Part One, Chapter 4 - Other Governance Issues Flashcards
These flashcards cover the content in Part One, Chapter 4 - Other Governance Issues (pages 54 - 72 in the textbook). (83 cards)
1
Q
Where can you find a list of all of the corporate governance frameworks adopted globally?
A
The European Corporate Governance Institute (ECGI) via its online website.
2
Q
What type of approach has the US adopted to corporate governance?
A
A rules-based approach
3
Q
Which Act is abbreviated to SOX?
A
Sarbanes-Oxley Act of 2002
4
Q
What does SEC stand for?
A
Securities and Exchange Commission
5
Q
The Securities and Exchange Commission adopted a rule that required all stock markets to adopt what?
A
Standards in their listing rules governing the composition and functions of audit committees, and the independence of directors.
6
Q
The New York Stock Exchange and Nasdaq Stock Market adopted requirements that companies listed on their markets should follow. Provide four examples of this.
A
Companies listed on their markets should have:
- A majority of independent directors on their boards.
- Regular executive sessions of the independent directors, that is where the independent directors meet on their own.
- An audit committee, compensation committee and a nominating committee.
- Shareholder approval for all equity compensation plans.
7
Q
What other rules did SOX introduce, applicable to US companies?
A
- Auditor independence, audit partner rotation, and restricting the non-audit services an auditor could provide to a company.
- Independent, non-governmental board, the Public Company Accounting Oversight Board to oversee the audits of public companies.
- The CEO and CFO must certify the quarterly and annual reports including financial statements filed with the SEC.
8
Q
What did the SEC under s. 404 of SOX introduce?
A
Requirements for management to:
- Establish and maintain an adequate system of internal controls and procedures for financial reporting.
- Include in the company’s annual report a report on the effectiveness of the company’s internal controls over
financial reporting.
9
Q
True or false? The SEC under Section 406 introduced requirements for company-wide code of ethics.
A
False!
Section 406 saw only codes of ethics introduced for CEOs, CFOs, and accounting officers, not company-wide.
10
Q
Section 806 of SOX protected whistle-blowers of which company types?
A
Listed companies
11
Q
How many principles did the Investor Stewardship Group (‘ISG’) (2017) publish?
A
Six
12
Q
List the six principles of the Investor Stewardship Group.
A
Principle 1: Boards are accountable to shareholders.
Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
Principle 4: Boards should have a strong, independent leadership structure.
Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
13
Q
The King Committee on Corporate Governance was established in the early 1990s in which country?
A
South Africa
14
Q
How many versions of the King Code of Corporate Governance are there?
A
Four
15
Q
Which institute is responsible for The King Code?
A
The Institute of Directors in Southern Africa (IoDSA).
16
Q
True or false? The King Code is a requirement for all companies listed on the Johannesburg Stock Exchange.
A
True!
17
Q
Why are The King Codes regarded as interesting?
A
Because they:
- Created and still adopt the ‘stakeholder inclusive’ approach.
- Corporate responsibility and ethics form part of the King Code definition of corporate governance.
- They were introduced in 1994 – only two years after the Cadbury Code in the UK.
- They provide for a single corporate governance framework in that they apply to all types of organisation, not just listed companies.
- King III adopted the ‘apply or explain’ regime to be followed by the ‘apply and explain’ regime in King IV.
18
Q
The South African corporate governance framework is often described as what?
A
A hybrid corporate governance regime
19
Q
Which version of The King Code adopted the ‘apply and explain’ regime?
A
King IV
20
Q
What does King IV focus on attaining?
A
- Ethical culture and effective leadership.
- Performance and value creation in a sustainable manner.
- Adequate and effective controls.
- Trust, good reputation and legitimacy with stakeholders.
21
Q
True or false? King IV also introduces a principle applicable to institutional investors.
A
True!
22
Q
Why are The King Reports so important in South Africa?
A
Because the region struggles with corruption, health issues, and a lack of much needed skills. The King Reports have repositioned corporate governance in South Africa as a method of achieving sustainability of organisations.
23
Q
What type of board system does Germany operate?
A
A two-tier board system
24
Q
According to the Franks and Mayer report (2001), what percentage of large listed companies in Germany had a single shareholder?
A
85%
25
Which Act in Germany protects minority shareholders?
Germany's Stock Corporation Act
26
How does Germany's Stock Corporation Act protect minority shareholders in large listed companies?
The Act provides that the supervisory boards of large listed companies are elected 50% by the company's employees and 50% by the company's shareholders.
27
In a large listed German company, who is responsible for appointing and dismissing the management board?
