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Last minute Revision for paper P1. Hope it might help.

Sound Corporate Governance: HOTSFAIRR


Honesty-not tell lie, tell the truth with investigation of the truth
Openness-Timely provide effective info to SH accept confidential info
Transparency-complete clarity with all info presented (fin-non-fin) (understandability)
Social responsibility-Sustainability + CSR + Environmental issues
Fairness-Equal treatment of all StKHL (Minority SH)
Accountability–individuals who take decision is accountable for the consequences of the outcome
Independence-Avoid circumstances which arose conflict of interest.
Reputation-do not do anything which can effect reputation, adopt good business cases, code of ethics.

ROLE of Board: Fiduciary Duty: Duty of care, Duty of loyality.


1 Responsible for direction
2 Delegated most ex.power to ex.mgt
3 Board balance and Independence
4 Appointment of the Board
5 Performance Evaluations
6Decision about raising finance
7Paying dividend and making major decision

Role of Chairman:
1 Functioning the board by overseeing it
2 Setting agenda for meeting
3 Oversee board actions
4 Conducting the board meeting
5 Liaisons with EDs and NEDs
6 Communicate with key stakeholder ( SH , II )

Role of SH
1 Vote on the election of Director
2 Amendment in corporate charter (changes in nature in business and share, transfer to another jurisdiction)
3 Key corporate matter (sale of com assets,merger or ACQ, Liquidation)
Problem: problem of collective action, free rider, agenda control by manager.

Role of Stock Exchange:


1 Director must attend edu.prog by S.exg
2 Director must be truly independent, not connected with SH or any com.
3 Adequate disclosures of CG and internal control on the Annual Report
4 Employment (Activity, control, power) of A.Com clearly stated in the A. Report
5 Expanding the disclosure of activity conducted by listed com in A. Report

Role of GOVT:
1 Company act in social responsibility. CSR
2 Employment level, monetary policies, market supply, demand of goods and service.
3 various accept of fiscal policies (capital allowance incentive, course of taxation raised)

Agency cost:
1 Agent monitoring expenditure (director’s fees, benefits, so on)
2 Agent bonding cost (meetings with II)
3 Remaining residual loss (MGT misuse their positions)

Transection cost theory : Cost of doing business


Directors are rational on the other hand they have optimistic behavior.
1 Cost of negotiating with others
2 Cost of writing the contract in an appropriate way so that it is.

Stakeholder theory
NORMATIVE FORM of Stakeholder theory: accommodate all stakeholder concern not because of what the organization can get instrumentally “get out of it” for its own profit but doing so organization observes its moral duty to its
each stakeholder.
INSTRUMENTAL FORM of stakeholder theory adopts business cases rather than pure moral ethics cases. Good ethics is good business.

Classification of Stakeholder
Internal VS external: inside org vs outside org (employee vs competitor)
Narrow VS Wide: most affected vs less affected (based on com’s decision), (SH, Employee, MGT VS GOVT, Society)
Primary VS Secondary: continue participation VS not directly depend, (based on immediate survival)
Active VS Passive: seek participation in com’s activity VS do not seek participation on com’s policies making.
Voluntary VS involuntary: engage with org voluntarily (transferable) VS affected by com’s activity(non-transferable)
Legitimate VS illegitimate: Recognized by law VS unrecognized. Active economic relationship VS no possible cases to taking their views in action while taking decision.
Known VS Unknown: known by org by their claims. Unknown stakeholder claim.

Unitary Board
1 One single board
2 Ed’s + NED’s sit on a similar position.
3 Same responsibility and enjoy same rights
4 work for same objective

Advantage
1 close relationship between ED’s and NED’S
2 both work for a same goal
3 Effective communications between Directors
4 Information flow
5 diversified knowledge and experience

Two Tier Board:


SUPERVISORY BOARD
1 Play role similar to NED
2 Monitoring
3 Oversee the direction of the business
EXECUTIVE BOARD
1 Plays role similar to ED’s
2 Implementation
3 Running the business.
Advantage
1 More distinct formal separation between S. Body and EX. Body
2 Exclusion of employee from MGT.
3 Ned’s may have sufficient time for oversee the ED’s (better Monitoring)
Role of NED’s
1 Strategy: diversify background, can make sound decision.
2 Performance: Scrutinize the performance and monitoring the reporting of performance.
3 Risk: financial info is accurate. Financial system and internal control + risk management system is robust.
4 people: determine appropriate level of remuneration of ED, appointing + succession planning + removal of EDs

Rights of Directors:
1 Full and unrestricted access to any info that relate to the company
2 Right to indemnity from fallow director where there is an equal responsibility for breach of duty
3 Right to an induction program.
4 Access to an ongoing training and development program. Keep up to date.

Remuneration Committee: All I.NEDs. Role


1 Set rem. Policies (Motivate+ Attract + Retain)
2 Establish target for performance relate pay.
3 Establish the pension scheme
4 Ensure compliance required by law and provide all info in the annual report.
5 Consider SH participation in the AGM an vote for com’s rem policies.

Rem Package for S. Executive:


Annual compensation: Salary, Personal pension, Bonus (tied up with performance of the company) Long term compensation: Share option, restricted company share.

Nomination Committee: Majority I.NEDs (The chairman of the board can be the chairman of the committee)
Promote Meritocracy in the requirement of the board, should not practice cronyism
Role:
1 Composition of the board, Balance board, equal NEDs and EDs or more NEDs than EDs
2 Consider skill, experience, knowledge, experience of current and prospective EDs in relation for future needs.
3 Make and review succession plan for EDs
4 Recruitment, removal, training
5 Equitable Performance, evaluate board performance at least once a year.

Risk Management Committee: EDs+NEDs: Silent


Risk review cover
: Financial, operational, compliance, Business
Role:
1 Create awareness.
2 Ensure implementation of Risk management policies and procedure
3 Provide info and up to date the board
4 Evaluate new risk identified by Operational Management.
5 Review investment appraisals
6 Give feedback of I. Proposal by evaluating it to the board.

Risk Management System: 5 steps


1 Identify the risk: based on:sources, strategic or operational, based on severity (strategic, tactical, operational),
2 Risk Assessment: likelihood and impact, based on quantitative, semi quantitative and qualitative.
3 Manage the risk: Tara framework, risk diversification, ALARP
4 Communication the risk result: report to the Risk COM.
5 Motoring: regular review risk status, effectiveness of the measure for managing the risk

Internal control : always focus on Turnbull’s guidance.


Elements: PAPAMOSS
1 Control Activity / Control Procedure: operational, financial, compliance, risk MGT.
2 Control Environments: awareness and attitude to internal control shown by MGT, EMPLOYEE, DIRECTORS
3 Monitoring: Should undertake by I. Audit ensure that control are being APPLY AS PRESCRIBED.
4 Communications: timely reporting to the board for sound decision making, whistle blowing arrangement.
Advantage
1 Manage risk that is significant for a com’s business objective
2 facilitate the effectiveness and efficiency of I.C (operational)
3 Help to ensure the reliability of IC and Ex. Reporting
4 Assist Compliance with Law and regulation
5 Timely Preparations of reliable business info
6 Safe guarding com’s assets including prevention and detection of fraud.

The Board role in Risk management, Role of NED’s, Chairman, ED’s in Risk management:
1 Identify the nature and extent of the risk facing by com.
2 The extent and categories of risk it regards as acceptable for the company to bear (risk apatite)
3 The likelihood of risk concern materializing.
4 Assess the com’s ability to reduce the likelihood and impact of the risk that do materializing.
5 Cost benefit Analyzing to mitigate the risk.
On Report
1 Regularly receives and reviews on IC system
2 Undertake an annual assessment for the purpose of making its statement on IC.

Role of Management:
1 Implement board policies on Risk and Control
2 Identify and evaluate the risk
3 Ensure effective communication process by regular reporting to the board about Risk.

