Learning Unit 1

Question 1

What are Risks?

Answer 1

Uncertainties or circumstances that will either prevent you from achieving your goals or those that will steer you towards them.

Question 2

Businesses face 3 types of risks, what are they?

Answer 2

1. Financial
2. Environmental
3. Legal

Question 3

What is compliance risk management?

Answer 3

A business should identify risk areas and consider risks and urgency in terms of impact and damage.
Risks are classified by inherent risk and residual risks.
Inherent risks entail = untreated risks and influence business in absence of mitigrating measures implemented
Residual risks entail -= treated risks, occur despite mitigation measures beingg put in place.

Question 4

Types of Business risk:

Answer 4

1. Pure risk
2. Business Risk

Question 5

Differentiate between a pure risk and business risk?

Answer 5

Pure Risk: Pure risks involve situations where there are only two possible outcomes: loss or no loss. These risks do not offer any opportunity for gain and are typically beyond the organization’s control. Examples include natural disasters, theft, or accidents. Organizations often manage pure risks through insurance and preventive measures. Examples: fires, floods, accidents, or theft. Businesses usually handle this by getting insurance or taking safety measures.

Business Risk: This is when a business takes a chance, and the outcome could be either good (profit) or bad (loss). Examples include entering new markets, launching new products, or changes in consumer preferences. Managing business risks involves strategic planning, market research, and financial analysis.

Question 6

What is Corporate Governance?

Answer 6

Corporate Governance is the exercise of ethical and effective leadership by governing body towards the achievement of ethical culture, good performance, legitimacy. Ensures businesses operate ethically, transparently, and in the best interests of stakeholders (shareholders, employees, customers, and society).

Question 7

What are the pillars of corporate governance?

Answer 7

FART
1. Fairness
Ensures that all stakeholders are treated equitably, without favoritism or discrimination.

Promotes trust and loyalty among employees, investors, and customers.

Unfair treatment can lead to legal challenges, employee dissatisfaction, or reputational damage.

Example: Equal opportunities for promotions and fair dividend distributions to all shareholders.

2. Accountability

Ensures that decision-makers (such as the board of directors and executives) are answerable for their actions.

Encourages responsible management that aligns with company goals and stakeholder interests.

Weak accountability can lead to mismanagement, fraud, or unethical practices.

Example: A CEO must justify business decisions to shareholders during annual general meetings (AGMs).

3. Responsibility

Companies must act ethically and consider their impact on society, the environment, and the economy.

Encourages sustainability and corporate social responsibility (CSR) initiatives.

Irresponsible business practices (e.g., pollution, labor exploitation) can lead to legal action and damage brand reputation.

Example: Companies implementing green energy initiatives to reduce environmental harm.

4. Transparency

Involves openly sharing financial and operational information with stakeholders.

Builds trust and confidence among investors, employees, and the public.

Lack of transparency can lead to financial scandals or loss of investor trust.

Example: Companies listed on the JSE (Johannesburg Stock Exchange) must disclose financial statements regularly.

Question 8

Discuss Sustainability.

Answer 8

The main focus is that they are long term goals.
It is the duty of the board to ensure that the organisation is sustainable.
The believed ethical organisation is sustainable to attract investors.
Board sets tone for the organisation.

Question 9

What is a triple bottom line concept?

Answer 9

It focuses on the economic, employees and environment. The Triple Bottom Line (TBL) concept evaluates a company’s success based on three key areas: economic performance, environmental responsibility, and employee well-being.
1. Economic (Profit) 💰
A business must be financially sustainable while acting ethically.
Focuses on long-term profitability, fair trade, and responsible financial management.
Example: A company that reinvests profits into innovation and fair wages instead of only maximizing shareholder returns.

2.Environment (Planet) 🌍
Businesses must minimize their negative impact on nature.
Includes reducing carbon footprints, managing waste, and using sustainable materials.
Example: A manufacturing company adopting eco-friendly production methods to reduce pollution.

3.Employees (People) 👥
Workers should be treated fairly, with good working conditions and fair wages.
Includes employee rights, workplace safety, diversity, and personal development.
Example: A company providing healthcare benefits, skills training, and a safe work environment.

Helps businesses operate ethically and responsibly.
Improves brand reputation and investor trust.
Encourages sustainability for long-term success.

Question 10

What are the 3 P’s?

Answer 10

1.People (Social Responsibility) 👥
Focuses on fair treatment of employees, customers, and communities.
Includes fair wages, diversity, employee well-being, and community development.
Example: A company providing good working conditions and supporting local education programs.

2.Planet (Environmental Responsibility) 🌍
Ensures businesses minimize their environmental impact.
Includes reducing pollution, conserving resources, and using sustainable materials.
Example: A company switching to renewable energy and reducing plastic waste.

3.Profit (Economic Sustainability) 💰
Focuses on financial stability and long-term growth.
Ensures business profitability without harming society or the environment.
Example: A company reinvesting profits into innovation and ethical business practices.

Question 11

What are the board responsibilities?

Answer 11

The board should act as the focal point for corporate governance.
The board should ensure that the company acts and is seen to be a responsible, corporate citizen.
The board should cultivate/promote an ethical corporate culture.
The board should be responsible for the process of risk management.
Financial Oversight 💰
Approves budgets, financial reports, and major investments.
Ensures transparency and accountability in financial reporting.

