P1 Corporate Governance A6-A9

Question	Answer
Rules-based system Advantages	• Clarity • Standardisation • Penalties are a deterrent against bad CG • Easier compliance with the rules, as they are unambiguous, and can be evidenced
Rules-based system DisAdvantages	• Can create just a "box-ticking" approach • Not suitable to all possible situations. • Creates unnecessary administration burden on some companies • One size does not necessarily fit all. • Expensive
Principles-based system Advantages	• Not so rigid, allows for different circumstances. • Allows companies to go beyond the minimum required. • Less of an admin burden. • Can develop own specific CG and Internal controls (For example physical controls over cash will be vital to some businesses and less relevant or not applicable to others.
Principles-based system DisAdvantages	• The principles are so broad that they are of very little use as a guide to best corporate government practice • Not easier compliance as with the rules, as they are ambiguous, and can not be evidenced
SMEs Differences to a listed company	• Often Family owned • Often no separation between management and owners • Little differences between owner and director objectives • Smaller number of shareholders - who are often in contact with the company - so conflict less likely
How a listed company is different form SMEs	• Objectives of shareholders and directors may be different • Asymmetry of information • Shareholders get less info than directors, making monitoring harder • A separation between ownership and control • Shareholders and directors are different people
Reasons for demand of CG	• Increasing internationalisation and globalisation • Differential treatment of domestic and foreign investors • Issues around financial reporting • The different characteristics amongst different countries • High profile corporate scandals
Features/Conditions of SOX	• Companies sign certificate stating accuracy of financial statements • If accounts are re-stated due to non-compliance with standards - CEO forgoes previous 12month bonus • Non- audit work restrictions on auditors • Senior audit partner changed every 5 years • Directors cannot sell shares at “sensitive times”
Effects of SOX	• Personal liability for directors • Improved investor confidence • Improved internal control • Improved use of audit committees • Increased costs • Reduced responsiveness of companies • Reduced risk taking
Enlightened Self Interest	By looking after society also, society will respond and look after your company
Carroll’s view on CSR	Economic • Economic responsibilty towards shareholders, employees etc -eg Maximise EPS, be consistently profitable • Eg. • Shareholders demand a good return • Employees want fair employment • Customers seek good quality products Legal • Legal responsibility to operate within the laws of society e.g.. Health and safety • Laws codify society's moral views Ethical • Ethical responsibility to act fairly e.g..Do not put profits before ethical norms Philanthropic • Philanthropic responsibility to give to charities, sponsor art events etc
Social responsiveness of a company	• Reaction (deny all responsibility to society) • Defence (Accept responsibility but do the minimum) • Accommodation (Do what is demanded of them) • Proaction (Go beyond the norm)
Why prepare a social report?	• Build their reputation on it (eg body shop) • Society expects it (Shell) • Long term it will increase profits • Fear that governments may force it otherwise
How companies interact responsibly with society	• Provide fair pay to employees • Safe working environment • Improvements to physical infrastructure in which it operates
Human Capital Management reports should:	• Show size of workforce • Retention rates • Skills needed for success • Training • Remuneration levels • Succession planning
Ownership and property generally have four elements:	• O has the right to use P as he wishes • O has the right to regulate anyone else’s use of P • O has the right to transfer rights to P on whatever terms he wishes • O is responsible for ensuring P does not harm others
Shareholders have the following rights: with regards to ownership of share	• The shareholder owns a right to participate in the risks and rewards of ownership but only to a limited degree • To sell their stock • To vote • To obtain certain information about the company • To sue for misconduct • Residual rights in the case of liquidation.
AGM Purpose:	• Present the year’s results • Discuss the outlook for the coming year • Present the audited accounts and • To have the final dividend and directors’ emoluments approved by shareholders.
Reasons for EGM	Management may want: • a shareholder mandate for a particular strategic move, such as for a merger or acquisition. • Other major issues that might threaten shareholder value may also lead to an EGM such as a ‘whistleblower’ disclosing information that might undermine shareholders’ confidence in the board of directors • They also occur for many irregular events for special issues such as takeovers • The issue is basically too serious to wait for the next AGM
Disclosure requirements Information about the board of directors:	• the composition of the board in the year, • information about the independence of the non-executives, • frequency of, and attendance at, board meetings, • how the board's performance has been evaluated.
