Scope of Corporate Governance

Handouts Chapter 4 to 8 Risk and Internal control 06 Dec 2019
Chapter 1 • Corporate governance Syllabus learning outcomes (1)

Scope of corporate • Agency
governance • Stakeholders • Define and explain the meaning of corporate governance

• Roles of stakeholders • Explain and analyse the issues raised by the development
• Main issues in corporate of the joint stock company as the dominant form of
governance
business organisation and the separation of ownership
and control over business activity
• Analyse the purpose and objectives of corporate
governance in the public and private sectors
• Explain and apply in the context of corporate governance
00 the key underpinning concepts
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O • Explain and assess the major areas of organisational life
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affected by corporate governance
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Syllabus learning outcomes (2) Syllabus learning outcomes (3)
• Compare and distinguish between public, private and non- • Define and explore agency theory
governmental organisations (NGO) with regard to the • Define and explain the key concepts in agency theory
issues raised by, and the scope of, governance
• Explain and explore the nature of the principal-agent
• Explain and evaluate the roles, interests and claims of the relationship in the context of corporate governance
internal parties involved in corporate governance
• Analyse and critically evaluate the nature of agency
• Explain and evaluate the roles, interests and claims of the accountability in agency relationships
external parties involved in corporate governance
• Explain and analyse the following other theories used to
• Analyse and discuss the role and influence of institutional explain aspects of the agency relationship: Transactions
investors in corporate governance systems and structures, cost theory and Stakeholder theory
for example the roles and influences of pension funds,
insurance companies and mutual funds
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Corporate governance (1) Corporate governance (2)
Features of corporate governance • Corporate governance is the system by which

• Requires a willingness to apply the spirit as well as the organisations are directed and controlled
letter of the law • It is a set of relationships between directors, shareholders
• Attracts new investment into companies, particularly in and other stakeholders
developing nations
• Means shareholders can trust those responsible for
running and monitoring the company
• Accountability is generally a major theme including
accountability not just to shareholders but also other
stakeholders and accountability not just by directors but
by auditors
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Features of corporate governance (continued) Features of corporate governance (continued)

• Management, awareness, evaluation and mitigation of • Underpins capital market confidence in companies
risk are fundamental and in the government/regulators/tax authorities that
• Adequate and appropriate systems of control administer them
• Overall performance enhanced by good supervision • Protects value of shareholders' investment
and management within set best practice guidelines
• Framework for an organisation to pursue its strategy in an
ethical and effective way
• Offers safeguards against misuse of resources,
human, financial, physical or intellectual
38 39
Cadbury report Corporate governance (5)
'...the effectiveness with which (UK Company) boards Benefits

discharge their responsibilities determines Britain's Performance management
competitive position. They must be free to drive their
companies forward, but exercise that freedom within a + Risk control
framework of effective accountability. This is the essence of + Asset safeguarding
any system of good corporate governance.' + Accountability
The context of the 1992 report was to address the: = Enhanced market value
' ...continuing concern about standards of financial reporting
and accountability, heightened by BCCI, Maxwell and the
controversy over directors' pay, which has kept corporate
governance in the public eye.'
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Fairness Transparency
• Take into account all stakeholders with legitimate interests • Openness, disclosure in financial statements, press
• Respect for rights and views releases, websites
• Maybe legal protection for certain groups, for example • Not concealing information when it may affect decisions
minority interests • Default position of disclosure rather than concealment
• Includes information in financial statements and other
documents
• Helps avoid information asymmetry between managers
and shareholders
• Underpins stock market confidence and reassures
investors
42 43
Innovation Scepticism
• Recognises needs of organisation change over time • Professional scepticism is an attitude that includes a
questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and
critically assessing audit evidence
• Non-executive directors show scepticism to challenge
executive directors effectively
• Auditors and audit committees should demonstrate
professional scepticism
44 45
Independence Independence (continued)

• Being free from constraints or influences that would • Varying degrees of independence
prevent correct actions being taken • Total independence (no knowledge/connection with the
• Essential quality of professionalism other party)
• Independence of mind means providing an opinion • Zero independence (inability to take a decision without
without being affected by influences compromising considering the effect on the other party)
judgement
• Independence of appearance means avoiding situations
where an informed third party could reasonably conclude
that individual's judgement would have been compromised
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Independence (continued) Independence (continued)

