Module 2 Corporate Governance Flashcards
What is corporate governance?
The system by which companies are directed and controlled
What is agency risk?
The risk that the agents’ (directors) self interest deviates from that of the principal (shareholders)
What are agency costs?
Costs of reducing agency risk (External auditor fees)
What is the UK corporate governance code? Bob Drives a CAR
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, Risk and Internal control
- Remuneration
What is the requirement for audit committee compositon?
Non executive directors only, minimum of 3
What is the requirement for nomination committee compositon?
Majority of Non executive directors
What is the requirement for remuneration committee compositon?
NED’s only, minimum of 3
What companies need to “comply or explain” with the Code?
Entities with a premium listing on the London Stock Exchange
Companies listed on the LSE need to include what as part of their annual report?
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
Who is impacted by the Sarbanes Oxley Act 2002 (SOX)?
- Registered with the SEC in the US
- UK registered subsidary of a SEC registrant
- Non US publicaly traded companies operating in the US
What are the additional requirements of SOX?
- 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
Why is corporate governance important?
Allows companies to mitigate the agency risk that arises as a result of directors running a company on behalf of the shareholders.
UK corporate governance code structure
18 main principles (What) 41 provisions (How)
What is an audit?
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.
What three procedures can shareholders implement to reduce agency risk?
- Use the diretors renumeration packages as incentive
- Monitor directors performance
- Appoint an external auditor
