Corporate governance Flashcards
(39 cards)
what is the agency theory?
Focuses on a company’s objective, which traditionally profit maximization.
Concerned with roles, responsibilities, and conflicts between “principals” (stakeholders) and “agents” (directors).
The perspective of the comapny on corporate social responsibility (among the 7 of GOA) influences how directors act in shareholders’ interests.
Stewardship Concept?
-Emphasizes that stewards aka directors should protect and promote rights of shareholders and stakeholders
-Agents (directors) should be accountable for balancing interests of various stakeholders.
benefits of incorporation?
-it greatly increased the supply of long-term funds to industry
-contributed to the creation of far more wealth within the global economy.
-encouraged many more people of moderate means to invest their disposable income in businesses and at much lower risk than would hitherto have been possible within unincorporated organisations
cons of incorporation?
-would be problematic unless some system of external governance was imposed to safeguard the interests of these owners. need for corporate governance
-The directors of such companies, however, being the managers rather of other peoples money rather than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company’
describe the legal framework for corporate governance
-Companies Acts globally regulate corporate governance. (UK corp gov code, sarbanes oxley in US)
-Legislation covers constitution, disclosure, reserves, capital maintenance, and creditor protection.
-Requires independent external audits by qualified professionals.
responsibilities of directors?
-Directors ensure financial reports are relevant and faithfully represent the company’s affairs.
-Stakeholders rely on reports being a “true and fair” representation of the company’s financial state.
-Auditors mainly focus on the faithful representation of financial information.
what are the auditing requirements of companies?
-Companies must legally audit their accounts at the end of each financial period.
-Corporate governance codes emphasize effective auditor roles and independent, objective relationships with directors.
-Concerns include auditor appointment, tenure, and potential conflicts related to consulting services.
What is Corporate Governance?
Corporate governance involves both internal and external factors.
External governance includes laws, stock market rules, and accounting standards.
Internal governance relates to compliance, culture, values, and ethical behavior within organizations.
What Role Does the Corporate Governance Framework Play?
The framework provides a structure for governing company behavior.
External rules and codes are effective when supported by a compliance climate within organizations.
What Does an Effective Corporate Governance Promote?
Effective corporate governance promotes transparency, skepticism, and objectivity.
It creates systems and procedures to comply with external requirements and prevent anti-stakeholder behavior within the organization.
How Does Internal Corporate Governance Address the Agency Problem?
Internal governance, or corporate culture, helps bridge the “expectations gap” between agents and principals.
It aligns the interests and motivations of all levels within the organization, reducing agency problems.
principle vs rules based code
Principles-based codes allow flexibility and voluntary compliance with explanations for departures.
Rules-based codes require strict legal compliance with potential legal sanctions for departures.
What was the Cadbury Code and its key recommendations
The Cadbury Code (1992) aimed to enhance transparency and accountability to shareholders.
Key recommendations included improving financial reporting, emphasizing the independence of non-executive directors, and introducing robust internal controls and internal audit.
What did the Combined Code of Corporate Governance emphasize in 1999
The Combined Code (1999) emphasized the maintenance of a sound system of internal control to safeguard shareholders’ investment and company assets.
It focused on broader responsibilities of companies regarding shareholders’ interests.
What were some key revisions in the UK Corporate Governance Code (FRC, 2014)?
-Re-election of the company chairman annually.
-Encouragement of gender diversity on boards.
-Independent review of board of directors’ performance.
-Alignment of director remuneration with longer-term performance metrics.
-Closer interface between non-executive and executive directors.
What is essential for effective corporate governance, regardless of governance structures?
Boards of directors must set a “tone from the top” and actively create a culture of transparency, honesty, and integrity within organizations at all levels.
-Creating a climate where individuals are conscious of the economic, social, and ethical consequences of their decisions and behavior.
just relying on code, standars, legislation is not enough.
How can directors promote responsibility, accountability, and transparency within organizations?
By using formal structures like audit and remuneration committees, appointing independent non-executive directors, and strengthening auditing regulations.
Mainly achieved by having a sustainable, long-term perspective and encouraging ethical behavior.
What can companies do to encourage responsible behavior and ethical conduct within their organizations?
Design corporate codes of ethics and behavior.
Establish a system of cultural values linked to individual performance appraisal and professional development.
Promote consonance between primary stakeholder aims and those of other stakeholders.
What instruments and practices promote a positive organizational climate?
Equitable productivity and bonus schemes.
Transparent recruitment and promotion policies.
Good staff welfare and reward systems.
Effective environmental policies.
Good customer relations.
An overriding quality culture that values all levels of employees and considers the impact of decisions on stakeholders’ interests.
What areas should good governance extend to beyond basic compliance?
Internal control.
Performance measurement and management.
Budgetary control systems.
Quality management.
Staff recruitment, training, and development.
Reward and promotion systems within a business organization.
Why is embracing corporate governance principles important for businesses?
It helps protect the interests of stakeholders, including the public interest, from a sustainable and longer-term perspective.
What is the contrast between the wider view of agency theory and the narrower stewardship perspective?
The wider view emphasizes a sustainable, longer-term perspective, while stewardship is narrower in focus.
Why is the development of an informal corporate culture and ethical values important in corporate governance?
it reduces the risk of negative behaviors such as wastefulness, inefficiency, fraud, and deception, fostering a sustainable balance of interests among shareholders, lenders, employees, suppliers, customers, and the general public.
How can a sustainable balance among stakeholders’ interests be realistically achieved?
By making corporate social responsibility part of the mindset of all those working in business organizations, ensuring accountability and responsibility to all stakeholders from the inside out.