• Importance of independent non-executive directors, • Independence of external auditors from their clients is
(directors who are not primarily employed by the company also important in corporate governance ̶ the auditor is
and have very strictly controlled other links with it) acting on behalf of the shareholders and not the client
• Good position to promote the interests of shareholders • Close friendship with the client may influence external
and other stakeholders auditor's judgement, and mean that external auditor is not
• Should avoid managerial capture – accepting executive effectively representing shareholder interests
managers' views on trust without analysing and • Internal auditors also need to be independent of
questioning them colleagues whom they are auditing
• Carry out effective monitoring of the company and its
management in conjunction with equally independent
external auditors on behalf of shareholders
48 49
Probity Responsibility
• Avoidance of dishonest behaviour • Management responsible for organisation
• Truth-telling/not misleading • System allow for corrective action and penalising
• Avoidance of reporting in slanted way mismanagement
• Limits of responsibility to different stakeholders is
debatable
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Accountability Accountability in public sector

• Directors and companies to shareholders • Government determines objectives (how clear are they?)
• Professionals to values • Problem if body's main objectives are non-economic, but
• Making accountability work is responsibility of both parties the government also wishes to limit the amount it spends
on the body
• Public sector to stakeholders
• Extent of management's accountability towards other
stakeholders such as the community within which the
organisation operates may be unclear
• Holders of public office accountable for their decisions
and actions to the public, and must submit themselves to
whatever scrutiny is appropriate for their office
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Reputation Reputation (continued)

• Determined by how others view a person, organisation or Consequences of poor reputation:
profession • Supplier and customer unwillingness to deal with the
• Reputation for competence, supplying good quality goods organisation for fear of being victims of sharp practice
and services in a timely fashion, and also being managed • Inability to recruit high-quality staff
in an orderly way • Fall in demand because of consumer boycotts
• Poor ethical reputation can be as serious for an • Increased public relations costs because of adverse
organisation as a poor reputation for competence stories in the media
• Increased compliance cost because of close attention
from regulatory bodies or external auditors
• Loss of market value because of falling investor
confidence
54 55
Corporate governance (20) ACCA's Code of Ethics
Judgement The ACCA Rulebook has a Code of Ethics and Conduct for
• Taking decisions that enhance organisation's prosperity members that lays down five fundamental principles:
• Board members must have sufficient knowledge and skills • Integrity
to provide meaningful direction • Objectivity
• Professional confidence and due care
• Confidentiality
• Professional behaviour
Required
Explain why these fundamental principles are important:
(a) When running an accounting practice
(b) To the accounting profession as a whole
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ACCA's Code of Ethics Corporate governance (21)
(a) Integrity
• Gain trust of clients of the firm • Straightforwardness
• Avoid being sued for misconduct • Fair dealing
• Encourage users of information to rely on it (eg courts,
taxation authorities, regulators) • Honesty and completeness in relationships
• Need for trust in business relationships
(b) • Underlying principle of corporate governance
• Ensure public confidence in the profession
• Provide professional bodies with grounds for
disciplining unethical members
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Agency theory Agency (1)
• Acting on behalf of another (principal) in dealing with

others
Self Interest Self Interest
• In corporate governance, directors (agents) run company
on behalf of shareholders (principals)
PRINCIPAL appoints AGENT
Shareholders The Board
Detailed
Information
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Agency (2) Agency
Agent's responsibilities What would be the consequences of directors misusing their

