Regulatory frameworks Flashcards
Effective CG should ensure…
that the organisation is directed and controlled in a manner that meets the needs and expectations of its stakeholders
4 broad areas of risk
- risks that affect ability of org to continue as going concern
- risks to reputation
- risks that affect continuity of operations
- risks in relations to non-financial needs of stakeholders, such as H&S
2 key links between CG and risk
- Achievement of org’s objectives and those of stakeholders requires identifying and controlling risks
- Directing an organisation by setting objectives requires a strong understanding of risks (especially positive risks) of the operational environment which can be exploited
Which CG development was the key milestone from a risk-management perspective?
1999 Turnbull Report on internal control
1999 Turnbull Report on internal control eventually develop into…
the FRC’s Risk Guidance document (2014)
What does ‘comply or explain’ mean? UK CG
Principles can be adapted or not complied with by an org if there is reason to do so which they then must explain publicly
What is the ‘comply and sign’ approach? US CG
Organisations must comply to the letter of the rule, with no exceptions & accountable individuals are expected to personally sign off on CG effectiveness
5 key risk-management provisions from UK CG Code
- Board is responsible for managing principal risks and ensure sound risk-man and internal control systems, the effectiveness of which should be reviewed at least annually
- Non-execs should scrutinise management performance, including robustness of fin. controls and risk-man systems
- Audit committee or separate risk committee should be in place to support board work on internal control and risk-man
- Info on risks and risk-man and internal control systems should be provided in annual report
- Work on risk-man should include consideration of appetite for risk, embedding risk culture. Board should consider risks associated with strategic change and major initiatives
Who must adhere to UK CG Code?
PLCs with a premium listing on LSE
*other companies may choose to adhere in part or in full
What is the primary legislation for Irish companies?
The Companies Act 2014
CG requirements in Ireland (3)
- Main requirements are applied to companies listed on Irish Stock Exchange
- Listing rules of ISE are based on UK CG Code (comply or explain)
- Certain additional regulations, such as to describe the work carried out by audit or risk committees are laid out in Irish Corporate Governance Annex
Developing a common EU approach to CG is very challenging because of differences in governance practices, such as
The composition of boards (unitary boards vs two-tier boards)
EU’s action plan for CG reform - not much focussed directly on risk-man but there are some relevant issues: (3)
- Recruitment of independent directors to avoid conflicts of interest
- Enhanced disclosure requirements such as on risk-man policies
- Enhancing long-term sustainability by preventing excessive risk-taking in pursuit of short-term profits
How are EU governance requirements implemented?
Any regulations are adopted into relevant domestic frameworks, and therefore do not need to be complied with directly
G20/OECD principles on CG - 4 key risk-man principles:
- Ensuring shareholders with controlling interest do not force excessive risk-taking for short-term returns
- Prevention of unethical or illegal practices through whistleblowing controls
- Public disclosure to ensure stakeholders have information on foreseeable risks
- Board is responsible for overseeing an organisation’s internal control and risk-man systems, including reviewing these and creating committees
Relevance of G20/OECD principles
Principles are incorporated in domestic CG and risk-man regulations - such as in UK and Ireland
World Bank’s support and guidance on governance focusses on which sorts of countries?
Developing countries
World Bank’s work on governance focusses on two key areas:
- Promoting transparent and accurate financial reporting - to ensure stakeholders have reliable information
- Improving the governance of state-owned enterprises which are often providers of essential products and services
Which sorts of institutions often face additional, more prescriptive, governance regulations?
Financial institutions
3 countries (of more) whose own CG regulation is based on UK CG Code
- Republic of Ireland
- Kenya
- NIgeria
