Past Exam Questions - Definitions and Issues Flashcards
NOVEMBER 2022 - MY ANSWER
Explain the differences between the governance of a company and the management of a
company.
5 mark question
There is no one definition of corporate governance and the meaning of governance has evolved over time.
In 1992, the Cadbury report defined this as ‘ The system by which companies are directed and controlled’.
This has evolved and different versions of a definition have been published via the OECD and G20.
The UK CG Code 2018, advises “To succeed in the long-term, directors and the companies they
lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be
responsive to the views of shareholders and wider stakeholders.”
This is different to the management of a company whose role is the operational day to day management the company.
The management of the company is directed by the executive committee where as the responsibility for strategy and governance falls to the Board of the company.
JUNE 2022 - MY ANSWER
The agency theory of corporate governance states that the agent and principal may have
conflicting interests. Explain these conflicting interests, using examples.
5 mark question
The agency theory was developed in 1932 by Berle and Means breaks down into 2 components, the principals who are the owners or shareholders of the business and the agents, who manage the business. Further work in this area was carried out by Jensen and Meckling in 1976.
The agency theory states that agents and principals have different goals and are therefore in conflict with each other.
It sets out 4 areas of potential conflict. They are:
- Moral Hazard -
I never set out examples. Should have added “An example of this would be that managers may want to maximise the benefits to their role and their individual power as they have no interest or shares in the company. This could lead to takeovers and acquisitions even though this may not be in the best interest of the company long term. - Earnings Retention
I never set out examples. Should have added “An example of this would be that as many agents pay is linked to the size of the company, it is in their benefit to increase the size of the company which may increase their benefits and pay rather than do what is in the best long term interest of the company, - Lack of Effort
I never set out examples. Should have added “An example of this would be agents work less hard than if they were the owners of the business. - Time Horizon
I never set out examples. Should have added “An example of this would be shareholders are looking for a long term investment return where as agents may be focused on short term returns due to bonus payments etc.
The solution or goals to this issue is the implementation of good corporate governance practices.
JUNE 2022 - MY ANSWER
Principle B of the UK Corporate Governance Code requires the Board of a company to establish
the company’s purpose. Explain why a company’s purpose is important.
5 mark question
Only through having a purpose would a company board be able to set out strategy, met objectives and make decisions based on the purpose.
The purpose of a company, underpins the values and behaviours shapes its culture and the way it conducts its business.
It needs to be communicated to stakeholders, normally via a website so they can see and choose whether or not to engage or investor or become a stakehodelr of the company.
Employees also need to know a common goal they are contributing to to ensure they are aligned in their actions and decision making.
The board should review their purpose and monitor if they are achieving this through annual reporting of management and seek to take corrective action where they are not or amend the purpose through time if this changes.
NOVEMBER 2021 - MY ANSWER
Describe the advantages and disadvantages of a principles-based approach to corporate
governance by a country, compared to a rules-based approach.
5 mark question
Advantage of a principle based approach to CG are:
Companies can explain how they have applied the principal , provision or guidance setting out why they have done it in this manner which moves away from a tick box exercise.
Companies vary in size, structure and complexity and therefore one rule might not be suitable for all. Therefore a principal based approach lets companies decide how they can best apply the principal to their individual requirements.
Additionally, if a company is unable to comply with a principal, it gives an opportunity to explain and show investors (and other stakeholders) why they could not or choose not to apply / comply.
Rule based approaches mean that all companies are treated equally regardless of their size and complexity and this can be unfair depending on the company structure.
Critics of rules based approaches would argue that a rules based approach only works if enforcement is undertaken each time and the punishment (should have written sanctions) is equal.
NEVER ADDED AN INTRO DESCRIBING WHAT A PRINCIPLE BASED CODE WAS COMPARED TO A RULES BASED APPORACH AND EXAMPLES OF EACH. WOULD HAVE GOT RECOGNITION FOR DOING SO AND GIVING EXAMPLES.
NOVEMBER 2021 - MY ANSWER
Prepare a briefing note from the Company Secretary to the Chair explaining the
requirements in the Listing Rules and the UK Code about reporting on compliance with
the principles and provisions in the UK Code. Include a discussion of how Mealmix should
approach reporting on its non-compliance with two of the provisions in the UK Code.
9 mark question
Skelton answer as part of bigger question.
