Module 2 Corporate Governance Flashcards

1
Q

What is corporate governance?

A

The system by which companies are directed and controlled

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2
Q

What is agency risk?

A

The risk that the agents’ (directors) self interest deviates from that of the principal (shareholders)

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3
Q

What are agency costs?

A

Costs of reducing agency risk (External auditor fees)

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4
Q

What is the UK corporate governance code? Bob Drives a CAR

A
  1. Board leadership and company purpose
  2. Division of responsibilities
  3. Composition, succession and evaluation
  4. Audit, Risk and Internal control
  5. Remuneration
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5
Q

What is the requirement for audit committee compositon?

A

Non executive directors only, minimum of 3

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6
Q

What is the requirement for nomination committee compositon?

A

Majority of Non executive directors

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7
Q

What is the requirement for remuneration committee compositon?

A

NED’s only, minimum of 3

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8
Q

What companies need to “comply or explain” with the Code?

A

Entities with a premium listing on the London Stock Exchange

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9
Q

Companies listed on the LSE need to include what as part of their annual report?

A

A corporate governance section:

  • Narrative statement - Describe how the company has applied the principles of the code
  • Compliance statement - State whether they complied with all principles, must explain why if they have not
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10
Q

Who is impacted by the Sarbanes Oxley Act 2002 (SOX)?

A
  • Registered with the SEC in the US
  • UK registered subsidary of a SEC registrant
  • Non US publicaly traded companies operating in the US
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11
Q

What are the additional requirements of SOX?

A
  • Annual report certification - Reports must be certified by both the CFO and the CEO
  • A section 404 report - Report on internal controls, managements resposibilites and assessment of the effectivesness
  • Audit commitee - Must preapprove all audit/non audit services provided by external auditors
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12
Q

Why is corporate governance important?

A

Allows companies to mitigate the agency risk that arises as a result of directors running a company on behalf of the shareholders.

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13
Q

UK corporate governance code structure

A
18 main principles (What)
41 provisions (How)
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14
Q

What is an audit?

A

An examination of a company’s financial statements by an independent expert, which culminates in the expert providing an opinion on weather the financial statements give a true and fair view to the shareholders.

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15
Q

What three procedures can shareholders implement to reduce agency risk?

A
  1. Use the diretors renumeration packages as incentive
  2. Monitor directors performance
  3. Appoint an external auditor
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16
Q

What are the Principles of Corporate Governance (The Principles)?

A
  • Isseued by G20 and the OECD
  • Provide a benchmark for assesing and improving corporte governance
  • Issued in 2015
  • Contains six principles
17
Q

How should responsibilites be divded?

A
  • Chair should be independent on appointment
  • Chair and CEO should not be the same person
  • NED’s should have sufficent time
  • At least half the board are NED’s
18
Q

What is an important remnuaration principle?

A

NED’s should not recieve share options or performance perks