Sample Paper FCs Flashcards
Examine the claim that corporate governance is converging. To support your answer, make reference to different types of board structures and national examples. (50)
HOW WOULD YOU STRUCTURE THE ANSWER?
- Explain concept of CG convergence
- Explain types of board structures referencing national examples
- Explain ways in which CG is converging
- Explain limitations to CG convergence
What is CG convergence?
Suggests that disparate systems across the globe may gradually evolve to adopt similar practices and standards, primarily due to globalisation.
Ways in which CG IS converging?
- Adoption of IFRS: Standardises financial reporting across boarders
- Increasing influence of Institutional Investors: As capital increases globally, so does II influence
Ways in which CG IS NOT converging?
- Cultural/ institutional resistance
- Differing economic/ political contexts
With reference to theory, explain how executive remuneration practices align with CG principles. (25)
HOW WOULD YOU STRUCTURE THE ANSWER?
- Explain Agency Theory approach to remun (alignment of interest)
- Explain Stkh Theory approach to remun (consideration of broader implications on shareholders)
- Explain Stew Theory approach to remun (remun = tool for recognising/ rewarding)
- Explain CG Principles related to pay
What CG Principles are related to Executive Remuneration?
- Transparency
- Accountability
- Proportionality/ fairness
Do executive pay practices truly reflect corporate performance? (25)
HOW WOULD YOU STRUCTURE THE ANSWER?
- Reflection of Corporate performance in Exec pay
- Stakeholder perception and economic conditions
- Limits of current pay practices
With an example, expand upon the reflection of corporate performance in executive pay:
Ideally, compensation should be closely tied to corporate performance.
Ex// Bob Dudley (BP): After Deepwater Horizon Spill, BP faced severe financial and reputational damage, yet the CEO’s pay still increased.
Example for stakeholder perception and economic conditions influencing executive pay?
Wells Fargo post financial crisis - Executive bonuses were scrutinised amidst widespread consumer fraud scandals.
What are some limits of current CG pay practices?
- Short Termism: Exec remun. emphasises short-term gains over long-term sustainability potentially enacouraging behaviours not in best interest of company.
- Complexity of metrics: Metrics used to determine performance-based pay can sometimes be opaque or overly complex.
Explain the concept of SH Value, its links to AT based CG, and how SH Value matters to CG (25).
HOW WOULD YOU STRUCTURE THE ANSWER?
- Explain SH Value
- Explain AT
- Why SH Value matters
Reasons why SH Value matters?
- Guiding principle
- Corporate decisions/ strategy
- SH relations
Reflect on alternative theoretical approaches to SH Value and AT and discuss why these are unlikely to replace current practices in CG (25)
HOW WOULD YOU STRUCTURE THE ANSWER?
- Explain alternative theoretical approaches
- Explain challenges to replacing SH Value/ AT
- Practical considerations with replacing
What are the alternative theoretical approaches to AT/ SH Value?
- Stakeholder Theory
- Stewardship Theory
- Institutional Theory
- Resource Dependence theory
What are some practical considerations that must be taken into account regarding the replacement of AT/ SH Value theory with alternative theories?
- Complexity of broader stakeholder engagement
- Measurement and accountability issues with broader stakeholder engagement
Discuss the role of the board and the different types of boards (12.5)
HOW WOULD YOU STRUCTURE THIS ANSWER?
- Roles of the board of directors
- Different types of boards
- Importance of Board Committees
Using examples, explain the composition and function of some committees (12.5)
HOW WOULD YOU STRUCTURE THE ANSWER?
For each committee explain its:
- Composition
- Function
- Give an example
What is the typical composition of an Audit Committee?
- 3-5 members
- All should be non-exec
- Majority independent
- Chair should have financial expertise
- At least one member background in accounting/ financial management
Audit committee example?
JP Morgan: Audit committee assists the board in its oversight of the integrity of financial statements etc.
Typical composition of the Compensation committee?
- Entirely independent directors
Compensation committee example?
Apple: Comp committee reviews, approves and recommends policies relating to compensation and benefits of company’s executives.
Typical composition of Nominations and Governance Committee?
- Mix of directors
- Majority independent
- Chosen based on their understanding of the company’s CG policies and ethical standards
Nominating and Governance Committee Example?
Google: Leadership development and Compensation Committee handles nomination process AS WELL AS compensation
Examine the relationship between ‘reform’ or changes to committees and corporate governance failures (25)
HOW WOULD YOU STRUCTURE THE ANSWER?
- Triggers for committee reform
- Types of committee reform
- Effectiveness and limitations of reforms
What are some types of potential committee reforms and their corresponding examples?
- Strengthening audit committee e.g. S-Oxley post Enron
- Enhancing compensation committee e.g. post financial crisis
- Broadening role of nominations and governance committee e.g. VW emmissions scandal