From Helen Co. Sec
To Bob - Chair of Mealmix
Briefing Note - Requirement of LR and UK CG Code
In response to your query, I have set out the LR requirements in connection to the principles and provisions of the UK Code. These are:
The listing rules require companies to include on their annual reports:
1) a statement of how the company has applied the Principles set out in the UK Corporate
Governance Code, in a manner that would enable shareholders to evaluate how the
principles have been applied.
2) a statement as to whether the listed company has:
a. complied throughout the accounting period with all relevant provisions set out in the UK
Corporate Governance Code; or
b. not complied throughout the accounting period with all relevant provisions set out in the UK
Corporate Governance Code and if so, setting out:
i. those provisions, if any it has not complied with;
ii. in the case of provisions whose requirements are of a continuing nature, the period
within which, if any, it did not comply with some or all of those provisions; and
iii. the company’s reasons for non-compliance.
The Code offers flexibility through its ‘comply or explain’ approach, which is designed to
encourage companies to develop governance processes and practices that are the most suitable
for their particular circumstances and to report them in a meaningful way.
This means that in the two provisions where were we have not been compliant with the UK CG Code, we are able to share, explain and offer clarity why we were not complaint and set out the reasons behind this non compliance.
The explanation for non-compliance should show that an alternative arrangement has been more appropriate and beneficial in upholding high standards of governance.
DIDN’T LINK IT BACK TO THE TWO REASONS OF NON COMPLIANCE!
JUNE 2021 - MY ANSWER
Explain how the enlightened shareholder value approach, in section 172 of the Companies Act
2006, attempts to reconcile the shareholder value and stakeholder approaches to corporate
governance.
5 marks
The shareholder value put the shareholder as the number one priority in business with the purpose of the business to make long term returns for the shareholder. The saying “the business of business is business” is linked to this approach.
The stakeholder approach means that the views and outcomes of each stakeholder group should be considered in each decision taken by the company.
The enlightened shareholder value approach attempts to align and reconcile the interests of the shareholder with the wider stakeholders.
With the introduction of the directors duties and powers s171-177 of the CA2006, section 172 moved the UK towards an enlightened shareholder value approach.
S172 of the CA 2006 advises the duty of a director to promote the success of the
company for the benefit of it’s members as a whole” and expands on this in the detail adding…
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have
regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term;
(b) the interests of the company’s employees;
(c) the need to foster the company’s business relationships with
suppliers, customers and others;
(d) the impact of the company’s operations on the community and
the environment;
(e) the desirability of the company maintaining a reputation for
high standards of business conduct; and
(f) the need to act fairly as between members of the company’.
However, once considered, a director may ultimately act in the interest of the shareholders and although they may have considered other stakeholders, may choose to put the interests of the shareholder above others.
NOVEMBER 2020 - MY ANSWER
Accountability and transparency are core principles of corporate governance. Explain why
transparency is one of the core principles and how it can aid accountability.
5 marks
NOVEMBER 2022 - MARKING SCHEME
Explain the differences between the governance of a company and the management of a
company.
5 mark question
Award up to five marks from the following:
Governance means ensuring that the business of a company is conducted properly (1),
whereas management means running the business. (1)
The governance of an organisation includes establishing its structures, policies and
procedures. (1)
Corporate governance can be defined as the system by which a company is directed and
controlled. (1)
The management of a company relates to how it operates its business and includes the
day-to-day operational management of the business. (1)
It is the Board of directors who are responsible for the governance of a company and they
cannot delegate that responsibility. (1)
The Board of directors normally include non-executive directors, who are not employees of
the company and so, although they are responsible for its governance, they do not
manage the company. (1)
In contrast, the management of a company is led by the executive directors and can be
delegated to a management team. (1)
Reward other valid responses
JUNE 2022 - MARKING SCHEME
The agency theory of corporate governance states that the agent and principal may have
conflicting interests. Explain these conflicting interests, using examples.
5 mark question
The agency theory of corporate governance is that an agent-principal relationship exists in
a company where there is a separation of ownership and control, with the shareholders
being the principal and the directors or managers being the agent. (1)
The director or manager (manager), as agent, is expected, to promote value for the
shareholders, as principal, above their own interests, but this gives rise to conflicts
because the managers (that is the agent) and the shareholders (that is the principal) can
have differing interests.(1)
Examples of these conflicting interests are:
- Shareholders are likely to be focusing on the long-term growth in the value of the
company, and on the value of their shareholding. In contrast, the managers may be
focused on their short term remuneration and may not stay with the company for
more than a few years. (1) - There is a moral hazard because a manager’s incentive to maximise the benefits
that come from their role is higher when they have no, or only a few, shares in the
company. (1) - Managers may work less hard than they would if they were the owners of the
company which could result in smaller profits for the company. (1) - The remuneration of managers is often related to the size of the company rather
than its profits. This gives managers an incentive to increase the size of the
company, rather than to increase the returns to the company’s shareholders. (1)
Reward other valid responses.
