Regulatory frameworks Flashcards
What is corporate governance?
What is one link between risk-management practices and corporate governance regulation?
Explain this idea. (2)
In summary, explain how risk-management can be used to support the control of organisations.
Explain how risk-management can be used to support the direction of organisations.
The system by which companies are directed and controlled
= to identify and control the sources of risk that may either support or threaten the establishment and achievement of an organisation’s objectives
(1) A well-governed organisation should take all reasonable steps to ensure it achieves its objectives = RM supports these activities with tools and techniques to identify, assess, monitor, and ultimately control the risks to these objectives (e.g., risks that affect going concerns, reputation, operations, H&S)
(2) Good governance should effectively manage, NOT eliminate risk = the effects of risk can never be eliminated, organisations need to build both resilience and agility in all their activities to respond to changes in circumstances or deal with consequences of unforeseen events
Controlled = effective RM should help organisation achieve its strategic objectives
Directed = effective RM can help organisations make better strategic decisions = RM helps organisation understand the environment it operates in e.g., the risks its exposed to, their significance, and ability to manage these = ensures opportunities relating to risks are exploited without threatening financial viability
Why was the 1992 Cadbury Report commissioned?
Name 3 recommendations included in the 1992 Cadbury Report principles.
What guidance did the 1999 Turnbull Report produce to ensure what?
What is the latest UK corporate governance code?
As a response to growing concerns about the standards of financial reporting and board/SM accountability for various governance and RM scandals
- CEO and chair roles should be separate
- Boards should have at least 3 NEDs
- Each board should have an audit committee made up of NEDs
Guidance on internal control to ensure financial and fraud controls were properly considered by boards
2018 UK Corporate Governance Code
What is the ‘comply or explain’ approach to corporate governance?
Why is a company required to explain non-compliance?
What are the 3 advantages?
What are the 3 disadvantages?
= organisations are asked to comply with a voluntary principles-based code of best practice AND the company must explain to shareholders why it has not if it thinks it’s not in its best interests to
Ensures stakeholders are kept informed of the organisation’s governance arrangements and the reasons why these arrangements may not follow precisely the guidance in the code
Advantages:
1. Allows degree of flexibility when deciding how to implement specific regulations (reduced unnecessary compliance costs)
2. Recognises that a Single set of rules may not be appropriate for all organisations (differ in size, structure, complexity, stakeholder needs, strategic objectives etc.)
3. Makes the board and SM responsible for deciding how to comply = facilitate creativity and move away from ‘tick box’ CG and risk-management
Disadvantages:
(1) Allows avoidance with specific regulations to the detriment of stakeholders
(2) It’s not legally enforceable by criminal or civil sanction = only works where stakeholders have necessary skills and authority to assess compliance and enforce change when needed
(3) Creates uncertainty = hard to decide not to comply when it is unsure how stakeholders will react
What is the ‘comply and sign’ approach to corporate governance?
What are the 2 advantages?
What is the disadvantage?
= organisations must comply strictly to the rules with no exceptions AND accountable individuals (usually the board) must personally sign off the effectiveness of organisations’ governance arrangements
Advantages:
1. Ensures maximum compliance = if organisation found not to have effective governance they can face fines and/or imprisonment
2. Works well where there is agreed best practice or where organisations are very similar in terms of their nature, scale, and complexity
Disadvantage:
(1) Rigid and not flexible
What are the 5 key risk-management regulations in the UK Corporate Governance Code?
What are principal risks?
- Boards are responsible for identifying, assessing, and controlling the principal risks to which an organisation is exposed
- Boards, in particular the NEDs, are responsible for ensuring that effective RM and IC systems are in place = regular monitoring and annual formal review of effectiveness
- A board audit committee or a separate board risk committee should normally be in place
- Information on the organisation’s principal risks and the soundness of its RM and IC systems should be provided in the annual report
- The board’s work on RM should include consideration of the organisation’s appetite for risk, as well as embedding the desired risk culture
Principal risks = large-scale risks to achievement of strategic objectives that may threaten business model, future performance, solvency, and liquidity
IRISH REGULATIONS
What is the main piece of company law in Ireland and what did it do?
Name an example.
What are the 2 corporate governance regulations in Ireland?
Smaller companies listed on the Enterprise Securities Market may comply with what?
The Companies Act 2014 = helped bring Irish company law up to date and set out new legal structure for CG
Act requires companies (on a comply or explain basis) to adopt appropriate compliance measures and to prepare a statement of compliance with company and tax law in annual financial statements
- Irish Stock Exchange Act 1995 = listing rules of Irish Stock Exchange (based on UK CG Code)
- Irish Corporate Governance Annex = additional CG regulation for listed companies
The UK CG Code and related Irish CG Annex, or the Quoted Companies Alliance CG Code
EU REGULATIONS
Why is developing a common EU approach to corporate governance and risk-management challenging?
Why is developing a degree of consistency across the EU necessary?
The EU has been following an action plan for corporate governance reform since 2003 (updated in 2012). What 3 things does this focus on?
What approach has been adopted?
Why is there no need for organisations to comply directly with the governance requirements set by the EU?