Disclosure requirements Brief reports on:	• the remuneration • audit risk • nomination committees • composition and frequency of meetings
Disclosure requirements Further discloures	• An explanation of directors’ and auditors’ responsibilities in relation to the accounts • Information about relations with auditors including reasons for change and steps taken to ensure auditor objectivity and independence when non-audit services have been provided • A statement that the directors have reviewed the effectiveness of internal controls, including risk management • A statement that the company is a going concern
Three E's Of Public sector	• Economy represents value for money and delivering the required service on budget, on time and within other resource constraints. • Efficiency An efficient organisation delivers more for a given level of resource input than an inefficient one. • Effectiveness describes the extent to which the organisation delivers what it is intended to deliver.
Oversight body roles include:	• Ensure compliance with regulations • Ensure it meets any performance targets • Monitor performance against budget • Make senior appointments to the public sector body
Corporate governance	is the system by which organisations are directed and controlled in the interest of shareholders and other stakeholders
Internal CG & External CG	INTERNAL • Board giving direction • Risk analysis • Internal Controls EXTERNAL • Law and regulations • Notion of social responsibility
How CG can reduce company failures	• It addresses issues of management • It helps to identify and manage the wide range of risks • It specifies a range of effective internal controls • It encourages reliable and complete external reporting of financial data • It underpins investor confidence • It encourages and attract new investment
The purpose of Corporate Governance	• monitor those who control the resources owned by investors • contribute to improved corporate performance and accountability in creating long-term shareholder value.
Public VS Private difference	• their ownership (principals), • their mission and • the legal/regulatory environment within which they operate.
Concepts of Corporate Governance Fairness	• Respecting the rights and views of any groups with a legitimate interest. • This means a lack of bias. • This is especially important where personal feelings are involved.
Concepts of Corporate Governance Responsibility	• Willingness to accept liability for the outcome of governance decisions. • Clarity in the definition of roles and responsibilities. • Conscientious business and personal behaviour.
Concepts of Corporate Governance Accountability	• Answerable for the consequences of actions. • Providing clarity in communication channels with internal and external stakeholders. • Development and maintenance of risk management and control systems.
Concepts of Corporate Governance Honesty/Probity	• Not simply telling the truth but also not being guilty of issuing misleading statements or presenting information in confusing or distorted way. • Truthful • Not misleading
Concepts of Corporate Governance Integrity	• A person of high moral virtue. Adheres to a strict moral or ethical code despite other pressures. • It is an underlying principle of corporate governance and it is vital in all agency relationships. • Straightforward dealing.
Importance of integrity in corporate governance:	• Codes of ethics do not capture all ethical situations. • Any profession (such as accounting) relies upon a public perception of competence and integrity. • It provides a basic ethical framework to guide an accountant’s professional and personal life. • It underpins the relationships that an accountant has with his or her clients, auditors and other colleagues. • Trust is vital in the normal conduct of these relationships and integrity underpins this.
Concepts of Corporate Governance Transparency/ Openness	• Means openness (say, of discussions), clarity, lack of withholding of relevant information unless necessary. • Disclosure, including voluntary disclosure of reliable information.
Importance of transparency:	• Gains trust with investors and authorities. • Underpins market confidence in the company through truthful and fair reporting. • Helps manage stakeholder claims. • Reasons for secrecy/confidentiality include the fact that it may be necessary to keep strategy discussions secret from competitors.
Concepts of Corporate Governance Independence	• Independence of NEDs. • Independence of the board from operational involvement. • Independence of directorships from purely personal motivation.
Concepts of Corporate Governance Reputation	• Personal reputation for moral virtues. • Organisation reputation for moral virtues. • Accountancy profession reputation for moral virtues.
Concepts of Corporate Governance Innovation/Scepticism/Judgment	Innovation • ability of company to transfer local knowledge and ideas in the new products/processes that will create value Scepticism • especially in the meaning of professional scepticism – being challenging, scrutinise management by questioning, not just accepting their explanations Judgment • taking decisions enhancing organisation’s performance
Duties of Directors & Functions of the Board	• to carry out their fiduciary duties to act in the best interest of the company • to use their powers in the appropriate way grounded according to statute and case law • to avoid conflicts of interests • to exercise a duty of care.