• Accountability to principal position as agents?
• Fiduciary duty (position of trust, no conflict of interest)
• Personal performance
• Obedience to principal's instructions
• Skill and care
• Confidentiality of principal's affairs
• Handing over benefits
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Agency Agency (3)
• Failing to notify or to consult investors on major decisions Agency problem in corporate governance
• Withholding information about the business and decisions • Breach of trust by directors, because they are pursuing
• Excessive pay to directors own interests or have different objectives from
• Large amount of share options granted to board at bargain shareholders
prices • Preventing directors excessively rewarding themselves or
• Unjustifiable use of company flats, cars, planes etc underperforming
• Lavish expense accounts and glamorous business trips
• Removal of directors may be too big a step
• Vanity investments such as on HQ buildings and high
profile acquisitions
• 'Golden parachutes' at retirement/dismissal such as
several years' pay and guaranteed pensions
• Close relations with political and celebrity figures backed
up by charitable giving by the firm they manage
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Agency (4) Agency (5)
Agency costs Agency costs

• Shareholder steps to exercise control, such as attending • Costs of studying company data and results
AGMs or ultimately becoming directors themselves • Purchase of expert analysis
• Expensive and difficult to verify what agent is doing, partly • External auditors' fees
because the agent has more information available about
his activities than the principal does • Costs of devising and enforcing directors' contracts
• Expensive and difficult mechanisms to control the • Time spent attending company meetings
activities of the agent • Costs of direct intervention in the company's affairs
• Agency costs are costs of the monitoring that is required • Transaction costs of shareholding
because of separation of ownership and management • Managers will spend time and resources proving that they
are maximising shareholder value by providing increased
disclosure or meeting with major shareholders
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Monitoring directors Monitoring directors
Suggest some ways in which shareholders can monitor and Monitoring systems
control a board of directors. • Increase numbers of Non-Executive Directors (NEDs)
• Request formation of committees
• Employ consultants
• Management audit
• Attend AGM and question board
• Require additional information to be reported
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Resolving agency problem Remuneration incentives

• Alignment of interests – accordance between objectives of • Profit-related/economic value-added pay – pay or
agents and of organisation bonuses related to the size of profits or economic value-
• Give managers incentives relating to profit or share price added.
• Shares – inviting managers to subscribe for shares in the
company at an attractive offer price
• Executive share option plans (ESOPs) – share options
giving the holder the right after a certain date to subscribe
for shares in the company at a fixed price. The value of an
option will increase if the company is successful and its
share price goes up
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Shareholder-auditor Other agency relationships in companies

• Shareholders principals, auditors agents monitoring • Directors-principals, managers-agents
directors' stewardship • Managers-principals, employees-agents
• Non-executive directors act as shareholders' agents in • Creditors-principals, directors/managers-agents
monitoring auditors
• Agency costs include audit fee and time spent by
management dealing with auditors
• Agency costs determined by shareholders and
requirements of standard-setting body
72 73
Agency relationships in public sector Agency relationships in charities

• Principals – political leaders and ultimately • Principals – donors and recipients
taxpayers/electors • Agents – directors and employees of charity who spend
• Agents – representatives, executive officers and money
employees of public sector bodies • Trustees ensure directors deliver value for money and
• Problem – how to reconcile different taxpayer/elector charity's aims fulfilled
views • Conflicts between purposes of charity and commercial
requirements
• Annual report demonstrating what charity has done should
help resolve problems
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Transaction cost theory Transaction cost theory (continued)

• Companies keep business in-house to reduce • Management play safe, concentrating on easily
uncertainties about supply understood markets and individual transactions they can
• Companies therefore seek vertical integration easily control
• Managers act opportunistically in own interests • Company may run efficiently and effectively
• Managers influenced by the amounts that they • Focus on low-risk activities may discourage potential
personally will gain, the probability of bad behaviour investors who are looking for a large return
being discovered and the extent to which their actions are • Shareholders dissatisfied with low profits may seek
tolerated or even encouraged in corporate culture greater involvement in governance
• Managers behave rationally up to a point, limited by the
understanding of alternatives that they have
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Stakeholders (1) Stakeholders (2)
• Groups or individuals with interests directly affected by the Stockholder/shareholder views

activities of a firm or organisation and who have claims on • Shareholders alone have a legitimate claim to influence
the organisation over the company, as they own the company
• Stakeholders who make direct claims do so with their • Directors as agents have moral and legal duty only to take
own voice account of shareholders' interests
• Stakeholders who have indirect claims are generally • If shareholders wish to maximise their returns, then
unable to make claims themselves because they are for directors' sole duty is to pursue profit maximisation
some reason inarticulate or voiceless. Although they
cannot express their claim directly to the organisation, this • Gray, Owen, Adams pristine capitalist view
does not necessarily invalidate their claim.
• Stakeholder claims may affect achievement of objectives
• Organisations may misinterpret claims
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Problems with stockholder/shareholder view Stakeholder view

