Reading 31: Introduction to Corporate Governance and Other ESG Considerations

Question 1

Define corporate governance.

Answer 1

The system of internal controls and procedures through which individual companies are managed. It aims to minimize and manage conflicts of interest between those within the company and stakeholders.

Question 2

Explain the role of the audit committee.

Answer 2

Review information technology.

Evaluate policies and procedures.

Supervise the internal audit group.

Appoint and evaluate the findings from the external auditors.

Perform other necessary processes and procedures.

Question 3

Identify the benefits of effective governance.

Answer 3

Operational efficiency

Improved control

Better operating and financial performance

Lower default risk and cost of debt

Question 4

List the 7 primary stakeholder groups within a corporation.

Answer 4

1. Shareholders
2. Creditors
3. Employees (managers, executives, other)
4. Board of directors
5. Customers
6. Suppliers
7. Governments/regulators

Question 5

Name the 6 key areas of interest when analyzing a company’s corporate governance structure.

Answer 5

1. Economic ownership and voting control
2. Board of director’s representation
3. Remuneration and company performance
4. Investors in the company
5. Strength of shareholders’ rights
6. Managing long-term risks

Question 6

List the 5 methods used in the implementation of ESG mandates.

Answer 6

1. Negative screening
2. Positive screening and best-in-class
3. ESG integration/incorporation
4. Thematic investing
5. Impact investing

Question 7

Explain the role of the board of directors.

Answer 7

The board of directors acts in the best interest of the shareholders who elect them. They oversee the operations through monitoring the company and management performance while providing strategic direction.

Question 8

Describe the warning signs that can present when evaluating a company’s remuneration.

Answer 8

The lack of equity incentives to align with shareholders

Little variation in results over multiple years due to inadequate hurdles

Excessive payouts relative to comparable companies with comparable results

Strategic implications of incentives that may not be appropriate

Plans that have not changed with the company’s life cycle change