Test your knowledge - Part 1 Flashcards
- Provide a definition of corporate governance and explain the four general principles
A definition of corporate governance and the four general principles:
The system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
The four general principles are: , Fairness, Accountability, Responsibility and Transparency.
- Explain what is meant by agency theory.
Agency Theory:
A theory (developed by Jensen & Meckling, 1976) that concerns the separation of ownership and control between owners and managers and the conflicts that arise given the differences between their interests. As managers, directors act as agents for the shareholders (principals).
Agency conflicts and agency costs arise because of these differences. The intention, through an “agency contract” is to align the interests of owners and managers.
- Provide a definition of ‘stakeholder’.
A stakeholder is any group or individual who can affect or be affected by the achievement of the organisation’s objectives.
- Briefly explain the different theoretical shareholder/stakeholder frameworks (approaches) to corporate governance. Which one(s) best represent the approach in the UK?
The different theoretical shareholder/stakeholder frameworks (approaches) to corporate governance. are:
- Shareholder value approach – govern the company in the best interests of its owners.
- Stakeholder approach (or pluralist approach) – striking a balance between economic and social goals, by meeting the objectives of the shareholders but having regard to the interests of others (including the public at large)
- Enlightened shareholder approach – pursue interests of shareholders in an enlightened and inclusive in the form of a compromise between shareholder (agency) and stakeholder approaches. The shareholder is still key, but other stakeholders should be considered.
- Integrated approach – stakeholder inclusive where the interests, needs and expectations of all material stakeholders are considered. No one stakeholder is more important than another.
Which one(s) best represent the approach in the UK is:
In the UK, it could be argued that shareholder value had been the most representative of the approach taken historically, with the trend moving towards stakeholder approach.
On the introduction of the Companies Act 2006, and specifically section 172 setting out the directors’ duty to ‘promote the success of the company ….. having regard to other factors’ (which includes other stakeholders), the enlightened share holder approach is now more representative.
- What are the main differences between corporate governance approaches in the UK, USA and South Africa?
The main differences between corporate governance approaches in the UK, USA and South Africa is that:
In the UK and South Africa the corporate governance codes are voluntary and are based on a “comply or explain” and “apply and explain” approach respectively. In the US, the approach to corporate governance is under the Sarbanes Oxley Act 2002 which is rules based and a legal requirement.
In terms of frameworks, corporate governance in the UK takes the enlightened stakeholder approach whereas in South Africa the King Code IV is based on the integrated approach.
- What are the five sections of the UK Corporate Governance Code 2018?
- Board Leadership and Company Purpose (A - E)
- Division of Responsibilities (F - I)
- Composition, Succession and Evaluation (J - L)
- Audit, Risk and Internal Control (M - O)
- Remuneration (P - R)
- What advantages can the adoption of good governance practices lead to?
There is much evidence that well-governed organisations perform better, showing that the adoption of good governance practices lead to:
- long-term sustainability
- improved access to external financing
- lower cost of capital
- improved operations performance
- increased firm valuation and share performance
- reduced risk of corporate crisis and scandals
- effective decision making
- improved oversight, monitoring and evaluation
- succession planning
- ethical behaviour
- List the main issues in corporate governance where a conflict of interest might arise.
The main issues in corporate governance where a conflict of interest might arise:
- Financial reporting and auditing
- Remuneration of directors and senior executives
- Company and stakeholder relations
- Risk taking and the management of risk
- Effective communication between directors and shareholders
- Ethical conduct and Corporate Social Responsibility (CSR)
The above were the main areas of conflict cited in the ICSA’s suggested answer to Q2(a) of the November 2018 examination:
“Discuss the key issues in corporate governance where a conflict of ownership and control might be apparent. (15 marks)”
So, if you listed the main issues – great start! Could you discuss them?
- List the main consequences of weak governance practices.
Consequences can include:
- Failing companies (as reflected in many of the corporate scandals of recent years)
- Reputational problems through unethical business practices
- Excessive regulation in response to scandals
- Lack of investment in capital markets
- Development of shareholder representative bodies which monitor the corporate governance practices of the companies they invest in and shareholder activism
- Focus on regulating and disclosing senior executive pay
- Establishment of powerful regulators (e.g. US SEC)
- Which section of the Companies Act 2006 links directly to the stakeholder approach of corporate governance and why?
The section of the Companies Act 2006 that is linked directly to the stakeholder approach of corporate governance is
Section 172 in which directors have a duty to “promote the success of the company for the benefit of its members as a whole and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.”
- In addition to the UK Corporate Governance Code and the Companies Act 2006, name three other rules/regulations that listed companies in the UK are required to follow.
- Prospectus Rules
- UK Listing Rules
- Disclosure Guidance and Transparency Rules
- Market Abuse Regulation
- What does the FRC Guidance on Board Effectiveness state, in general, as the role of the company secretary?
The FRC Guidance on Board Effectiveness states, in general, the role of the company secretary:
Paragraph 79 states that the company secretary is responsible for
- ensuring that board procedures are complied with;
- advising the board on all governance matters;
- supporting the chair; and
- helping the board and its committees to function efficiently.
- What is the meaning of ‘the conscience of the company’?
The company secretary can be described as ‘the conscience of the company’ in the context of business ethics and corporate governance. Acting in accordance with conscience means acting in a way that seems ethical.
In order to do so, the company secretary must be independent-minded and should not be under the influence of any other individual such as the company chairman or CEO.
- What are the three main areas of responsibility of the company secretary in corporate governance according to ICSA Guidance?
- Specific responsibilities derived from the UK Code
(board composition and procedures; board information, development and relationships; accountability). - Responsibilities relating to statutory and regulatory compliance
(directors’ duties; share dealing; protection of inside information; verification of published information; responsible release of market information; compliance under continuing obligations under Listing Rules and DTR). - Corporate responsibilities
(ensuring the board are aware of institutional investors’ guidelines and disclosure principles).
- Name and explain the principles and provisions within the UK Corporate Governance Code 2018 that refer to the company secretary.
The UK CG codes that refer to a company secretary:
Principle I. The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently
Provision 16. All directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters. Both the appointment and removal of the company secretary should be a matter for the whole board.
Provision 17. The board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management* positions, and oversee the development of a diverse pipeline for succession[…]
- The definition of ‘senior management’ for this purpose should be the executive committee or the first layer of management below board level, including the company secretary
