CORPORATE GOVERNANCE NOVEMBER 2008 ICSA

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Compulsory answer all parts of this question, 1 a Outline the main features of a two tier board structure 4 marks. SUGGESTED ANSWER, In contrast to unitary boards where all directors are members of the same. board a two tier structure consists of two boards a supervisory board and a. management board,Two tier boards are common in Germany. The supervisory board consists of Non Executive Directors NEDs and is led by. the company Chairman In Germany the NEDs are mainly not independent and. may be former executives or represent interests such as employees and major. shareholders, The management board consists of Executive Directors and is led by the Chief. Executive Officer, The management board is responsible for managing the enterprise for risk.
management and for developing and implementing corporate strategy. However the work of the management board on strategy must be co ordinated. with the supervisory board, The role of the supervisory board is mainly to advise and supervise the. management board In addition the supervisory board must be involved in any. decision that is of fundamental importance to the company for example a. decision that would significantly affect the company s assets financing or. The two boards should co operate closely to the benefit of the enterprise The. success of corporate governance depends on a good working relationship. between the supervisory board and the management board and in particular. on a good working relationship between the company Chairman and the head of. the management board,Other relevant points were also given credit. EXAMINER S COMMENTS, Most candidates provided a reasonable or very good answer to this question. b Explain the meaning of the term insider dealing and indicate the. sanctions which may be attached to this activity 4 marks. SUGGESTED ANSWER, Insider dealing is the use of inside information by an insider to deal in shares of. a company to make a profit, Inside information is price sensitive information that has not been released to.
the public but when released could have an effect on the share price of the. company For example it could be information about takeover discussions. between two companies that are nearing agreement but are still confidential. Page 2 of 18, An insider is any person with access to inside information They include directors. and senior executives of a company their professional advisers and any other. person who is given the inside information by an insider Receiving inside. information makes a person an insider, Insider dealing is a criminal offence in various countries In the UK it is a. criminal activity under the Criminal Justice Act 1993. Insider dealing is a criminal offence in the UK and if found guilty an individual. would face a fine and or imprisonment However the burden of proof is high. and there have been only a few successful prosecutions in the past. EXAMINER S COMMENTS, Many candidates answered this question well although there were some common. faults Some candidates failed to mention that insider dealing meant buying or selling. shares of a company an obvious point to make but candidates may have assumed. wrongly that the point was so obvious that it needn t be mentioned. Many candidates discussed the rules for directors on dealing in their company s shares. during close periods Although the reason for the close period rules is to prevent insider. dealing they do not explain the general law on insider dealing. c Outline what a director s duty of skill and care entails 4 marks. SUGGESTED ANSWER, A duty of skill and care for directors has been an item of common law in the UK. and is now included as a legal duty for directors in the Companies Act 2006. The duty is owed to the company rather than the shareholders. It is a duty not to act negligently in carrying out his or her duties as a director. The level of skill and care required has been set in the UK by case law for. example re D Jan of London, The standard of skill and care expected is the higher of i the skill that the.
director would objectively be expected to have as a person in his particular. position in the company and ii the knowledge skill and experience that the. individual actually does have Some candidates used the standard of skills. expected of a finance director as an example, Directors could be made personally liable for losses suffered by the company if. found to be in breach of this duty,EXAMINER S COMMENTS. Again there were many good answers to this question However there were some. common faults too, Many candidates failed to mention that the duty is a legal statutory duty. Some candidates discussed the fiduciary duty of directors in UK law which is a. different duty,Page 3 of 18, Some candidates listed all the statutory duties of director in the Companies Act. 2006 However the duty of skill and care is only one of them so the list was. not required, d Summarise the main principles relevant to corporate governance in.
the public sector 4 marks,SUGGESTED ANSWER, This question was looking for answers that discussed Nolan s principles of corporate. governance in the public sector As there are seven of them candidates would have had. time to write only very briefly about these principles They are. Selflessness holders of public office should take decisions in the public interest. not for personal benefit, Integrity holders of public office should not place themselves under any. obligation to another person who might use this obligation to exert influence. Objectivity decisions should be made for rational reasons and. selections choices made on merit, Accountability holders of public office should be accountable to the public for. their actions, Openness holders of public office should be as open as possible about the. decisions they make,Honesty they should also act honestly.