Governance practices vary considerably = UK has single unitary board structure, Germany has dual board-structure with 2 tiers (management board that reports to supervisory board)
To facilitate the operation of the single market and meet other objectives like the protection of human rights and H&S
- Recruitment of independent directors
- Enhanced disclosure requirements, includes disclosure of RM policies
- Enhancing long-term sustainability of organisations by preventing excessive risk-taking in the pursuit of short-term profits
Comply or explain approach
Any EU regulations are adopted into the relevant domestic frameworks for CG and RM
OECD PRINCIPLES OF CORPORATE GOVERNANCE
What do the G20/Organisation for Economic Co-operation and Development (OECD) 2015 Principles of Corporate Governance provide?
From a risk-management perspective, what are the 4 key principles?
For UK&I these principles are incorporated where?
An OECD peer-review report on risk-management and corporate governance was published in 2014. What were the 2 findings?
a worldwide benchmark for good CG practice and assessments of this practice
- Ensuring that shareholders with a controlling interest do not force excessive risk taking to generate short-term returns
- Preventing unethical or illegal practices through whistleblowing controls
- Public disclosure to ensure stakeholders have info on all reasonably foreseeable material risks
- The board is responsible for overseeing IC and RM systems = review RM policies and procedures and create audit/risk committee
In domestic CG and RM regulations
(1) in general RM requirements are too focused on financial risk controls and should cover a broader range of risks to an organisation’s objectives
(2) risk-governance standards in many countries are too high level and should follow more detailed provisions for financial institutions
Why do organisations such as the EU and OECD need to provide regulations on corporate governance and risk-management? (2)
- As markets, organisations, and their stakeholders become globalised, there is a need to ensure consistent CG arrangements around the world
(Otherwise creates an uneven playing field e.g., Global financial crisis 2007-08)
- Effective CG and related RM regulations help to raise the quality of management in organisations = supports global value creation and stakeholder equality
WORLD BANK CORPORATE GOVERNANCE GROUP
What does the World Bank do?
What are the 2 key areas the World Bank’s work on corporate governance focuses on?
Provides financial and technical assistance to developing countries around the world on CG and RM = advice and consultancy, training and learning programmes (helped implement Kenyan CG Code through training to directors)
- Promoting transparent and accurate financial reporting = ensure stakeholders have reliable information to assess the organisation and make business/investment decisions
- Improving the governance of state-owned enterprises, who are often providers of essential products and services to local communities and businesses = ensure state-owned enterprises are accountable for quality of products and services they provide and are free from corruption
CORPORATE GOVERNANCE REGULATIONS IN OTHER NATIONS - THE CHANNEL ISLANDS
The UK Corporate Governance Code is a cornerstone of corporate governance regulation and has influenced codes in many countries.
What are the corporate governance regulations in the Channel Islands?
Company law in the Channel Islands is generally based on what?
Who oversees corporate governance regulations?
Commercial organisations that are subsidiaries of parent companies in the UK, elsewhere in Europe or internationally must comply with some or all of the relevant regulations in the home state of their parent company. What does this mean?
Additional governance regulations exist for which type of institutions?
There are no generally applicable CG regulations in the Channel Islands beyond the general fiduciary duties of directors that exist in company law and for directors to perform these duties with due care, skill and diligence
Company law in England and Wales
= the respective Jersey and Guernsey Financial Services Commission
Many Channel Island companies will take steps to comply with elements of UK CG Code or QCA code (for small to medium-sized)
Financial instructions that are often more prescriptive = regulations are closely aligned to the EU and related UK CG requirements for financial institutions
CORPORATE GOVERNANCE REGULATIONS IN OTHER NATIONS - UNITED ARAB EMIRATES
Corporate governance regulations in the United Arab Emirates focus on what type of entities?
What approach to corporate governance has been adopted?
Name 3 topics that corporate governance covers.
Name 2 requirements.
Additional governance regulations exist for which type of institutions?
Focus on listed companies
Rules based CG = significant fines for breach
(1) board composition (2) board committees (3) remuneration and audit
(1) Companies must have social responsibility policies on protecting the local community and the environment
(2) Must appoint a Compliance officer
Financial institutions
CORPORATE GOVERNANCE REGULATIONS IN OTHER NATIONS - KENYA
Corporate governance regulations in Kenya focus on what type of entities?
What approach to corporate governance has been adopted?
Name a mandatory requirement.
Focus on listed companies
The Kenyan Code on CG includes rules AND guidance on an apply or explain basis
Board must establish audit committee and internal audit function
CORPORATE GOVERNANCE REGULATIONS IN OTHER NATIONS - NIGERIA
Corporate governance regulations in Nigeria focus on what type of entities?
What approach to corporate governance has been adopted? (2)
Name a requirement of the Nigerian Securities and Exchange Commission Code of Corporate Governance.
Focus on public companies
(1) Voluntary CG Code on comply or explain basis
(2) There are other codes for specific industries = Central Bank of Nigeria Code of Governance for Banks is rules based
= the board is responsible for implementing and monitoring the RM process and for embedding it into day-to-day operations
CORPORATE GOVERNANCE REGULATIONS IN OTHER NATIONS - RUSSIAN FEDERATION
Corporate governance regulations in the Russian Federation focus on what type of entities?
What approach to corporate governance has been adopted?
Name 3 topics covered.
Name a requirement.
Focus on public joint stock companies
No specific regulation on GG, BUT is a voluntary CG Code
(1) shareholder rights, (2) role of cosec, (3) disclosure of information
Companies need to maintain effective RM and IC control systems and review the effectiveness of these systems