Agency relationship in the Public Sector 1	• In private companies, the owner/manager split creates an agency problem - this still exists within the public sector. • Management serve the interests of the taxpayer who, though, are likely to seek objectives other than long run profit maximisation. • This causes a problem however. The taxpayer/electorate does not have one simple goal (like shareholders have that of profit maximisation). • So public servants, elected and non-elected, try to interpret the taxpayers’ best interests • So there will be a problem of establishing strategic objectives and monitoring their achievement. • The millions of taxpayers and electors in a given country are likely to want completely different things from public sector organisations.
Agency relationship in the Public Sector 2	• Some will want them to do much more while others, perhaps preferring lower rates of tax, will want them to do much less or perhaps not to exist at all. This can be called the problem of ‘fitness for purpose”. • It is normal to have a limited audit of public sector organisations to ensure the integrity and transparency of their financial transactions, but this does not always extend to an audit of its performance or ‘fitness for purpose’. • Many nationalised companies have recently been privatised. Moving from state control to having to comply with company law and relevant listing rules, in the process creating large new companies in industries such as energy, water, transport and minerals. • This change means competition. It changes the skills needed by executive directors, so is usually accompanied by a substantial internal culture change
Charities and voluntary organisations 1	• here is often a third sector, charities and voluntary organisations, the first two being business and the state. These exist for a particular social, environmental, religious, humanitarian or similar benevolent purpose and often enjoy tax privileges and reduced reporting requirements. • In exchange, a charity must demonstrate its benevolent purpose and apply for recognition by the country’s charity commission or equivalent. • Then there is the agency problem between the donors and the charity. Will the donations be used fully for the purpose? Hence the need for very strong regulation • Some charities voluntarily provide full financial disclosures and this places increased pressure on others to do the same.
Charities and voluntary organisations 2	• A common way to help to reduce the agency problem is to have a board of directors overseen by a committee of trustees (sometimes called governors). The trustees here act in a similar way to NEDs, and will generally share the values of the charities purpose • Charities can exhibit their effectiveness by using a social or environmental audit-type framework, including a regular and transparent report on how the charity is run and how it has delivered against its stated objectives. This increases the confidence and trust of all of the main stakeholders: service users, donors, regulators and trustees and reduces the agency problem
Directors Rights	Articles of association • These prescribe how directors operate including the need to be re-elected every 3 years Shareholder resolution • This can stop the directors acting for them Provisions of law • Eg health and safety or the duty of care. Board decisions • Boards make decisions in the interests of shareholders not directors
Directors Fiduciary Duties	Act in good faith: • as long as directors’ motives are honest Duty of skill and care • This is a legal requirement. • The amount of skill expected depends on your expertise and experience
Penalties for Directors acting without due skill and care	• Any contract made by the director may be void • Directors may be personally liable for damages if negligent • May be forced to restore company property at their own expense
The composition and balance of the board	• Separate MD & chairman • Minimum 50% non executive directors (NEDs) • Independent chairperson • Maximum one-year notice period • Independent NEDs (three-year contract, no share options)
Company secretary Functions	Compulsory • In most countries, the appointment of a company secretary is a compulsory condition of company registration. • This is because the company secretary has important responsibilities in compliance, including the responsibility for the timely filing of accounts and other legal compliance issues. Advises legal responsibilities • The company secretary often advises directors of their regulatory and legal responsibilities and duties. Loyal to company • His or her primary loyalty is always to the company. • In any conflict with another member of the company (such as a director), the company secretary must always take the side most likely to benefit the company Technical knowledge • In many countries’ he (get me being all modern!) must be a member of one of a list of professional accountancy or company secretary professional bodies
Company secretary Roles	• Maintaining the statutory registers • Ensuring the timely and accurate filing of audited accounts and other documents to statutory authorities • Providing members (eg shareholders) and directors with notice of relevant meetings • Organising resolutions for and minutes from major company meetings (like the AGM)
