Topic 3- Corporate Governance Flashcards
what is corporate governance
Corporate Governance is about ensuring that companies are run well in the interests of their shareholders and the wider community. The need for this arose due to high profile collapses of companies
Good CG is particularly important for publicly traded companies
maintaining satisfactory standards of CG is the responsibility of those operating the company
Corporate Governance is the system by which companies are directed and controlled through boards of directors which establish corporate aims, provide leadership, supervise management and report to shareholders.
what are the two aims of good corporate governance
The aim of good corporate governance should be to ensure that an organisation is governed in a way that will ensure that its overall objectives are most likely to be achieved.
▪ Maximisation of shareholder wealth –shareholder value/agency model
▪ Stakeholder model
what is the corporate governance structure
1) Segregation of CEO & Chairman role
2) Committees ▪ Risk ▪ Remuneration ▪ Nomination ▪ Audit
3) Internal audit
those charged with corporate governance are responsible for seeing what?
▪ the strategic direction of the entity (reviewing and guiding corporate strategy
▪ promote long term sustainable success
▪ directors should lead by example
▪ obligations related to the accountability of the entity. This includes overseeing the financial reporting process.
▪ promotion of good corporate governance
▪ risk assessment processes
▪ the establishment and monitoring of internal controls
▪ compliance with applicable law and regulations
▪ implementation of controls to prevent and detect fraud and errors.
what 3 things does an effective board have
▪ Appointments to the board should be made in a formal, rigorous and transparent manner
▪ All directors should allocate sufficient time to the company to discharge their duties effectively
▪ The board and committees should have the appropriate balance of skills, independence and knowledge in order to discharge their duties effectively
what should a committee be made up of
Each committee should have its own term of reference and be made up of independent non-executive directors. Although the board delegates its authority to the committee, it retains responsibility. The committee would make recommendations to the board appropriate to its responsibilities.
what is risk committee
Responsible with the job of monitoring risk management processes (especially the non-financial risks), and ensuring risk strategy is successfully embedded throughout the company.
Companies must address the risk issues and:
- Identify the risks faced e.g. operational, financial, legal
- May maintain a risk ledger
- Assess the relative importance of each risk
- Sometimes accept the risk as an inevitable part of it’s operations
what is Remuneration committee
Determine remunerations policy on behalf of the board and the shareholders.
Ensure that each director is fairly but responsibly rewarded for their individual contribution.
what is nominations committee
Suggests suitable board members and senior posts.
Selecting the right person for the job, not on who they know.
what are the key responsibilities of the board?
and here, what does the term board mean
▪ Reviewing and guiding corporate strategy
▪ Monitoring the effectiveness of the company’s governance practises and making changes as needed
▪ selecting, compensating, monitoring and when necessary replacing key executives
▪ Aligning key executive and board remuneration
▪ Monitoring and managing potential conflicts of interest of management, board members and shareholders
▪ Ensuring the integrity of the corporation’s accounting and financial reporting systems, overseeing the process of disclosure and communications
Board: primary mean the supervisory board in a 2 tier board arrangement or the non-executive directors and relevant sub committees in a unitary board structure
what is the audit committee made up of
minimum of 3 NED
1 with financial experience
at least one member in the audit team should have what skills
recent relevant financial experience
what is the objective of Audit committee
3 things
Increase public confidence in the credibility and objectivity of the information
Supporting the directors in meeting their responsibilities in respect of financial reporting
liaise with external auditors
who should not be a member of the audit committee
.The chair
what is the function of an audit committee
▪ Monitoring/Review the integrity of the financial statements (by reviewing)
▪ monitor (review) the effectiveness of the internal financial control systems
▪ monitor and reviewing the the internal audit department
▪ recommendations/Appointment/removal of the external audit. The AC will make these recommendations to the board.
▪ Reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process
▪ They also look at the fees, terms of the engagement and length of the engagement
▪ oversee the Whistleblowing policy- These are arrangements for confidential reporting by employees and investigation of possible improprieties.
Act as the body that can be reported to for suspected fraud/ law and regulation breaches in confidential
in relation to the internal audit, what are the responsibilities of the audit committee
▪ Ensure IA has direct access to the board chair and to the audit committee
▪ Review and assess the annual internal audit work plan
▪ Receive reports on the results of internal audit work
▪ If no IA function in place, review the need for one annually
All companies face risks of many kinds,
companies must address the risk issues and do what?
▪ Identify the risks faced (e.g. operational, financial, legal)
▪ May maintain a risk register
▪ Assess the relative importance of each risk
▪ Sometimes accept the risk a an inevitable part of it’s operations
what are the advantages of having an audit committee
▪ It will help to improve the quality of the financial reporting of the company; the audit committee will assist by reviewing the financial statements and explaining to non-financial directors.
▪ The establishment of an audit committee can help to improve the internal control environment of the company. The audit committee is able to devote more time and attention to areas such as internal controls.
▪ The finance director will benefit in that he will be able to raise concerns and discuss accounting issues with the audit committee.
▪ The audit committee will be responsible for appointing (Monitoring & making recommendations) the external auditors and this will strengthen the auditors’ independence and contribute to a channel of communication and forum of issues.
▪ If the company has an internal audit (IA) department, then establishing an audit committee will also improve the independence of IA.
▪ The audit committee can also provide advice on risk management to the executive directors. They can create a climate of discipline and control and reduce the opportunity for fraud, and increase the public confidence in the credibility and objectivity of the financial statements.
▪ The appointment of an audit committee with one non-executive director on the board will start to provide some non-executive input to board meetings, and an increase in skill set on the board.
what are the dis-advantages of having an audit committee
▪ Establishing an audit committee may indicate that the directors are not trusted and will unsettle the directors as the directors may think the purpose is to catch the management out.
▪ Costs incurred in setting up an audit committee, would this be a beneficial cost to the company.
▪ Information overload, therefore potentially distracting the directors to the key risks of the business.
▪ There may be difficulty in selecting experienced non-executive directors for the role
from start to finish, list 4 parts of the audit process
1) Engagement letter- Terms of engagement/Basis fee
2) planning letter- Plan of action/Timetable/audit strategy
3) report to management- if there are weaknesses this will be communicated to the audit committee
4) Audit report- disclosure of the audit opinion/material misstatements will be communicated to the audit committee
