ACCA P1
13. What is stakeholder theory?
Stakeholder theory is the theory that is based on the general "theory of the firm" incorporating corporate accountability to a broad range of stakeholders such as employees, the environment, local communities, as well as their shareholders.
Define the concept "Integrity"
Straightforward dealing, honesty and completeness, basis of trust
25. What is the role of the Trade Union in Corporate governance?
TU exists to protect employee interests, so TU is interested in: - the pay and working conditions, - concerned with poor board communication, - lax risk and control environment --> potentially jeopardize health and safety of employees. - can be used to harness employee support
Define the concept "Fairness"
Take into account all stakeholders with legitimate interests and respect their rights and views.
Define the concept "Judgment"
Taking decisions that enhance organisation's prosperity of the organisation
Define "Obedience"
The agent must act strictly in accordance with his principal's instructions provided these are lawful and reasonable. Even if he believes disobedience to be in his principal's best interests, he may not disobey instructions.
Explain "Confidence" in the context of agency
The agent must keep in confidence what he knows of his principal's affairs even after the agency relationship has ceased.
Explain "No conflict of interest"
The agent owes to his principal a duty not to put himself in a situation where his own interests conflict with those of the principal
Define personal performance of agent
The agent who agrees to act as agent for reward has a contractual obligation to perform his agreed task by himself and not to delegate it to another.
28. Identify 3 company strategies to enhance CSR/Corporate citizenship
+ Boardroom leadership + Engagement + Disclosure
36. Identify 4 reasons for the emergence of corporate codes
+ Countries' desire for more transparency and accountability + Countries' desire to increase investor confidence (both of potential and existing investors) + Driven by a financial scandal, corporate collapse, or similar crisis. + The requirement of setting up a higher standard of behavior rather than local legislation requirements, ensuring that local companies comply with international best practice
2. What are benefits of good corporate governance?
+ Enhance the trust of shareholders --> Attract more new investment into companies + Underpin capital market confidence in companies --> protect the value of shareholders' investment. + Good supervision and management enhances the overall performance of the business. + Provide a framework to peruse its strategy ethically and effectively and offer safeguards against misuse of resources + Improve the internal control system, greater accountability to stakeholders by directors and auditors.
38. What are advantages of principle-based code?
+ Focus on objectives rather than mechanisms --> easy to incorporate into strategic planning + Flexibility: lay stress on elements that rules cannot be applied. + Breadth of application: applicable across different legal jurisdictions + Based on comply and explain basis
Why is the Transparency quite important?
+ Mitigate the agency problem. Without effective disclosure, the position could be unfairly weighted towards managers, since they have far more knowledge of the company's activities and financial situation than owner/investors + Reassures investors and underpins stock market confidence in how companies are being governed and thus significantly; influences market prices.
Why are NEDs important?
+ Not getting involved in daily execution, NEDs are in the best position to promote the interests of shareholders and other stakeholders + Freed from pressures that could influence their activities, independent non-executive directors should be able to carry out effective monitoring of the company and its management on behalf of shareholders + Non-executive directors' lack of links and limits on the time that they serve as non-executive directors should promote avoidance of managerial capture
27. Explain 5 reasons why the board must take CSR into account
+ Protecting and enhancing reputation, brand equity and trust + attracting, motivating and retaining talent + managing and mitigating risks + Improving operational and cost effeciency + developing new business opportunities - new prodcuts and services, new markets, new alliances, new business models
List out common elements of good corporate governance
+ Risk management, awareness, evaluation and mitigation + Appropriate control systems + Framework to pursue strategy ethically and effectively + Safeguards against misuse of resources + Spirit of codes + Accountability to stakeholders + Good supervision and management within set best practice guidelines
11. Explain agents, principal, information asymmetry
- Agents are the company's directors - Principals are the company's shareholders - Information asymmetry is one of the issues of agency theory in which the principals and the agents have access to different levels of information. - The agency problem and information asymmetry will lead to a residual loss for the shareholder. - Residual loss is the reduction in the shareholder's welfare in agency theory terminology.
20. Explain the difference between legitimate and illegitimate stakeholders
Legitimate stakeholders: who have a claim which is considered by the organisation to be fair, reasonable and legitimate Illegitimate stakeholders: whose claims will be ignored.
28.1 Please explain the Boardroom leadership as a company strategy to enhance CSR
A commitment to CSR must have wholehearted support of the board: + establish the long term commitment that involves ongoing improvement in measurement, verification, performance and reporting + provide a statement of CSR values and principles + appoint an executive director with a special brief for CSR + appoint independent directors
Define "skill"
A paid agent undertakes to maintain the standard of skill and care to be expected of a person in his profession.
