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Chapter 1: NOTES:
Corporate Governance
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Chapter 1: NOTES:
Corporate Governance
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2. What is a fundamental difference Stewardship theory follows the legal requirement for directors
between stewardship theory and to act solely in the interests of the shareholders.
stakeholder philosophy
Stakeholder philosophy believes that companies should be
accountable to a wide range of stakeholders affected by its
activities.
Summary/Reflection:
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1. Distinguish a holding company, a A holding company is a company that holes all of the
wholly owned, a partly owned dominant shares of the voting rights in another company.
subsidiary company, and an A subsidiary company is a company in which and other
associated company. company (its holding company) holes all of its voting
shares (a wholly owned subsidiary) or a majority of its
voting shares (partially owned subsidiary).
An associate company is a company over which another
company exercises dominant power even though it does
not hold a majority of the voting rights in that company, for
example where the other shareholders are widely spread.
2. Why might a company incorporate The primary reason is, typical, low taxation with some
in an offshore jurisdiction? businesses exempt from profit tax, and no capital gains or
wealth taxes. Additionally, an offshore jurisdiction might have
good community relations, political and economic stability, no
exchange controls, and offer companies registered their
flexibility, corporate privacy and confidentiality. A pool of
professional service providers, sound company draw, and
regulation that is reasonably but not bureaucratic.
3. Can shareholders attend internal Not unless they are managers of the company as well as
meetings of the company or shareholders
access management accounts and
other corporate information?
4. Why do groups adopt a chain Principally to leveraged financial power gain from the gearing.
structure? By investing in a chain, the head of the chain is able to exercise
more influence over the companies in the chain then would be
available by investing in individual companies in the chain.
5. What are dual – class shares? The creation of two or more classes of voting shares in which
one class enjoys greater voting rights in the other class
6. What is a nomad? A nominated adviser authorised by the UK AIM market, which
all AIM companies are required to appoint. The nomads
experience provides a quality control mechanism by checking
the company’s plans and certifying to the exchange that the
company is suitable and ready for listing
7. What is a dual – listed company? A dualistic company is a group structure in which to listed
companies merge that both companies continue to exist and
share ownership of a single, operational business. The group
then has to stock exchange listings, with different bodies of
shareholders, usually in different countries.
8. Why might companies consider Many companies use joint ventures with another company to
entering into joint venture enter markets, transfer technology, procure supplies, obtain
agreement? finance, share management skills, manufacturer products
around the world, or share risk in on an international scale
9. What activities might shareholder Shareholder activism can include communication and
activism include? negotiation direct with management, but also media campaigns
or blogging to change corporate practices, proxy battles
advancing shareholder resolutions to force change, calling
shareholder meetings, all litigation against companies or their
directors. Some shareholder activists use their shareholding to
advance their own social, environmental, or other agenda, and
influence corporate behaviour.
10. Can companies hold shares in Only in some company law jurisdictions. In other jurisdictions,
themselves? Give examples? companies are prohibited from investing in themselves through
group networks.
Summary and reflection
1. Should the managing Dir/CEO of a If disagreements arise that were not envisaged in the initial
joint venture company, who is also joint-venture (JV) agreement, directors of the JV company can
employed by one of the joint- face conflicts between their responsibilities to the JV company
venture partners, be a member of and to the JV partner company that employs them. Although
the joint venture company bought? many JV companies do appoint the managing director or CEO
of the JV to the board, others now appoint only representative
directors from the partner companies and have the JV
managing director attend meetings in a non-voting non-partisan
way.
2. How are partnerships governed? Basically in a partnership, the partners are responsible for
governing the firm. In a firm with few partners, governance is by
a meeting of all the partners. In larger firms the partnership may
decide to appoint a managing partner and a governing body,
perhaps called an executive or management committee, which
meets regularly to manage partnership affairs, with a periodic
perhaps annual, reading of the entire partnership to accept the
accounts, to transact business reserved to the meeting and
appoint members to the governing body.
3. What is a limited – liability Some countries have a form of limited liability partnerships
partnership? (LLP). This governance vehicle gives the benefits of limited
liability to the members, but allows the flexibility of organising
as a traditional partnership. The governance of an LLP is
similar to that of a partnership: members provide the capital,
contribute personally, and share profits and losses, to give
some protection to those dealing with a limited partnership.