The supervisory board
28
In a large listed German company, what is the management board responsible for?
Managing the company
29
Which government set up the Cromme Commission?
The German Government
30
Why was the Cromme Commission set up?
To look at the corporate governance regime for listed companies in Germany.
31
Which code replaced The Cromme Code and in what year?
The German Corporate Governance Code in 2017.
32
The German Code consists of three types of provisions. List them.
1. Legal stipulations that oblige the company to follow applicable law.
2. 'Shall' recommendations, which follow the comply or explain regime.
3. 'Should' suggestions, where companies do not need to disclose their deviation from them.
33
The German Code was updated in 2019 and saw five major changes. List them.
1. Introduction of 25 new principles.
2. Added recommendations on the remuneration of the management board.
3. Added definitions of the independence of shareholder representatives in the supervisory board.
4. Created independence of supervisory board members from a controlling shareholder.
5. Limited the number of supervisory board members.
34
True or false? In Japanese companies, the ownership and control is separated.
True!
35
The Japanese approach to corporate governance has adapted to become more market-orientated. Why is this?
The reforms were made as a response to Japan's long-running economic problems.
36
Name the code created to open the Japanese market to foreign investors.
Principles for Responsible Institutional Investors: Japan’s Stewardship Code
37
How many principles does The Japanese Stewardship Code have?
Eight
38
What is the aim of The Japanese Stewardship Code?
To provide a framework for institutional investors in fulfilling their stewardship responsibilities to their clients and beneficiaries.
39
What type of regime did The Japanese Stewardship Code adopt?
The 'comply or explain' regime
40
Provide five examples of the principles contained in The Japanese Stewardship Code.
1. Institutional investors should have a clear policy on how they fulfil their stewardship responsibilities, and publicly disclose it.
2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
3. Institutional investors should monitor investee companies so that they can appropriately fulfil their stewardship responsibilities with an orientation towards the sustainable growth of the companies.
4. Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.
5. Institutional investors should have a clear policy on voting and disclosure of voting activity.
41
What does Japan's Corporate Governance Code define corporate governance as?
‘A structure for transparent, fair, timely and decisive decision making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities.’
42
Which two approaches does Japan's Corporate Governance Code adopt?
1. Principle-based approach
2. 'Comply and explain' approach
43
Where are Japanese companies listed on?
The Tokyo Stock Exchange
44
List five purposes of Japan's Corporate Governance Code.
1. To secure the rights and equal treatment of shareholders
2. To take appropriate co-operation with stakeholders other than shareholders
3. To ensure appropriate information disclosure and transparency
4. To define responsibilities of the board
5. To provide dialogue with shareholders
45
True or false? China’s listed companies have a concentrated ownership structure.
True!
46
China’s listed companies have a concentrated ownership structure. What does this mean?
That the ownership and control are not separated.
47
What is the focus of China's corporate governance framework? Provide three examples.
1. To protect minority shareholders
2. Regulating controlling shareholders
3. Disclosure and transparency
48
What type of board system does China follow?
China follows the two-tier board system which includes a board of directors and a supervisory board.
49
What is the role of the board of directors verses the supervisory board?
The board of directors is responsible for the management of the company whereas the supervisory board is responsible for ensuring that the board of directors do not violate laws or the Articles of Association.
50
Which five countries have adopted the Scandinavian corporate governance framework?
Denmark, Finland, Sweden, Norway, and Iceland
51
What type of board system does the Scandinavian framework adopt?
A one-tier board of directors with a management structure beneath it.
52
The Scandinavian framework adopts a management structure underneath the board of directors. What is their role?
To take instructions from the board of directors and see to the day-to-day affairs of the company.
53
True or false? The board of directors in the Scandinavian model enjoys both executive and oversight powers.
True!
54
Shareholders in the Scandinavian model sit above the internal structures of the board of directors and management structure creating a hierarchical system. What powers do the shareholders hold?
Shareholders can appoint and dismiss the members of the board of directors.
55
In the Scandinavian model, only those in the level directly above can appoint and dismiss the members of the body beneath them. What powers do the board of directors hold?
The board of directors appoints and dismisses the members of the management structure.
56
Why is share ownership in Scandinavia not seen as problematic, despite laws supporting the supremacy of a dominant majority shareholder?
Because Scandinavian law allows for dominant shareholders to be held liable for any reckless behaviour in their decision making or where the dominant shareholder is seen to be coercing either the board of directors or management into a particular action for the benefit of that shareholder.
57
Which Code do Dutch companies comply with?
