Corporate Governance (Up to Non-Legal Corporate Governance Mechanisms)

Accountability- Present a fair, balanced and understandable assessment of the company's position and prospects. (Transparency in all decisions) State 3 more features of accountability.

Maintain sound risk management and internal control systems. Establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles. Maintaining an appropriate relationship with the company's auditors.

Uk Corporate Governance code (2014)- Principle A.2 of the UK corporate governance code 2014 recommends that there should be a clear division of responsibilities at the head of a company. State 4 key board roles.

Chief Executive Officer(CEO), Chairman, Senior Independent Director, Company Secretary.

Briefly state the theories of Corporate Governance.

Agency theory. Stewardship theory. Stakeholder theory. Transaction cost economics.

Comply or Explain- The UK Financial Reporting Council claims that the 'comply or explain' approach is the 'trademark or corporate governance in the UK'. State 3 features of the approach.

An approach that covers much of the subject matter of the UK code. The code contains over 50 'provisions' with over 110 examples of what companies, boards, directors and others 'should' do. No legal requirement to comply with these provisions and companies can decide not to do so as long as they give an explanation of any no-compliance.

State 5 key board committees.

Audit committee, Remuneration committee, Nomination committee, Risk committee, Ethics committee.

Leadership- Collectively responsible for the long term success of the company. State 4 more features of leadership.

Clear division of responsibilities at the head of the company. No one individual should have unfettered powers of decision. The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. Non-executive directors should constructively challenge and help develop proposals on strategy.

State 4 disadvantages of comply or explain.

Difficulty in verifying whether they actually do comply with these provisions in practise. Material compliance with the code is hard to measure and monitor. Lack of awareness of supervisory roles of shareholders and auditors. More of a 'tick box exercise' than deeper analysis of deviation.

Non-Legal Corporate Mechanisms- State 4.

Directors' remuneration. Institutional investors. Non-executive directors. The market for corporate control.

What is Corporate Governance (various definitions)- Ways in which companies are run and operated effectively and properly and not mismanaged. State 3 other definitions.

Distribution of rights and responsibilities among different participants in the organisation such as the board, managers, shareholders and other stakeholders. Procedure for decision making in relation to corporate affaires. The means through which those objectives are achieved and the process of monitoring the companies performance in the pursuit of those objectives.

Stakeholder theory: (beyond shareholders- all people affected by decisions) Define stakeholder and give some examples of who it could include.

Freeman: A stakeholder is 'any group or individual who can affect or is affected by the achievement of the firm's objectives'. This could include shareholders, creditors, employees, customers, society at large (CSR link) and government.

Development of Specific Areas of Corporate Governance. Turnball developed internal control, Myners developed institutional investors (effect on directors), state 4 more developments.

Higgs developed non-executive directors. Tyson developed recruitment and development of non-executive directors. Smith developed audit system and the effects of audit committees. Davies developed board diversity: women in senior roles & CEOs extending to race.

Effectiveness- Appropriate balance of skills, experience, independence and knowledge. Formal, rigorous, and transparent procedure for the appointment of new directors. State 3 more features of effectiveness.

Induction on joining the board and should regularly update and refresh their skills and knowledge. Undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. (no director can be a director for life- regular re-elections and reviews must be taken).

Features of Corporate Governance (Mallin)- It helps to ensure that an adequate and appropriate system of controls operates within a company and hence assets may be safeguarded. State 4 more features.

It prevents any single individual having too powerful an influence. It is concerned with the relationship between a company's management, the board of directors, shareholders and other stakeholders. It aims to ensure that the company is managed in the best interests of the shareholders and other stakeholders. It tries to encourage both transparency and accountability which investors are increasingly looking for in both corporate management and corporate performance.

State 5 main principles of UK Corporate Governance.

Leadership, Accountability, Remuneration, Relations with shareholders and effectiveness. (NOTE: the UK corporate governance code operates on the basis of 'comply or explain' principle and is regularly reviewed in consultation with companies and investors) (it is a code of conduct not a law).

Remuneration- Should be designed to promote the long-term success of the company. State 3 more features of remuneration.

Performance-related elements should be transparent, stretching and rigorously applied. Formal and transparent procedure for developing policy on executive remuneration packages of individual directors. No director should be involved in deciding his/her own remuneration.

State 4 issues of Enron that corporate governance prevents today.

Power concentration in the hands of the CEO, weak role of Non-executive directors, conflict of interest regarding audit, composition of the board.

State 4 benefits of Comply or Explain.

Promoters innovation. Proportionality, Substance over form. Long-term learning within companies (regular updates).

Transaction Cost Economics: (focus internally on firms governance structure) State an advantage and a disadvantage of this theory.

Ronal Coase 1937- corporate governance should limit transaction cost and improve firms performance. Difficult to establish a clear casual link between corporate governance and performance.

What is Corporate Governance according to Blair?

The whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.

The Key Aspects of Corporate Governance in the UK- Single board collectively responsible for the sustainable success of the company. Checks and balances include what 4 things?

Separate chairmen and chief executive. A balance of executive and independent non-executive directors. Strong, independent audit and remuneration committees. Annual evaluation by the board of its performance- performance targets to increase remuneration.

Corporate governance reports and codes (self-regulatory) Cadbury Committee 1992- focused its attention on the financial aspects of corporate governance. What did the Greenbury Committee 1995 concentrate on?

The Greenbury committee 1995 concentrated on executive remuneration.

Relations with Shareholders- Dialogue with shareholders based on the mutual understanding of objectives. State 2 more features of relations with shareholders.

The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Use general meetings to communicate with investors and to encourage their participation.

Audit Committee- The Uk Corporate governance code (2014) states, 'the board should establish an audit committee of at least three, or in the case of smaller companies, two, independent non-executive directors...

The board should satisfy itself that at least one member has recent and relevant financial experience' (para c.3.1).

Corporate governance reports and codes- Hampel Committee 1998 provided a more general examination of the UK's corporate governance system. What did the Higgs report 2003 examine?

The effectiveness of non-executive directors. (The recommendations of the Cadbury, Greenbury and Hampel Committees were merged to form the Combined code in 1998. The code was updated in 2003, 2006, 2008, 2010 and in 2012 was updated again and renamed the UK Corporate Governance Code).

Corporate Governance (narrow definition)- It is the 'various mechanisms associated with company law that shape the way company managers exercise their discretion- Ian McNeil p.307. State another definition.

The main focus of corporate governance is on strategic direction, high-level decision making, supervision of management and legitimate expectations for accountability (McNeil p.308).

Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. What does it provide?

The structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance determined (OECD).

State the specific broad definition of corporate governance.

The system by which companies are directed and controlled (Cadbury Report 1992).

Principle/ Agent Theory- (owner= principle, management= agent) Problem- How shareholders (principle) can effectively monitor the performance of directors (agent)?

To prevent directors acting for self interest and imposing agency costs on shareholders. Attempt to address the problem shareholder approval for important matters under company law.

State 2 more key aspects of Corporate Governance in the UK.

Transparency on appointments and remuneration. Effective rights for shareholders, encouraged to engage with the companies in which they invest. (Must be in the best interests of the company to make it succeed).

Remuneration Committee- UK Corporate Governance code 2014 states, 'the board should establish a remuneration committee of...

at least three, or in the case of smaller companies two, independent non-executive directors' (para D.2.1).

Nomination Committee- The UK Corporate Governance code 2014 recommends there should be a formal, rigorous, and transparent procedure for the appointment of new directors to the board. 'There should be a nomination committee which...

should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors' (para B.2.1).