Trade Unions	Corporate Governance role Trade unions are able to ‘deliver’ the compliance of a workforce. If a strategy needs a high level of commitment, a union can help to unite the workforce behind the strategy and ensure everybody is committed to it. How do they do this? United front • This can also mean that management and workforce are seen as united by external stakeholders; making the achievement of strategies more likely. Keeps management abuses at bay • A trade union can be a key actor in the checks and balances of power within a corporate governance structure. • This can often work to the advantage of shareholders, especially when the abuse has the ability to affect productivity. Help effectiveness of company • Unions are often good at highlighting management abuses such as fraud, waste, incompetence and greed Help to control the employees • Where a good relationship exists between union and employer, then productivity of employees tends to increase
Shareholders Rights	• Elect representatives to the board of directors at the annual shareholder meeting • Recall board members who are not doing their job • Recommend amendments or propose policy to the Board • Call special meetings • Request shareholder education/training programs
Shareholders responsibility	• Attend the annual meeting, and other important shareholder meetings • Vote competent representatives to the board of Directors • Take a turn serving on the Board, if elected
Agency relationship	• The shareholders are the principals . They expect agents (directors) to act in their best economic interests • An agency relationship is one of trust between an agent and a principal which obliges the agent to meet the objectives placed upon it by the principal. • As one appointed by a principal to manage, oversee or further the principal’s speciﬁc interests, the primary purpose of agency is to discharge its ﬁduciary duty to the principal
Agency costs	• Shareholders incur agency costs in monitoring the agents (directors). • If they didn’t have to keep checking the managers then there would be agency costs. • When a shareholder holds shares in many companies, the total agency costs can be prohibitive; • shareholders therefore encourage directors’ rewards packages to be aligned with their own interests so that they feel less need to continually monitor directors’ activities.
Agency costs Examples	• Attending relevant meetings (AGMs and EGMs) • Studying company results • Making direct contact with companies -remuneration packages for directors - incentive schemes for directors and senior management -costs of communication of matters in financial reports - costs of meetings with financial analysts and institutional shareholders - costs associated with acceptance by the board of higher risk activities than shareholders are happy to accept - costs of establishing and using monitoring procedures
When should institutional investors intervene in company affairs?	• Concerns over strategy • Consistent underperformance (without explanation) • NEDs not doing their job properly • Internal Controls persistently failing • Failure to comply with laws and regulations • Inappropriate remuneration policies • Poor approach to social responsibility (reputation risk)
Steps to obtaining a listing on an international stock exchange	• In the UK a firm seeking listing must register as a public limited company. This entails a change in its memorandum and articles agreed by the existing members at a special meeting of the company. • The company must then meet the regulatory requirements of the Listing Agency which, in the UK, is part of the Financial Services Authority (FSA). These requirements impose a minimum size restriction on the company and other conditions concerning length of time trading. • Once these requirements are satisfied the company is then placed on an official list and is allowed to make a public offering of its shares. • Once the company is on the official list it must then seek the approval of the Stock Exchange for its shares to be traded. In principal it is open to any company to seek a listing on any exchange where shares are traded. • The London Exchange imposes strict requirements and invariably the applicant company will need the services of a sponsoring firm that specialises in this type of work.
The advantages of seeking a public listing	• It opens the capital market to the firm • It offers the company access to equity capital from both institutional and private investors and the sums that can be raised are usually much greater than can be obtained through private equity sources. • Enhances its credibility as investors and the general public are aware that by doing so it has opened itself to a much higher degree of public scrutiny than is the case for a firm that is privately financed.
The disadvantages of seeking a public listing	• A distributed shareholding does place the firm in the market for corporate control increasing the likelihood that the firm will be subject to a takeover bid. • There is also a much more public level of scrutiny with a range of disclosure requirements. • Financial accounts must be prepared in accordance with IFRS or FASB and with the relevant GAAP as well as the Companies Acts. • Under the rules of the London Stock Exchange companies must also comply with the governance requirements of the Combined Code

Next up

P1 Corporate Governance A6-A9

Description

Resource summary

Similar

	Created by Furqan Javed almost 8 years ago