• Modern corporations are so powerful, socially, • Corporate accountability to a broad range of
economically and politically, that unrestrained use of stakeholders
their power will inevitably damage other people's rights • Companies are so large, and their impact on society so
• Corporations may use their purchasing power or market significant, that they cannot just be responsible to their
share to impose unequal contracts on suppliers and shareholders
customers alike • Businesses should know how decisions affect people both
• Corporations may exercise undesirable influence over inside and outside
government through their investment decisions • Stakeholders should be seen not as just existing, but as
• Corporations exist within society and are dependent upon making legitimate demands upon organisation. The
it for the resources they use relationship should be seen as a two-way relationship
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Stakeholder view Organisation's responsibilities

• Debate about which demands are legitimate • Organisations have responsibilities to broad range of
• Some stakeholders will actively seek to influence what the stakeholders with claims on them
organisation does • Instrumental view – mainly economic responsibilities with
• Some stakeholders may be concerned with limiting the aim of maximising profits
effects of the organisation's activities upon themselves • Normative view – ethical/philanthropic responsibilities as
• Possible relationships with stakeholders include conflict, well as economic/legal
support, regular dialogue or joint enterprise
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Proximity to organisation Role in organisation

• Internal – employees/management • Primary – need participation to continue as going concern
• Connected – shareholders, customers, suppliers, lenders, (customers, suppliers, government)
trade unions, competitors • Secondary – their ceasing to participate won't affect
• External – government, local government, public, continued existence (managers, neighbours)
pressure groups, opinion leaders • Distinction based on how stakeholders affect organisation
• Organisation must keep primary stakeholders happy
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Impact of organisation Engagement with organisation

• Narrow – most affected by organisation's strategy • Active – seek to participate in organisation's activities
(shareholders, employees, suppliers, major customers) (managers, shareholders, regulators, pressure groups)
• Wide – less affected by organisation's strategy • Passive – don't seek to participate in policy-making
(government, less significant customers, community) (shareholders, local communities, government)
• Distinction based on how much organisation affects • Passive stakeholders may be interested and potentially
stakeholders powerful
• Should organisations always pay most attention to narrow • Passive stakeholders eg important shareholders may
stakeholders? need to take active role if organisation is in trouble
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Nature of claims Choice of involvement

• Direct – know they can affect or are affected by • Voluntary – choose to have involvement with organisation
organisation (employees, major customers, suppliers) (employees, customers, suppliers, shareholders)
• Indirect – cannot express claims directly or are unaware • Involuntary – engage with the organisation without
of them (wildlife, individual customers/suppliers of large choosing to do so (neighbours, wider public, government,
organisation, future generations) natural world, future generations)
• Stakeholders who have largest claims may not be aware
of them
• Stakeholders who cannot express their claims must have
them interpreted (will claims be correctly interpreted?)
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Validity of claims Validity of claims

• Legitimate – valid claims • Contractual or exchange basis
• Illegitimate – invalid claims • Different types of claim including legal, ownership or the
• Who decides legitimacy? firm being responsible for their welfare
• On what basis? • Stakeholders having something at risk as a result of
investment in the firm or being affected by the firm's
• Ultimately may depend on ethical or political perspective activities
of person making judgement
• Stakeholders benefit from, or are harmed, by the firm
• Stakeholder rights are being violated, or not respected, by
the firm
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Stakeholders (15) Stakeholders
Recognition of claims Discuss the importance to an organisation of recognising its

• Recognised – managers consider interests and views stakeholders when making significant strategic decisions.
when deciding strategy
• Unrecognised – managers don't consider claims when
deciding strategy
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Stakeholders Stakeholders (16)
• Establish support for strategic goals Knowledge of claims