However, the disclosure requirements tend to be more stringent
than those for a traditional partnership, and similar to those of
the company.
4. Explain the difference between a A holding company is a company at the head of the group
holding, a subsidiary, and an pyramid. Its Board of Directors is often called the main
associated company board.
Subsidiary company is one in which the holding or parent
company holds all or a majority of the voting shares in the
company.
An associated company is one in which the holding
company, although not holding a majority of the shares,
has sufficient interest to control it and determine its actions.
5. Explain the two distinct options in 1. Subsidiary company self-governance, allowing each
governing and managing a group company in the group to govern itself and manage its own
of companies affairs, subject to overall group wide policies and resource
allocation.
2. Groupwide governance, treating the group companies as
divisions or departments of the holding company.
6. What are the benefits of drawing The opportunity for cross group coordination, the sharing of
subsidiary company directors from expertise, training and development of future mainboard
other companies in the group directors, management development, and the building of group
norms and culture.
7. Explain what a family council is A family council, consisting of the family members who own
and does in a family company shares (management and nonmanagement), meets prior to
meetings of the shareholders and the directors to identify
issues that affect family members and to resolve them in the
best interests of the family.
8. Explain what a sovereign wealth An investment fund that invests a country’s financial surpluses
fund is and which countries have in the shares of companies in other countries. Arab and Asian
been particularly involved countries stayed own funds have been used to invest in the
United States and Europe
9. What are some of the sectors in Sovereign wealth funds have invested in telecoms technology,
which sovereign funds have real estate, ports, and to transport operations, in the financial
invested sectors.
1. In the market for Chinese listed A shares - listed in China and available only to Chinese
companies, what are the residents
differences between A shares, B B shares – listed in China, but available only to foreign
shares, and shares, L shares, and investors
H shares N shares – China-based companies listed in New York
L shares – China-based companies listed in London
H shares – China-based companies listed in Hong Kong and
Singapore
2. Distinguish the roles in China of SASAC, the state-owned assets supervision and administration
the SASAC and the CSRC Council of the State Council, holes the China government
shareholding in all China’s listed companies (other than those
in the finance sector).
CSRC, the China securities regulatory commission of the State
Council, is the Chinese government’s corporate regulator.
3. What are five types of corporate State-owned enterprises (SOEs), which may be large,
enterprises medium, or small, with state ownership at the national,
provincial, or local level
collectively owned enterprises, including urban collectives
and rule townships and village enterprises (TVEs)
privately owned organisations, defined as firms with more
than seven employees
small, individually owned enterprises with no more than
seven employees
foreign-invested firms
4. What is a major problem facing Companies in India, both in the public and private sectors
boards in many Indian companies? including multinationals, are dominated by majority
How does the Asian corporate shareholders, with pre-emption rights for minority shareholders
governance Association rate Indian frequently ignored. A corporate governance rating by the Asian
corporate governance? corporate governance Association in 2007 assessed India’s
corporate governance as fair to poor
5. In Russia, what have been the The role of the state has expanded and government influence
significant changes in corporate over some companies has increased. Some ownership has
governance under the presidency been transferred back to the state by next expropriation or by
of Vladmir Putin? acquisition in the market, as in the case of Yukos.
6. What are the unusual governance Brazilian company law and the code have three unusual
features in Brazilian company law corporate governance features-the fiscal council, the family
and corporate governance codes? council, and the advisory board
7. Hong Kong is a special No. Hong Kong has its own corporate governance code,
administrator of region (SAR) of enshrined in the Hong Kong stock exchange listing rules.
China. Do Hong Kong listed
companies have to follow the
Chinese corporate governance
rules laid down by the CSRC?
8. Who often controls listed chaebol Listed chaebol companies are often still controlled by the
companies in South Korea? How is dominant owner-family interests. Even though companies
that control maintain? attract outside capital, family domination is maintained through
insider boards and cross ownership with subsidiary companies.