4. Define "Fiduciary duty"
A responsibility of the directors of an organisation to the shareholders of the company. This means that directors are expected to be extremely loyal to the person whom they owe a duty (the principal). They must not put their personal interests before this duty and must not profit from their person as a fiduciary.
List out responsibilities of agent in agency relationship
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
14. Explain how active stakeholders can put pressure on the company
Active stakeholders are those who actively seek to participate in the orgranisation's activities. These stakeholders may or may not be a prat of the organisation's formal structure.
19. Explain the difference between the active and passive stakeholders
Active stakeholders: Those who seek to participate in the organisation's activities, including managers, employees, and institutional shareholders Passive stakeholders: Those who do not seek to participate in policy-making such as most shareholders, local communities and government
10. Define Agency theory
Agency theory defines the company's directors as the "agents" and the shareholders as the "principal". In other words, the shareholder, who is the owner or principal of the company, delegates day-to-day decision making in the company to the directors, who are the shareholder's "agents"
5. If the business is asked to "broaden fiduciary responsibility", what does this mean?
Although the primary fiduciary duty of directors in large public companies will be to shareholders, directors in businesses may have good reason to broaden their views on fiduciary responsibility. This would involve taking into account, and acting in the interests of, the local wildlife centre, the residents, the school, the local government authority and the fans.
Explain "Handed over benefits"
Any benefit must be handed over to the principal unless he agrees that the agent may retain it. Although an agent is entitled to his agreed remuneration, he must account to the principal for any other benefits. The receiving of benefits from any third party as an inducement is considered as bribery and fraudulent.
Define the concept "Independence"
Being free from constraints or influences that would prevent a correct course of action being taken. Including: independence of mind and independence of appearance.
28.3 Explain Disclosure term
CSR disclosure is always voluntary and not a part of the Corporate Governance Code. Voluntary disclosure on CSR: Triple bottom line reporting (people, planet, profit) People: pertaining to fair and beneficial business practices toward labor and the community and region (working hours, remuneration, safety, working conditions) Planet: refer to sustainable environmental practices (wastage, energy consumption, sustainability) Profit: bottom line shared by all commerce, conscientious or not.
26. Define Corporate Social Responsibility
CSR is about how companies manage the business processes to produce an overall positive impact on society.
41. What is comply and explain?
Comply and explain is a regulatory approach in the field of corporate governance and financial supervision. Rather than setting out binding laws, government regulators set out a code, which listed companies may either comply with, or if they do not comply, explain publicly why they do not.
32. What is corporate Philanthropy?
Corporate Philanthropy is the act of a corporation or business promoting the welfare of others, generally via charitable donations of funds or time
36.1 What is Corporate Governance Code?
Corporate codes are essentially rules and principles relating to best practice in term of corporate governance. They must be followed by all listed companies in that countries' stock exchange
1. What is corporate governance?
Corporate governance is the system by which organisations are directed and controlled to ensure that the company's management acts in accordance with the interests of shareholders. It is a set of relationships between directors, shareholders and other stakeholders.
Define the concept "Accountability"
Directors and companies answerable for consequences of actions to shareholders, professionals to values, public sector to stakeholders
30. Identify 3 strategies to enhance SRI
Engagement: identify areas for improvement in the ethical, social, environmental policies of the companies invested in, and encourage them to make improvements Preference: fund managers work to a list of guidelines which trustees prefers companies invested in to meet Screening: trustees ask for investments to be limited to companies selected (screened) for their ethical behavior. Note: this may be positive or negative screening
List out corporate governance concepts
Fairness Transparency Independence Innovation Skepticism Probity Responsibility Accountability Reputation Judgement Integrity
7. Is there a clear link between the corporate governance and better performance?
In theory strong governance should lead to higher returns to shareholders. However, the evidence for this appears to be fairly mixed. The controversy over corporate governance has been fueled by a surprising lack of conclusive evidence .