• Pre-empt negative reactions • Known – existence known to organisation
• Assess level of interest and power • Unknown – existence unknown to organisation (wildlife,
• Identify ways of communicating with and managing communities affected by suppliers)
stakeholders • Distinction is significant if view is that organisation should
identify all stakeholder claims
• Implication that organisational decisions have minimal
impact
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Stakeholder mapping Stakeholders (17)
Level of interest Stakeholder mapping

• Power may mean active participation, views being
Low High regularly consulted or right of veto
• Stakeholder influence enhanced if power is combined with
Minimal effort Keep legitimacy and urgency of claim
informed • Level of interest reflects efforts stakeholders make to
Power participate and knowledge they have
Keep
Key players
satisfied
High
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Stakeholder mapping Problems with stakeholder mapping

• Corporate governance accommodates views • Very difficult to measure each stakeholder's power and
• Repositioning of stakeholders influence.
• Identify change blockers/facilitators • Map is not static. Changing circumstances may mean
stakeholders' positions move around the map.
• Assess legitimacy/urgency
• Map is based on the idea that strategic positioning,
rather than moral or ethical concerns, should govern an
organisation's attitude to its stakeholders.
• If there are a number of key players, and their views are in
conflict, it can be very difficult to resolve the situation, and
hence there may be uncertainties over organisation's
direction.
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Stakeholders (20) Roles of stakeholders (1)
Problems with stakeholder mapping (continued) Directors

• Mendelow's matrix considers power and influence but fails • Executive – full-time management
to take account into legitimacy. Legitimacy is a distinct • Non-executive monitoring
concept from power
• Concerned with remuneration and status
• For example minority shareholders in company controlled
by strong majority may not have much power, but law in
most countries recognises that they have legitimate rights
which company must respect
100 101
Roles of stakeholders (2) Roles of stakeholders (3)
Company secretary Company secretary (ICSA best practice)

• Ultimate loyalty to the company • Responsible to the board
• Arranges board meetings • Accountable to the board through the chairman on all
• Deals with documentation matters relating to his duties as an officer of the company
(the core duties)
• Ensures compliance with regulations
• If the company secretary has other executive or
• Corresponds with legal advisers administrative duties beyond the core duties, he should
• There may be legal requirements that listed company report to the chief executive
secretary has membership of professional body • Remuneration package should be settled by the board or
remuneration committee on recommendation of the
chairman or chief executive
102 103
Company secretary (contribution) Company secretary (contribution) (continued)

• Responsible for protecting the probity of company • Responsible for preventing breaches of laws, as officer of
• Guards against the directors acting in their own interests company
rather than those of company – may need to remind • Advises directors whose priorities and areas of
directors of their responsibilities expertise may not be in governance and compliance
• Protects interests of third party shareholders and other
stakeholders
• Interprets decisions of board and ensures they are
implemented throughout the company
104 105
Sub-board management Employees

• Supervise risk management/strategy implementation • Implement control systems
• Concerned with interaction with board • Adopt culture
• Concerned with impact of governance decisions • Provide feedback
• Boards need support of strong team • Concerned with pay and conditions
• Require information about working environment and future
of company
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Trade unions Trade unions

• Harness employee support • Union members often have similar objectives to senior
• Distribute information to employees management and share management's values
• Ascertain employee views • Trade unions can help ensure that workforce is committed
to implementing strategy
• Concerned with pay, working conditions, safety,
communication • Unity between management and unions will appeal to
those who do business with the company
• Influence depends on percentage of employees who are
members • Good relationships can help maximise productivity by a
contented workforce
• Trade union influence can also act as a balancing factor in
corporate governance, highlighting abuses by
management which would also concern shareholders
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Suppliers Customers
• Need co-operation • Power to shop elsewhere
• Credit restriction and poor service if payments delayed • Need to respond to their feedback
• Influence of their expectations/ethical views
• Public sector methods of finding out views include citizens'
juries and community time banks
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Roles of stakeholders (12) Institutional shareholders in UK
Institutional shareholders The major institutional investors in the UK are:

• Large shareholdings affect prices • Pension funds
• Require short-term profits • Insurance companies
• Should have dialogue with companies based on mutual • Investment and unit trusts (set up to invest in portfolios of
objectives shares)
• Particularly concerned with board composition • Venture capital organisations (investors particularly
• Can take direct action interested in companies that are seeking to expand)
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Problems with institutional shareholders Institutional shareholders' influence

• Excessive market influence • One-to-one meetings
• Avoiding risky shares • Voting in general meetings
• Focus on short-term gains • Publicising poor performance by companies
• Investors in institutions cannot influence investments • Contributing to corporate governance rating systems
114 115
Institutional shareholders' best practice Institutional shareholders' best practice

• Disclose how they will discharge their responsibilities • Establish clear guidelines on when they will actively
• Operate a clearly disclosed policy for managing intervene (concerns about strategy and performance,
conflicts of interest governance or approach to risk)
• Monitor performance of investee companies – gain • Act collectively with other investors, particularly at
assurance on operation of board by attending board times of significant stress or when the company's
meetings and AGM existence appears to be threatened
• Be particularly concerned with departures from • Operate a clear policy on voting and disclosure of
governance best practice voting activity
• Try to identify threats to shareholder value at an early • Report to their clients on their stewardship and voting
stage activities
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Institutional investors' intervention Institutional investors' intervention
From December 2010 Q1(a)(i) Concerns about strategy

Institutional shareholders may intervene if they perceive
Required
that management's policies could lead to a fall in the long-
term value of the company and hence the value of their
Explain the factors that might lead institutional investors to
shares. There could be concerns over strategic
attempt to intervene directly in the management of a
decisions over products, markets or investments or over
company.
operational performance. They could be concerned that
management was taking excessive risks or was unduly
risk-averse. Although institutional shareholders can sell
their shares if they are unhappy, in practice it may be
difficult to offload a significant shareholding without its
value falling.
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Institutional investors' intervention (continued) Institutional investors' intervention (continued)
Poor ethical performance Remuneration concerns

Institutional investors may intervene because they feel the Another sign of limited non-executive influence may be
board cannot be trusted. At worst they may fear excessive executive pay, with non-executive directors on
management fraud. They may also be concerned about the remuneration committee failing to enforce limits.
the company showing poor corporate social Investors will be concerned about executive greed and not
responsibility. This may make it vulnerable to social and aligning remuneration with shareholder interests.
environmental risks and harm its reputation. Internal control failures
Poor non-executive performance Institutional investors may have serious concerns about
Institutional investors may take steps if they feel that non- control systems. They may be worried that control
executive directors are exercising insufficient influence systems do not appear to have changed as the
over executive management. This is particularly significant circumstances of the company have changed. They may
when there are concerns over the executive directors, for also be worried about signs such as high-level fraud or
example a very strong chief executive. failure to control expenditure on major investments.
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Institutional investors' intervention (continued) Roles of stakeholders (17)
Compliance failures Small shareholders

The institutional investors may be concerned that they will • Limited shareholdings
suffer criticism if they are perceived as conniving in • Undiversified
breaches of stock market requirements or governance
• Require information
codes because they have not taken action.
122 123
External auditors Regulators

• Provide investors with confidence • Establish rules and standards
• Highlight governance and reporting issues • Carry out inspections and audits
• Need to be independent • Promote consumer interests
• Need to have audit committee support • Direct enforcement costs include setting up and running
• Remember audit fees are agency cost agencies
• Indirect enforcement costs incurred by regulated bodies in
conforming to restrictions
• Regulatory capture possibility – domination of regulator by
regulated
• May encourage firms to become too capital-intensive
124 125
Government Stock exchanges

• Establishes overall regulatory and control climate • Companies raise money
• Raises taxes • Investors transfer shares
• Gives subsidies/funds for investment • Exchanges provide data/regulatory framework
• Privatises industries
• Nationalises industries
• Runs public sector organisations
126 127
Not-for-profit sector Not-for-profit sector good practice