9. What typifies the governance of Concentrated ownership, with strong family ownership of
businesses in the MENA region? both private and listed companies or state ownership
dominant family oversight and control, with leadership from
the head of the family, and manorial decision-making,
opaque communications and relationship based trading
debt financing in which bank financing is often more than
shareholders’ equity
banking sector equity investment, with banks holding
significant shares in companies
10. What is the most significant legal Is La make Cherie a law introducing religious rules and
influence on corporate governance interpretations
in the MENA region?
Summary and reflection
1. What is a principal role of the The remuneration committee is responsible for recommending
remuneration committee of the to the board the remuneration packages of executive directors,
board and sometimes other top management, including their salary,
fees, pension arrangements, options to acquire shares in the
company and other benefits.
2. What is the principal role of the The role of the nomination committee is to suggest names for
nomination committee of the board board membership, in an attempt to introduce different
experience, personalities, and diversity to the board, and to
avoid domination of the nomination process by the Chairman,
CEO, or any other dominant directors.
3. What is the primary role of the The primary role of the audit committee is to liaise between the
audit committee board and the independent external auditors
4. What might that primary role Liaising between the board and the independent external
include auditors might include:
making recommendations to the board on their
appointment, reappointment, or removal and replacement;
reviewing and approving their terms of engagement;
ensuring their objectivity and independence from the
company, confirming that no conflicts of interest exists that
could affect the auditor’s ability to issue an unbiased
opinion on the company’s financial statements;
developing and implementing a policy for their engagement
on non-audit work;
working with them on audit procedures and plans, receiving
the auditor’s report and management letter about issues
that have arisen during the audit, and reviewing and acting
on these issues.
5. What other duties might a modern See 17 items listed in the main text
audit committee undertake
6. What might boards, and in See 10 items listed in the main text
particular their audit committees,
look to the internal audit function to
provide?
7. Who is responsible for the financial The directors are responsible for the preparation of the financial
accounts of a listed company – the statements, and for being satisfied that they give a true and fair
auditors or the directors view. The auditors responsibility is to audit and express an
opinion on the financial statements in accordance with
applicable law and international auditing standards.
8. In the United States, what do the PCAOB standards require auditors to:
PCAOB standards require auditors obtain reasonable assurance that effective internal control
to do? over financial reporting has been maintained;
assess the risk that a material weakness exists, testing and
evaluating the design, and operating effectiveness of
internal control based on the assessed risk;
perform such other procedures as are considered
necessary in the circumstances.
9. In the United States, what is the In the United States, the company secretary is typically known
company secretary typical known as the corporate secretary, and the role is frequently carried out
as, and who carries out that role? by the corporate lawyer.
10. What might the duties of a See the nine items in the main text
company secretary typically
include?
Summary and reflection
1. What are the six C’s for an Commitment, character, collaboration, confidence, creativity,
effective board? contribution
2. Name eight matters that new See case study 16.1 in the text
directors should know about if they
have followed a properly planned
orientation program
3. Name some issues that need to be Confidentiality, security, integrity, availability, assurance, cost
considered before adopting an effectiveness, flexibility, simplicity, and ease of use
electronic paperless system for
board reports
4. What are the key questions that Why, what, when, where, and who
should be posted before calling a
meeting
5. If a director lacks appropriate A director cannot opt out of certain items because he or she
knowledge on a subject matter lacks appropriate knowledge, although he or she may rely on
before the board, can he or she, information received in the opinions of fellow directors, given in
legitimately, opt out of discussions good faith, unless he or she has any reason to doubt-in which
on that item? case he or she must pursue the issue to its root.
6. Are there any Pacific rules Although, subject to the articles, there are no Pacific rules
governing the content or format of governing the content or format minutes of a board or board
units of board or board subcommittee meetings; they should provide a competent and
subcommittee meetings? complete record of what transpired, what was decided, and
what actions are to be taken by whom and when.
7. Name five qualifiers of a good A good report with high quality information is;
report with high quality information understandable;
reliable;
relevant;
comprehensive;
concise;
timely;
cost-effective.
8. Why should companies have a A newly appointed director needs a proper introduction
director induction program? program to reduce the learning time taken before beginning to
make significant contribution to board deliberations.
9. What is D&O? Directors and officers insurance
10. In a limited liability company, are No. Actions can be brought against the company the board,
the liabilities of the directors and/or individual directors. Claims for unlimited amounts can
limited? put directors personal assets at risk
Summary and reflection