus on changes in accounting policies
4. areas requiring the use of judgement and estimates
5. audit adjustments and compliance with accounting
6. legal and stock exchange requirements
Only independent directors are permitted in US & UK
In Australia, only non-executive members with majority being independent are allowed in this committee.
Risk committee
Professional Accounting in Business (PAIB) recommends companies should also establish strategy committee that review strategy in all dimentions including risk.
Auditors
Internal auditors: looking and checking to identify issues and control problems internally
External auditors: verifying the accuracy and ability of our financial reports