JUNE 2022 - MARKING SCHEME
Principle B of the UK Corporate Governance Code requires the Board of a company to establish
the company’s purpose. Explain why a company’s purpose is important.
5 mark question
Award up to 5 marks from the following:
A company’s purpose means the reason that it is in business. (1)
Everything a company does should stem from its organisation’s purpose because its
purpose sits at the top of its corporate governance framework. (1)
The company’s purpose should help the Board to make decisions about its strategic goals
and its consideration of risk. (1)
Setting out a company’s purpose helps to ensure that the company can focus its efforts on
being successful in the long-term, taking into account all of its stakeholders. (1)
It also helps to set the organisation’s governance framework of policies and procedures.
(1)
It gives clarity of purpose for the Board, management, employees and investors. (1)
The company’s culture needs to align with its purpose, as stated in Principle B of the UK
Corporate Governance Code. (1)
This is supported by Provision 2 of the Code which states that if the Board is not satisfied
that the company’s policy, practices or behaviours are not aligned with its purpose, it
should ensure that corrective action is taken by management. (1)
The UK Corporate Governance Code also states, in Principle P and Provision 40, that
executive remuneration should be aligned to the company’s purpose and values, and
should drive behaviours which are consistent with them. (1)
Reward other valid responses
NOVEMBER 2021 - MARKING SCHEME
Describe the advantages and disadvantages of a principles-based approach to corporate
governance by a country, compared to a rules-based approach.
5 mark question
Award up to 5 marks from the following:
A principles-based approach to corporate governance is where there is a
voluntary set of best practices, usually contained in a code of best practice,
for example in the UK the Corporate Governance Code. (1) (Note to Marker:
1 mark can be awarded even if specific example not mentioned)
In contrast, a rules-based approach to corporate governance consists of a
mandatory set of laws, regulations and standards, for example in the US the
Sarbanes-Oxley Act 2002. (1) (Note to Marker: 1 mark can be awarded
even if specific example not mentioned)
An advantage of the principles-based approach is that it is flexible. This
means that a company can decide to deviate from a particular provision if its
Board considers that the company’s circumstances mean that it is better for it
to do so. (1)
The principles-based approach therefore allows the Board of a
company to exercise judgement when applying the principles and therefore
arguably to better promote the long-term success of the company. (1)
In contrast, a rules-based approach is rigid and does not allow for any
adaptation or change in approach in order to cater for a company’s individual
circumstances. (1)
However, a disadvantage of the principles-based approach is that it cannot
be enforced in the same way as a rules-based approach, because there are
no sanctions or fines imposed for failing to follow the code or guidance.
(1)
This lack of enforcement means that the principles-based approach can
be criticised for failing to ensure that there is a minimum standard of good
governance and for not protecting shareholders and other stakeholders
sufficiently. (1)
In contrast, a rules-based approach can be accompanied by civil or criminal
sanctions for a failure to comply with the minimum governance standards that
have been imposed by that jurisdiction. (1)
Reward other valid responses.
NOVEMBER 2021 - MARKING SCHEME
Prepare a briefing note from the Company Secretary to the Chair explaining the
requirements in the Listing Rules and the UK Code about reporting on compliance with
the principles and provisions in the UK Code. Include a discussion of how Mealmix should
approach reporting on its non-compliance with two of the provisions in the UK Code.
9 mark question
Answers should demonstrate a good understanding of the Listing Rule reporting requirements
in relation to the UK Corporate Governance Code (UK Code) and of the requirements in the
UK Code about reporting, including in particular the requirements relating to explanations of
non-compliance with the UK Code, applying it to examples of non-compliance in the Mealmix
scenario.
Answers could include the following content
Answers should be set out as a memorandum from the Company Secretary of Mealmix,
Helen Tang, to the Chair of Mealmix, Bob Mayhew.
