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Corporate Governance and Ethics > Revision > Flashcards

Revision Flashcards

1
Q

What are the “inward-looking” responsibilities of the board?

A
  • Policy making

- Monitoring and supervising (e.g. budgets)

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2
Q

What are the “outward-looking” responsibilities of the board?

A
  • Accountability to shareholders (through the use of financial and non-financial reporting)
  • Strategic formulation
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3
Q

What is the shareholder theory?

A

The main purpose of a firm is to increase profitability, thus increasing shareholder value

Assumption that management are hired by shareholders to run the company of their benefit, and therefore are legally and morally obligated to serve their interests

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4
Q

What is the stakeholder theory?

A

That a company owes a responsibility to a wider group of people than just shareholders. The people affected by the actions of a business are its stakeholders.

Stakeholders include:
- Employees, customers, competitors, community etc.

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5
Q

Starbucks and Google UK Tax affairs

CSR

A

Although the measures adopted by the companies are legal, they are widely unethical because they utilise loopholes in the British tax system to pay less corporation tax in the UK

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6
Q

What is a dual (two-tier) board?

A

Two boards

  • Executive board of management
  • Supervisory board (employees are represented on this board)

In Germany, listed companies follow the two-tier board system

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7
Q

What are the benefits of a two-tier board system?

A

Allows employees to be more involved in decision making

The supervisory board is independent as one a maximum of two members of the executive board are allowed

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8
Q

What are the disadvantages of a two-tier board system?

A

Employee representation on the board can lead to employees holding back decisions that benefit the business as a whole, e.g. closing operations that are not profitable but means employees will lose their jobs

Also, the supervisory board may lack information to carry out its functions, they aren’t as knowledgeable about the firm as the executive board

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9
Q

What are the disadvantages of the stakeholder theory?

A
  • Only really focuses on short-term strategy
  • Encourages greater risk taking
  • The collapse of corporate firms such as Enron, Worldcom came from continuous pressure on management to increase returns to shareholders leading them to manipulate the company accounts
  • Seen as a historic way of doing business due to the disadvantages
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10
Q

What is a hybrid system of governance?

A

We use it in the UK

A combination of law (e.g. the Companies Act 2006) and regulation (e.g. The UK Corporate Governance Code 2014)

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11
Q

What are the advantages of a rule-based approach?

A
  • All companies are required to meet the same minimum standard of corporate governance
  • Companies do not have the choice of ignoring the rules
  • Improved investors confidence in the stock market, since all companies are required to comply with recognised rules of governance
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12
Q

What are the disadvantages of a rule-based approach?

A
  • Rules cannot keep up with developments and emerging initiatives
  • Can result in a ‘box-ticking’ exercise, focusing on the letter and not the spirit of the rules
  • The rule book can not cover everything, leaving gaps that could potentially be exploited
  • Since each state has their own company law, federal laws may be harder to pass since they require certainty amongst all of the states
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13
Q

What are the advantages of a principle-based system?

A
  • More flexible, allows for different circumstances
  • The Code can be updated to respond to changing conditions and expectations of shareholders
  • Allows companies to go beyond the minimum requirement
  • Directors report on the actual circumstances of their own business, rather than one based on specific requirements, should be more meaningful and useful
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14
Q

What are the disadvantages of the principle-based system?

A
  • The principles are so broad that they are of very little use as a guide
  • May be difficult for the directors to see whether they have met the specific requirements of the code
  • Not as easy to comply with as the rules-based, as they are ambiguous (can’t be evidenced)
  • Tends to result in general, meaningless statements
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15
Q

Who provides a federal oversight of corporate firms in the USA?

A

The Securities Exchange Commission (SEC)

As each state has their own company law

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16
Q

What are key points as to why shareholders can be seen as vulnerable?

A
  • Agency problem
    However, corporate governance rules and regulations are in place to ensure that shareholders can receive at least one financial annual report
  • Asymmetry of information
    The shareholder is at a disadvantage because the agent will have more information
17
Q

Explain the concept of the “race to the bottom”

A
  • Countries are undermining each other to make themselves look better
  • By reducing tax rates, it means that more companies will set up in their country
  • Overall, it is not a good scenario

Convergence of corporate governance can help to prevent this
However, the OECD says that convergence does not work, as all countries cannot have the same rules and regulations

18
Q

Explain the concept of “harmonisation” when talking about the issue of the “race to the bottom”

A

Harmonisation is the process of creating common standards across the internal market, so all countries have the same standards to aim for

Harmonisation is more likely than convergence

The EU proposed that all listed companies need to have a two-tier system, but the UK didn’t comply - this is an attempt at convergence
However, we now have Societas Europa which allows countries to choose to have a one-tier or a two-tier system - this is an example of harmonisation

19
Q

What are the advantages of utilitarian ethics?

A
  • Based on the principle of maximising happiness and minimising pain
  • Benefits the majority of people
  • Fair, since its basic principles are widely accepted
  • The consequentialism element is good as it means we weigh up the consequences of our actions before we take them
20
Q

What are the disadvantages of utilitarian ethics?

A
  • Ignores the importance of your duty - the dying millionaire example
  • The approach depends on predicting the outcome of your actions, which can’t always be determined
21
Q

What are the advantages of deontological ethics?

A
  • Provides guidelines for making moral decisions
  • Based on good intentions, a moral motive
  • An unforeseen good consequence can not be justified by an immoral action
22
Q

What are the disadvantages of deontological ethics?

A
  • In reality, our decision making it influenced by the consequences of our actions
  • Good will/motives could end in disastrous outcomes

Corporate Governance and Ethics (2 decks)

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