Leadership they should promote the other principles through leadership and by. setting an example,EXAMINER S COMMENTS, Candidates who recognised that the question related to the Nolan principles usually. provided an answer that was adequate or better The main problem experienced by. candidates was to confuse public sector with public companies and to write about. corporate governance in companies Candidates were given credit if they did not. mention the Nolan principles but wrote sensibly about issues related to the principles. e Explain the meaning of the term stakeholder providing examples of. stakeholders in your answer 4 marks,SUGGESTED ANSWER. Stakeholder must be defined A stakeholder or stakeholder group for a. company is any individual entity or group of individuals or entities whose. interests are affected by what the company does, This definition needs examples and explanation The examples could be used to. provide explanation, Lenders to a company are stakeholders because they have put money into the. company and wish to have the money repaid with interest They will be. concerned with anything that increases the risk of non payment. Page 4 of 18, Employees of a company have an interest in what their company does The.
company is their employer and they are dependent on the company for their. jobs salaries work experience training career prospects and so on. The general public may be significant stakeholders for a large company because. the company may have an impact on the economy as a whole and on the. environment,EXAMINER S COMMENTS, Virtually all candidates defined stakeholder adequately and listed some examples. However these candidates obtained only adequate marks because they failed to explain. the definition sufficiently As indicated above the examples should have been used to. explain the meaning of stakeholder more clearly, f What are the main requirements of the Sarbanes Oxley Act 4 marks. SUGGESTED ANSWER, A lot of information could be provided about the Sarbanes Oxley Act but the question. was looking for a brief but clearly explained list of the more significant elements of the. Act from a corporate governance perspective, The Act is US legislation containing statutory requirements relating to corporate. governance, The Act requires all companies with a listing in the US to provide financial.
statements that are certified by the Chief Executive Officer CEO and the Chief. Financial Officer CFO in order to vouch for their accuracy section 302. Section 404 requires each annual report to include an internal control report. stating the responsibility of management for internal control and containing an. assessment of the system of internal control in the company Material. weaknesses in internal control should be disclosed. The CEO and CFO must give up previous bonuses in the past 12 months if the. accounts are subsequently found to need re stating. There are restrictions on the type of non audit work that can be performed for a. company by its firm of external auditors, The Act provides some protection for whistleblowers. It established the Public Company Oversight Board,It introduced penalties for document shredding. EXAMINER S COMMENTS, The main requirements were to discuss section 302 and section 404 but credit was. given for other relevant items in the Act Many candidates could remember some. elements of the Act and were given marks accordingly. g What approach to corporate governance has been adopted by the. European Union EU 4 marks,Page 5 of 18,SUGGESTED ANSWER. The EU has been following a programme to improve the general standards of. corporate governance in member states, Each member state has its own voluntary code of corporate governance for.
stock market companies and the EU requires these companies to adopt a. comply or explain approach to a selected Code, The EU can also introduce corporate governance measures into national law by. issuing Directives, Candidate should have been able to mention at least one directive relating to. company law examples are the Modernisation Directive that introduced a. requirement for an annual business review There are now since 2008 laws. relating to audit committees and the publication of an annual corporate. governance report In 2009 the Shareholder Rights Directive to improve voting. and information rights for investors holding shares of companies in other EU. states will be introduced into national laws of EU countries although this will. have relatively little effect on the UK, Candidates who mentioned business review audit committee or shareholder rights were. given credit,EXAMINER S COMMENTS, Many candidates clearly found this question difficult to answer and struggled to find. anything relevant to write One or two candidates even confused the EU with the OECD. and the Commonwealth, h Outline the benefits of corporate social responsibility CSR for.
companies 4 marks,SUGGESTED ANSWER, A brief definition of CSR would have been useful CSR is responsibility shown by. a company for the broader interests of society as a whole and for stakeholders. other than shareholders It includes concern for the environment employees. and society in general, It has been suggested that companies with CSR policies tend to be better. managed and more successful commercially although there is no conclusive. evidence of this, From a business case perspective improving CSR improves corporate reputation. among stakeholders of the company By improving reputation and stakeholder. relations the company is likely to perform better over the medium to long term. Some institutional investors are required to report on the extent to which they. take socially responsible investment into consideration when making investment. decisions There is a stronger probability of support from the investment. community for a company with good CSR policies, Paying attention to CSR is important in terms of risk management There are. many risks related to poor CSR including environmental and human rights. related risks Such risks can destroy reputation and impact on share value. Page 6 of 18, CSR is also associated with conducting business in an ethical way A company s.
business might benefit from the trust between suppliers and customers that. comes from ethical dealing, Cynical candidates may also have commented that CSR policies give companies. an opportunity for favourable public relations which is an aspect of marketing. EXAMINER S COMMENTS, Many students failed to shown much commercial sense or realism when answering this. question Many asserted without any justification that CSR policies definitely did. improve a company s reputation and as a result customers would buy more profits. would increase investors would put more capital into the company the share price. would go up and employees would not want to leave the company. i What is the role of internal audit 4 marks, Internal audit is an independent appraisal activity within an organisation It acts. as a form of control, Its function is to check the functioning and the adequacy of other controls. The controls that are checked by internal audit are mainly internal controls. which are categorised by the Turnbull guidelines into financial controls. operational controls and compliance controls Internal controls are part of the. system of internal control, Financial controls are controls over accounting procedures to try to ensure that.

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