Module 2

Question 1

Definition of corporate governance?

Answer 1

The system by which companies are directed and controlled

Question 2

Why is corporate governance important to companies?

Answer 2

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

Question 3

Definition of agency risk?

Answer 3

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

Question 4

Examples of actions or directors that can constitute agency risks

Answer 4

Directors awarding themselves large bonuses

Using a more expensive supplier because of personal perks promised (bribery)

Short termist decisions

Question 5

What are the three procedures that can be implemented to reduce agency risk?

Answer 5

1. Directors remuneration packages as incentives
2. Monitoring the directors performance
3. Appointment an external auditor

Question 6

Definition of an audit?

Answer 6

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

Question 7

Definition of agency costs?

Answer 7

The costs of reducing agency risk

Include: costs of audit, costs in aligning directors and shareholders interests such as bonuses and pay rises

Question 8

What’s do shareholders do?

Answer 8

Appoint directors and the external auditor

Satisfy themselves that appropriate governance structure is in place

Question 9

What do directors do?

Answer 9

Set companies strategic aims and provide leadership to achieve them

Supervising management

Reporting to shareholders

Question 10

What do external auditors do?

Answer 10

Provide an opinion on directors financial statements

Objective view on aspects of governance

Question 11

What do internal auditors do?

Answer 11

Support the directors in their responsibilities

Providing a check on financial aspects and controls

Review companies governance frameworks

Question 12

What are the four areas of the Cadbury code of best practice?

Answer 12

1. The board of directors
2. Non-executive directors
3. Executive directors
4. Reporting and controls

Question 13

Recommendations of the code of best practice are

Answer 13

COMPLY OR EXPLAIN

Question 14

What did Derek Higgs report on?

Answer 14

The role and effectiveness of non-executive directors

2002

Question 15

What did Sir Robert Smith report on?

Answer 15

The role and effectiveness of the audit committee

2002

Question 16

What is the UK Corporate Governance Code organised under?

Answer 16

Board leadership and company purpose
Division of responsibilities 
Composition, succession and evaluation
Audit, risk and internal control
Remuneration 

BD CAR

Question 17

How many main principles are there in the code?

Answer 17

18

Question 18

How many provisions are there in the code?

Answer 18

41

Question 19

What do main principles in the code show?

Answer 19

What we should do as a company and why

Question 20

What do provisions in the code show?

Answer 20

How we should do it

Question 21

What are the executive directors responsible for?

Answer 21

Day to day operational management

E.g sales, finance

Question 22

What are the non-executive directors responsible for?

Answer 22

Not involved in day to day

Challenge and contribute to strategic decisions

Independent

Reduce agency risk

Question 23

What does the chairman do?

Answer 23

Chairs the board meetings

Independent on appointment

Question 24

What does the CEO do?

Answer 24

Responsible for executive directors

Ultimately responsible for day to day running of company

Question 25

What are the three sub committees?

Answer 25

Nomination Audit Renumeration

Question 26

What is the audit committee made up of?

Answer 26

At least 3 directors 100% NED At least one member should have recent and relevant financial experience

Question 27

What is the nomination committee made up of?

Answer 27

At least 3 | Majority NED

Question 28

What is the remuneration committee made up of?

Answer 28

More than 3 directors | 100% NED

Question 29

What does board division and company purpose involve?

Answer 29

- effective board, promote long term sustainable success - ensures necessary resources, framework of prudent and effective controls - effective engagement with shareholders

Question 30

What does division of responsibilities involve?

Answer 30

- Chair independent on appointment - roles of chair and CEO segregated - NEDs should have time to devote and provide constructive challenge and strategic guidance - at least half the board should be NEDs (independent)

Question 31

What does composition, succession and evaluation involve?

Answer 31

- formal rigorous and transparent board appointments - effective succession plan, based on merit and objective criteria - should have combination of skills, experience and knowledge - should a point a nomination committee - annual performance evaluation

Question 32

What does audit, risk and internal control involve?

Answer 32

- should establish an audit committee of independent NEDs - robust assessment of risks - monitor company’s risk management and internal control system

Question 33

What does remuneration involve?

Answer 33

- designed to support strategy and promote long term sustainable success - remuneration committee - remuneration for all NEDs should not include share options or performance related elements

Question 34

What entities are required to comply or explain with the code?

Answer 34

Only those with a Premium listing on LSE main market

Question 35

What is a narrative statement?

Answer 35

Description in annual report of how the company has applied the principles of the code

Question 36

What is a compliance statement?

Answer 36

Whether or not it has complied with all the relevant provisions throughout the accounting period Explain reasons if not

Question 37

What must companies with a premium listing on the main market of the LSE include in their annual report?

Answer 37

A corporate governance section: | Two part statement including a narrative statement and compliance statement

Question 38

What is the corporate governance act in the US?

Answer 38

Sarbanes-Oxley Act 2002

Question 39

What does the SOX act affect?

Answer 39

Companies that are: - registered with the securities and exchange commission (SEC) in the US - included in the accounts of a SEC company even if not US domiciled - non-US publicly traded companies operating in the US

Question 40

What does SOX contain?

Answer 40

Standards and requirements for corporate governance, financial reporting, ethics and some regulation More prescribed approach Legally required to comply More stringent than UK

Question 41

Why did SOX get introduced?

Answer 41

2001 large corporate failures, addressed by introducing SOX legislation

Question 42

UK and US annual report certification?

Answer 42

US signed off by CEO and CFO | UK signs diff by only one director in behalf of board

Question 43

SOX internal controls

Answer 43

Section 404 report as part of annual report: | - management responsibility for adequate controls and procedures

Question 44

SOX audit committees

Answer 44

Must pre-approve all services provided by external auditor