• Primary stakeholders include donors, regulators, grant • Focus on openness and accountability
providers, service users and general public • Ensure stakeholders have knowledge and opportunity to
• Trustees represent stakeholders hold trustees to account
• Trustees weigh up prioritisation of resources, needs to fill • Demonstrate that charity learns from mistakes and errors
gaps in welfare, best interests of stakeholders • Ensure principles of equality and diversity are applied
• May be conflict between different stakeholder views of • Ensure information and meetings are accessible to all
how commercial charity should be sectors of the community
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Roles of stakeholders (24) Main issues in corporate governance (1)
Not-for-profit sector good practice (continued) Legal and fiduciary duties of directors
• Seek members' views and encourage members to • Act in company's best interests
participate in governance • Use powers for proper purpose
• Act on broader responsibilities towards communities, • Avoid conflicts of interest
wider society and the environment stakeholders
• Exercise duty of care
130 131
Main issues in corporate governance (2) Main issues in corporate governance (3)
Board composition Accounting and auditing

• Need to avoid domination by single individual/small group • Greater transparency and reliability of accounts
of executive directors • Decreasing investor risks
• Board balance in terms of skills and specialisms • Tougher auditing standards
• Board balance in terms of age • Auditors to avoid conflicts of interest
• Diversity
132 133
Directors' remuneration Board supervision

• Directors being paid undeserved and excessive • Need for board to meet regularly to consider activities,
remuneration and bonuses risks and control systems
• Directors rewarded for making losses
134 135
Public and non-governmental governance Corporate social responsibility

• Supervise activities • Builds on stakeholders' debate
• Ensure appropriate control and risk management and • What responsibilities should organisation fulfil?
reporting systems in place
• Reflect strategic purpose of organisation
• Ensure income is being used to optimal effect
• Ensure board is being run efficiently
• May be supervisory board
• Concern with director remuneration, reasonable but threat
to reputation if excessive
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Chapter 2 • Approaches to corporate Approaches to corporate governance (1)

governance
Approaches to
• Governance codes
corporate Influences on governance development
• Sarbanes-Oxley
governance • Internationalisation of investment
• Corporate social responsibility
• Public sector governance • Investor treatment consistency
• Financial reporting weaknesses
• Individual country characteristics
• Corporate scandals
• Openness/Integrity/Accountability
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Handouts Chapter 4 to 8 Risk and Internal control 06 Dec 2019

Chapter 1 • Corporate governance Syllabus learning outcomes (1)

governance • Stakeholders • Define and explain the meaning of corporate governance

Syllabus learning outcomes (2) Syllabus learning outcomes (3)

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Corporate governance (1) Corporate governance (2)

Features of corporate governance • Corporate governance is the system by which

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Corporate governance (3) Corporate governance (4)

Features of corporate governance (continued) Features of corporate governance (continued)

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Cadbury report Corporate governance (5)

'...the effectiveness with which (UK Company) boards Benefits

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Corporate governance (6) Corporate governance (7)

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Corporate governance (8) Corporate governance (9)

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Corporate governance (10) Corporate governance (11)

Independence Independence (continued)

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Corporate governance (12) Corporate governance (13)

Independence (continued) Independence (continued)

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Corporate governance (14) Corporate governance (15)

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Corporate governance (16) Corporate governance (17)

Accountability Accountability in public sector

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Corporate governance (18) Corporate governance (19)

Reputation Reputation (continued)

Corporate governance (20) ACCA's Code of Ethics

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ACCA's Code of Ethics Corporate governance (21)

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Agency theory Agency (1)

• Acting on behalf of another (principal) in dealing with

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Agency (2) Agency

Agent's responsibilities What would be the consequences of directors misusing their

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Agency Agency (3)

Agency (4) Agency (5)

Agency costs Agency costs

Monitoring directors Monitoring directors

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Agency (6) Agency (7)

Resolving agency problem Remuneration incentives

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Agency (8) Agency (9)

Shareholder-auditor Other agency relationships in companies

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Agency (10) Agency (11)

Agency relationships in public sector Agency relationships in charities

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Agency (12) Agency (13)

Transaction cost theory Transaction cost theory (continued)

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Stakeholders (1) Stakeholders (2)

• Groups or individuals with interests directly affected by the Stockholder/shareholder views

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Stakeholders (3) Stakeholders (4)

Problems with stockholder/shareholder view Stakeholder view

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