Chapter 2 - Regulatory frameworks

Question 1

Give examples of the link between risk-management practices and corporate governance

Answer 1

• Identifying and controlling sources of risk may either support or threaten an organisation’s objectives
• Good governance should effectively manage, not eliminate risk
• Board should have a good understanding of the environment and organisation’s capabilities to exploit any opportunities e.g. consumer demand, technology development or political change - responsibility of board to direct the strategy of the organisation to exploit opportunities

Question 2

What happened in the VW emission scandal?

Answer 2

**Example of a governance failure to control risk **– device that provided false emission-test results, making these cars appear to be more environmentally-friendly – led to negative publicity, large fines in several countries and share price

Question 3

Failure to exploit opportunities can be as destructive as a failure to manage risks as shown in Kodak - outline the case.

Answer 3

Kodak developed digital photography but missed many opportunities to develop it into a marketable product – led to bankruptcy – with effective risk-management, Kodak could have identified, assessed, monitored or controlled the risks associated with developing digital photography and those associated with not doing so

Question 4

Outline the difference between the UK and US relating to Corporate Governance practices.

Answer 4

UK Code – comply or explain

US – Sarbanes Oxley – comply and sign – letter of the law – maximum compliance

Question 5

Name some examples of key risk-management regulations from the UK Code.

Answer 5

• The board is responsible for managing the principal risks an organisation is willing to take in the pursuit of its strategic objectives
• The board is also responsible for ensuring that the organisation has sound risk-management and internal control systems.
• NEDs should scrutinise management performance, including the robustness of the organisation’s financial controls and risk-management systems
• A board audit committee or a separate risk committee should be in place
• Information on the organisation’s principal risks and the soundness of its risk-management and internal control systems should be provided in the annual report
• The board’s work on risk-management should include the consideration of the organisation’s appetite for risk, as well as embedding the desired culture and the related risk culture

Question 6

Outline the key principles from the G20/OECD from a risk-management perspective - WISS

Answer 6

• Ensuring that shareholders with a controlling interest do not force excessive risk-taking to generate short-term returns because their limited liability may help to insulate them from the costs of this risk-taking.
• Prevention of unethical or illegal practices through the use of whistleblowing controls.
• Public disclosure to ensure that stakeholders have information on all reasonably foreseeable material risks.
• The board is responsible for overseeing an organisation’s internal control and risk-management systems.

Question 7

Corporate governance in the UAE?

Answer 7

• Focuses on listed companies
• Comply or significant fine
• Requirement of compliance officer
• Effective internal controls reviewed annually

Question 8

Corporate governance in Kenya?

Answer 8

modelled on UK regime – ‘apply or explain’ – mandatory requirement for boards to implement an effective risk-management framework, along with an effective system of internal control

Question 9

Corporate governance in Nigeria?

Answer 9

‘comply or explain’ – board is responsible for risk-management and should form its own opinion on the effectiveness of this process.