UK Corporate Governance Code and reporting against the Principles and Provisions
The UK Corporate Governance Code (UK Code) contains a set of Principles and supporting
Provisions. All companies to which the UK Code applies are expected to apply the Principles
and to “comply or explain” against the Provisions in the UK Code.
The Listing Rules (LR 9) require a UK incorporated company with a premium listing to include
in its annual report:
- A statement of how it has applied the Principles set out in the UK Code, in a way that
enables shareholders to evaluate how the principles have been applied. - A statement of whether it has complied throughout the accounting period with all of
the Provisions set out in the UK Code and, if it has not complied with them all, setting
out those provisions that it has not complied with and the company’s reasons for noncompliance.
The Introduction to the UK Code highlights that reporting on the application of the Principles
should put the application of the Principles in the context of the company’s particular
circumstances, including its purpose and strategy and how it has met its objectives and
achieved outcomes through the decisions it has taken. There should be signposting and
cross-referencing to those parts of the annual report that describe how the Principles have
been applied.
Explanations for non-compliance
In relation to the statement about compliance with the Provisions in the UK Code, the
Introduction to the UK Code says that companies should avoid a ‘tick box’ approach, in
particular in relation to explanations for non-compliance
The Introduction to the UK Code recognises that non-compliance with a Provision may be
justified in particular circumstances based on factors such as the company’s size, history and
ownership structure. It states that explanations should set out the background, provide a clear
rationale for the company’s action and explain the impact that the action has had.
In this particular case, there are two areas of non-compliance with the Provisions in the UK
Code which are referred to:
- In relation to the non-alignment of executive director pension contributions with the
workforce (which is a breach of Provision 38 of the UK Code), the explanation should
cover why this is the case for the current executive directors and say what steps the
company is taking or intends to take to align their pension provisions with the
workforce. For example, this could be a matter that will be dealt with fully in the new
remuneration policy which is currently being prepared, or there could be a phased
alignment over time. - In relation to the non-compliance with the requirements about the remuneration
committee and audit committee comprising three directors (which is a breach of
Provisions 24 and 32 of the UK Code), there needs to be an explanation of noncompliance for 3 months during the year even though the company was compliant
again by the year-end. It would be sufficient to explain that this was a temporary
issue, following the unexpected and sudden departure of one of the non-executive
directors, and that following the recruitment of a new director, these provisions are
now fully complied with.
JUNE 2021 - MARKING SCHEME
Explain how the enlightened shareholder value approach, in section 172 of the Companies Act
2006, attempts to reconcile the shareholder value and stakeholder approaches to corporate
governance.
5 marks
The shareholder value approach to corporate governance is the view that the
Board of directors of a company should govern the company in the best
interests of its shareholders (1)
The stakeholder value approach requires the Board of directors to have
regard to the views and interests of all of the company’s stakeholders,
including for example its employees and the local community, and not just its
shareholders. (1)
The enlightened shareholder value approach in section 172 of the
Companies Act 2006 combines these two approaches by imposing a duty on
directors to act in the way they consider would be most likely to promote the
success of the company for the benefit of its members/shareholders as a
whole and, when doing so, to have regard to the matters listed in that
section. (1)
The matters listed include the likely consequences of any
decision in the long-term and the impact of the decision on a range of
stakeholders, including for example employees, customers and the
community. (1)
The enlightened shareholder approach does not require the directors to act
for the benefit of any other stakeholders, or to balance the interests of
different stakeholders, but requires them to determine, having taken into
account those stakeholder interests, what action would best promote the
success of the company for the benefit of the shareholders as a whole. (1)
Reward other valid responses.
NOVEMBER 2020 - MARKING SCHEME
Accountability and transparency are core principles of corporate governance. Explain why
transparency is one of the core principles and how it can aid accountability.
5 marks
Award up to 5 marks from the following.
Transparency is a core principle of corporate governance because:
* Transparency is needed in order for shareholders to be able to assess a
company’s Board and how it operates. (1)
* Transparency and openness helps to create trust between the company
and its shareholders and other stakeholders. (1)
* Transparency can drive better behaviour by companies because they are
being judged by the behaviours that are disclosed. (1)
* Timely and accurate disclosure is needed in order for a fair market to
operate in the securities of traded companies. (1)
Transparency can aid accountability because:
* The provision of information can help stakeholders to hold companies to
account. (1)
* It requires companies to set out who is accountable for what so that
stakeholders are clear who should be held responsible. (1)
Reward other valid responses