Question 12

What is the King IV Code (2016)?

Answer 12

Encourages an apply and explain approach, focusing on principles rather than rigid rules.
This is the framework for proactive corporate governance by providing guidelines for sustaining profit and having ethical business practice.
Mandatory in companies listed in JSE.
Uses an “apply and expan” aproach for governance.
Principle 13 and 16 provide guidance for governing body of a business to intergrate a dynamic and proactive compliance function into the processes of the business.

Question 13

Principle 13 vs Principle 16

Answer 13

Principle 13
1. Board
2. Up to the board of entity to to intergrate information compliance into the business.
3. Board ultimately responsible and accountable for ensuring compliance within the business.
4. If compliance function is outsourced or delegated it doesnot absolve the board the duty of compliance.
5. duty = board implement reporting system.

Principle 16
1. Stakeolders
2. Stakeholder-inclusive- approach entails that the board needs to take into account of stakeholders interests which may be affected by its decision making.
3. When making decisions the board should ensure that all stakeholders interests are taken into account, and tailored for interests of data subjects and 3rd parties.

Question 16

What does corporate governance take particular cognisance in?

Answer 16

King IV Code - which contains specific principles and implementation of governance.

Question 17

The key elements of governance are

Answer 17

Supervising
Monitoring Management Performance
Ensuring accountability of management to shareholders and other stakeholders.

Question 18

King IV defines corporate governance as the exercise of ethical and effective leadership by the board towards the achievement of the following governance outcomes:

Answer 18

Ethical Culture
Goood performance
Effective Control
Legitimacy

Question 19

Traditionally the company exists to to do what?

Answer 19

In order to maximise shareholder wealth, the interests of other parties such as employees, and society in general, are subsidiary to this objective.

Question 20

What is the pluralist view?

Answer 20

Governance would need to take into account of the interests of all parties on an equal basis.

Question 21

Define the King IV stakeholder inclusive approach.

Answer 21

Principle 16 which requires that the board does not take into account of the legitimate and reasonable needs, interests and expectations of all material stakeholders in the execution of its duties but with the very important qualificaltion, taht this must be done with a view to the best interest of the company over time.

Question 22

How does King IV refine the description of ethical leadership?

Answer 22

As involving the anticipation and prevention or otherwise amelioration of the negative consequences of the organisations activities and outputs on the economy, society, and the environment and that is exemplified by integrity, competence, responsibility, accountability, fairness and transparency.

Question 23

Effective leadership in terms of King IV.

Answer 23

Is described as being results driven and is about achieving strategic objectives and positive outcomes, Effective leadership includes, but goes beyond an internal focus on effective and efficient execution.

Question 24

True or false.
Ethical and effective leadership should complement and reinforce each other.

Answer 24

True

Question 25

King IV indicates that the primary governance role and responsibilities of the board will be to:

Answer 25

Steer and set strategic direction with regards to a) the company's overall strategy b)the manner in which specific governance areas are approached Approve policy and planning that gives effect to the strategy Oversee and monitor implementation and execution by management Ensure accountability for performance by among others reporting and disclosure

Question 26

Explain the unitary board

Answer 26

This is the classical governance model, often reffered to as the Anglo-Saxon model derives from the first UK companies Act of 1884, which enshrined the concept of the company as a legal entity separate from its owners. Governance was meant to be achieved a single board of directors appointed by the members and reporting to them on the stewardship of the enterprise. The shareholders would appoint independent auditors to report on the fairness of presentation on the financial statements.

Question 27

What is the two tier system?

Answer 27

In Germany the law requires some companies to have two boards of directors: 1. A supervisiory board, with no executive power but with the authority to appoint and to approve or remove members of the management board and which must approve major business decisions. Half of the members of the supervisory board are elected by shreholders and the other half are employee representatives. 2. A management board, responsible for the ongoing management of the enterprise and with the responsibility of reporting to the supervisory board at regular intervals.

Question 28

What is the vo determination (Mitbestimmung)?

Answer 28

It is a german model that requires that companies (other than industries which have different arrangements) with more than 2000 employees have a supervisory board with equal representation of employee and shareholder representatives of employee and shareholder representatives and where there are between 501 and 2000 employees, employee representatives must take up a third of the board. The chairman, typically a shareholder, nevertheless, the German system has created a climate in which disputes are more likely to be settled by dialogue rather than through conflict.

Question 29

Briefly explain the South African Unitary Board system

Answer 29

The 2002 King Report recommended that the unitary board structure remains appropriate for South African companies, given the positive interacton and diversity of views that take place between individuals with different skills, expierence and background. This view appears to have been accepted by King III and IV without debate.

Question 30

Keasy & Wright, two UK academics, have identified the following concerns:

Answer 30

1. The spread of creative accounting. 2. Spectacular increases in unexpected business failures 3. the apparent ease with which unscrupulous directors could expropriate other stakeholder funds. 4. the very limited role of auditors 5. the apparently weak link between executive compensation and company performance. 6. A market plsce focused on short term perspectives, to the detriment of general economic performance.