Define the concept "Responsibility"
Management responsible for organisation, means of corrective action and penalising mismanagement
24. What is Mendelow framework?
Mendelow framework is one way of weighing stakeholder interest to look at the power they exert and the level of interest they have about its activities Mendelow classifies stakeholders on a matrix whose axes are power held and likelihood of showing an interest in the organisation's activities. These factors will help define the type of relationship the organisation should seek with its stakeholders and how it should view their concerns. D: key player C: Keep satisfied B: Keep informed A: Minimal effort
Define the concept "Skepticism"
NEDs, auditors and audit committees should adopt an air of scepticism and an enquiring mind
16. Explain the difference between narrow and wide stakeholders.
Narrow stakeholders: Those most affected by the organisation's strategy - shareholders, managers, employees, suppliers, dependent customers Wide stakeholders: Those less affected by the organisation's strategy - government, less dependent customers, the wider community
Define the concept "Transparency"
Openness, disclosure in financial statements, press releases, websites
17. Explain the difference between primary and secondary stakeholders.
Primary stakeholders: Those without whose participation the organisation will have difficulty continuing as a going concern. Secondary stakeholders: Those whose loss of participation won't affect the company's continued existence such as broad communities (and perhaps management)
3. Define and explain the underlying principles of corporate governance and explain the reason for each principle
Principles: SIRJ FIT HAIR Skepticism: NEDs must apply skepticism to challenge the management decision effectively Innovation: Recognize that the needs of businesses and stakeholders can change over time. Responsibility: Directors should be responsible for the operation, control and strategy of the organisation Judgment: Directors of the organisation must be capable of sound judgment Fairness: equitable treatment of all partners. Independence: NEDs and auditors are required to be free from bias. Transparency: accurate and timely disclosure of information (both financial and operational) Honesty: acting in an upright and honest manner Accountability: the board should be accountable to the shareholders of the organisation Integrity: high moral virtue, adhering to a strict moral or ethical code notwithstanding any other pressures on him or her to act otherwise. Reputation: the organisation should uphold the reputation of the business.
Define the concept "Innovation"
Recognize that the needs of businesses and stakeholders can change over time.
Define the concept "Reputation"
Reputation is determined by how others view a person, organisation or profession. Reputation includes a reputation for competence, supplying good quality goods and services in a timely fashion, and also being managed in an orderly way.
29. What is social responsibility investment? (SRI)
SRI recognizes that corporate responsibility and society concerns are valid parts of investment decisions. SRI considers both the investor's financial needs and an investment's impact on society. SRI investors encourage corporations to improve their practices on environmental, social, and governance issues.
13.1 What is stakeholder?
Stakeholder is a group or individual who can affect or be affected by the achievement of an organisation's objectives.
21. Should the company recognize the claim of illegitimate stakeholders?
The company should not take into account the claim of illegitimate stakeholders. There is no possible case for this practice. There is much debate on the legitimacy of the claims of lobby groups, campaigning organisations, and NGOs.
37. What is a "Principle based" code?
The principle based code set out principals of corporate governance which must be followed rather than specific rules.
35. Do we need a formal governance structure in a family business?
The structure of a family firm in its formative years is likely to be informal. Once the firm has moved beyond the stage where authority is vested in the founders, it becomes necessary to clarify responsibilities and the process for taking decisions.
12. Identify 3 types of agency cost
There are three types of Agency cost + Monitoring costs: which are used to monitor the behaviors of agents, including cost of attending meetings, cost of studying company results, cost of making contact with the company and cost of NEDs + Bonding cost: reward package for directors; penalise agents for acting in ways that violate the interest of principals or reward them for achieving principals' goals + Residual loss: the reduction in the shareholder's welfare in agency theory terminology
34. Why is a family business less affected by corporate governance problems?
This is because ownership and control rather than being split are still one and the same.
22. What is an unknown stakeholder?
Those whose existence is unknown to the organisation (undiscovered species, communities in proximity to overseas suppliers)
Define the concept "Probity/Honesty"
Truth-telling/not misleading
18. Explain the difference between voluntary and involuntary stakeholders
Voluntary stakeholders: Those who engage with the organisation of their own free will and choice, and who can detach themselves from the relationship Involuntary stakeholders: Those whose involvement with the organisation is imposed and who cannot themselves choose to withdraw from the relationship
What is accountability in the context of agency relationship?
accountability means that the agent is answerable under the contract to his principal and must account for the resources of his principal and the money he has gained working on his principal's behalf.
What is independence of appearance?
avoiding situations where an informed third party could reasonably conclude that an individual's judgement would have been compromised.
28.2 Explain the Engagement term
companies should engage with their key stakeholders to determine what they regard as the group's principal CSR challenges and to understand if they are addressing them
What is agency relationship?/Nature of agency
is a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision-making authority to the agent.
What is independence of mind?
providing an opinion without being affected by influences compromising judgement.
23. Explain the benefits of analyzing stakeholders
• Get to know stakeholders better: - Relative importance, power and interests - Better managed relationships - Risks identified • Make better strategies and decisions • Greater acceptance of organisation actions by stakeholders