The Board role in internal control , Role of NED’s, Chairman, ED’s in internal control:
1 Establish sound IC system to safe guarded com’s assets SH interest
2 Establish A. COM to review the prep of financial statement and reporting
3 Establish sound control environment
4 Publish com’s IC report in the com’s Annual report
5 Review the com’s IC system (3 E’s) robustness.

Role of A. Com in Internal Control System:


1 Review the scope and outcome of audit
2 Try to ensure the objectivity of Audit is maintained
3 Reviews of audit fees and fees for other services
4 provide useful bridge between I. Auditor and Ex. Auditor
5 Review arrangements for whistleblower
6 In absence of RM. Com, AC play the role.

AC Relationship with External Auditor:


1 Appointment
2 Terms and remunerations
3 Auditor Independence and other audit service
Role of Internal Auditor:
1 Review internal control system (operational, financial)
2 Special Investigations
3 Scrutinize the financial reporting and operational operations
4 Value for money audit
5 Compliance with law and regulations
6 Risk Assessment: adequacy of the mechanism, for identifying and controlling the risk from internal and external sources

Factor to consider in assessing the company’s risk and control procedure:


1 Risk assessment:Clear objective on risk assessment and control issues, risk assessed ongoing basis, com’s risk apatite.
2 Control environments and control procedure: clear strategy for dealing with significant risk, Com’s culture; code of ethics; human resources policies; performance support the business objective, segregation
of duties between directors, communication with employee.
3 Information and Communication: board receives timely information and reliable reports on inside and outside of the company, proper arrangement for whistle blowing arrangement.
4 Monitoring: ongoing process embedded within the company overall business operation, company ability to survive in changes in objective business and EX. Environment, proper communication process for specific issues
E.g.:Fraud,illegal activities.

Content of board statement of internal control:


1 Board is responsible for com’s IC system and the effectiveness of the system also explain the system will manage the risk rather than eliminate the risk.
2 Summarization of the process of the board that has applied to evaluate the robustness of IC
3 Company’s ability to response in changes in business and its Ex. Environment
4 The quality of MGT ongoing monitoring of risk
5 Incidence of significant control failure and weaknesses and necessary action com have taken to mitigate
those significant failures.

Importance of adequate information flows to management


1 Good CG practice (timely and appropriate)
2 Management has an obligation to provide such info.
3 Board can take sound decision.
4 Asses the information which helps to monitor the business on behalf of SH.

Ethical Theory : Relativist vs Absolutist


1Relativism: concern about majority of the society thinks and follows, no rational way of determining whether an action is morally right or wrong other than by asking people of this or that society believes
it is morally right or wrong. (Pragmatic)
2 Absolutism : Ethical judgments are universal. If one action is wrong in one country, it’s also wrong in another country. (Dogmatic)
3 Moral minimum: Sits between this two. Morality decides based on there are some minimum set of obligation
as well as adaptation of norm of the local culture, societies beliefs.

Kohlberg Moral Development


1 PRECONVENTIONAL: fear of punishment or reward, Self-centered.
Obey or be punished:[/b]Do not act any activity or make decision based on punishment and reward.
Instrumental: Do things for the promise of future benefits.

2 CONVENTIONAL:
Relativism. Concern about peer group and society.
Follow your peers: Developed behavior pattern based on family, friends, work colleagues etc.
Follow Society: expand into “norm” for society as a whole. Do not do anything which harm to society

3 POST CONVENTIONAL: they think their own sets of values are more superior so they want change.
Individual Rights: not satisfied with existing law, Challenge social norm, wanted to change in democratic manner.
Universal principles:Their challenge is very high, do not mind to create chaos in society, harm others, and regard the chaos as a price to pay to effect the change.

Ethical theory : Deontology vs Teleology


Deontology:Non-Consequentialist, Absolutist, based on underlying principles of the decision maker motivation.
Ethics of duty: 3 Maxim. 1.Expect others to follow. 2.Expect others to work for me as individuals or as a group. 3.When the action known by other they will accept it or not.

Ethics of rights and Justice: Rights of moral claim by human: Respected, rights of life freedom, property.
Justice:Respect equally and fairly. Fair treatment of individual in a given situation with a result that everybody gets what they deserved.

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