The Dutch Stewardship Code 2018
58
What does The Dutch Stewardship Code 2018 operate on?
A 'comply or explain basis'
59
The Dutch model of corporate governance accommodates both the two-tier German model and the one-tier Anglo-Saxon model. Which model do Dutch listed companies follow?
The two-tier German model
60
Corporate governance in the public sector in the UK is based on the Nolan’s seven principles of public life. Briefly list the seven principles.
1. Selflessness
2. Integrity
3. Objectivity
4. Accountability
5. Openness
6. Honesty
7. Leadership
61
Which code do not-for-profit companies follow?
The Charities Code
62
How many principles does The Charities Code have?
Seven
63
The Charities Code is split into two and provides guidelines dependant on what?
How much income a charity makes.
64
Why should family-controlled companies adopt governance?
To keep conflict at a minimum.
65
At the shareholder level, how can family-controlled companies keep conflicts to a minimum? Provide three examples.
1. By agreeing and documenting the family's vision, mission, and values. This allows the family to be aware of the direction the business should be moving in.
2. Setting up a structure which family members can interact with those running the business.
3. Agreeing the process for appointing and the number of family members to be on the board of directors.
66
At the board level, how can family-controlled companies keep conflicts to a minimum? Provide two examples.
1. By setting up an advisory board comprising of experienced and respected individuals who can support in planning, marketing, and expansion.
2. By opening up a board to independent directors.
67
At the management level, how can family-controlled companies keep conflicts to a minimum? Provide one example.
By setting up education programmes and career planning so that family members are developed to take up positions in management within the company to ensure it stays under the control of the family.
68
What is the main purpose of the G20/OECD Principles of Corporate Governance?
To help policy-makers, investors, and other stakeholders assess and develop the legal and regulatory framework for corporate governance within a country.
69
Where are the G20/OECD Principles of Corporate Governance used?
Globally
70
How many chapters does the G20/OECD Principles of Corporate Governance have?
Six. Each chapter includes a principle and several sub-principles.
71
What is the main purpose of The Basel Corporate Governance Principles for Banks?
To provide 'a framework within which banks and supervisors should operate to achieve robust and transparent risk management and decision making and, in doing so, promote public confidence and uphold the safety and soundness of the banking system’.
72
The International Corporate Governance Network (ICGN) was established for what reason?
To improve the efficiency of markets and economies globally.
73
What are the ten main key issues in corporate governance?
1. Composition of boards
2. Financial reporting
3. Stakeholder relations
4. Corporate culture
5. Social responsibility
6. Sexual harassment
7. Remuneration of directors
8. Shareholder dialogue
9. Performance of directors
10. Risk management
74
Why is the makeup of boards a key issue in governance?
1. Many boards lack representation of ethnic minorities and women.
2. Many boards lack independence of board members.
75
Why is financial reporting a key issue in governance?
Because directors and senior managers produce accounts that disguise the true financial performance of the company.
76
Why might directors or managers provide inaccurate financial reports?
1. To enhance their own rewards
2. To cover up fraud
3. To cover up poor performance due to their own lack of experience
77
Why are stakeholder relations a key issue in governance?
Because companies do not always foster good relationships with suppliers, customers, and employees.
78
Why is social responsibility and sustainability a key issue in governance?
Because companies hold the power to affect local and global communities through their decision making and how sustainable they are.
79
Why is tax planning a key issue in governance?
Because companies purposely avoid paying tax that is legally due.
80
Why is shareholder dialogue a key issue in governance?
Because the profile of shareholdings in UK listed companies is changing with increased short-term holdings, a fall in retail shareholders and higher foreign
ownership.
It is therefore difficult for companies to have the dialogue intended through the UK’s corporate governance framework of physical annual general meetings and engagement with shareholders through one-on-one meetings with the chairman on governance or on operational performance.
81
Why are there corporate governance issues in developing and emerging markets?
Regulatory institutions in both emerging and developing markets are often newer, less-experienced and under-funded in comparison to their counterparts in more developed markets. This leads to less enforcement of laws and regulations.
82
Why should corporate governance frameworks be different in each country?
Corporate governance issues are different in different countries and this is why countries should adopt governance practices to deal with their specific issues, not just cut and paste governance frameworks from other countries.
83
Many organisations in developing and emerging countries are either state or family owned and/or not listed and this brings with it its own governance challenges. Provide two examples of these challenges.
1. Lack of ownership control by the government means no monitoring of management.
2. Conflict in family-owned businesses between controlling family members means informal governance structures and often inexperienced boards and management teams.
