AF437: Issues in Governance and Ethics Tutorial Questions Week 1 Chapter 1 The Free Market System and Business 1. How does an effective corporate governance structure improve investor confidence? - Ensures corporate accountability - Enhances reliability and quality of public financial information - Enhances the integrity and efficiency of the capital market - Mitigate risks including reducing disruptive behaviour and conflict of interest - Higher level of compliance 2. What benefits are obtained by the proper implementation of SOX? - Strengthens the control environment - Standardized processes - Improved documentation - Increasing board and audit committee involvement - Improves audit independence - Improves quality and reliability of financial information - Restores investor confidence in financial reporting regime 3. How can the board of directors influence the corporate culture? - Lead by example – i.e. displaying and communicating the values in and out of the corporation develop a practice of not only complying with applicable regulations, but also committing to doing the right thing and observing ethical principles of professional conduct in avoiding potential conflicts of interest. - Create an enabling environment that fosters a strong ethical culture, collegiality and passion for excellence – includes an appropriate reward and punishment system for performance - Create a suitable and appropriate set of values and then provide strategies and a business model that aligns to those values - add value to the company’s sustainable long-term performance; - effectively carry out their fiduciary duty and professional responsibilities; - are held accountable and personally responsible for their performance 4. What is the difference between a shareholder and a stakeholder aspect of corporate governance? What is the relationship between corporations and stakeholders, and what is the corporations’ role in that relationship? Shareholder Aspect - This aspect is based on the premise that shareholders provide capital to the corporations that exists for their benefit. Stakeholder Aspect - Stakeholders are now becoming more engaged in a company performance on a variety of economic, governance, ethical, social and environment issues Corporations rely on stakeholders in order to survive and grow while in return stakeholders rely on the corporation for the supply of goods or services required, income (employees, government), and for business (suppliers, lenders). 5. Discuss the following quote from Lori A. Richards, the SEC’s director of the Office of Compliance Inspections and Examinations: “It’s not enough to have policies. It’s not enough to have procedures. It’s not enough to have good intentions. All of these can help. But to be successful, compliance must be an embedded part of your firm’s culture”. Agree – it is not enough to have policies and procedures. They need to be adhered to and their implementation monitored – all the officers of the corporation must comply with these policies and procedures at all levels. It must become a culture that is embedded in the daily activities and work life. 6. What is the significance of quality financial statements and other financial reporting information? Stakeholders rely on financial statements provided by corporations to make decisions at various levels. Hence it is imperative that financial information provided are of high quality and are reliable. The corporate collapses in the early 2000s resulted in the loss of confidence of stakeholders in the financial reporting regime, and it took a lot of actions to try and restore stakeholder confidence in the financial reports. Therefore, it is very significant that the financial statements are accurate and free of material misstatements. 7. Will compliance with applicable laws, rules, and regulations ensure effective corporate governance? Explain your answer. Regulations, rules and laws are part of corporate governance – they are mechanisms by which the performances of those charged with corporate governance are measured by. They ensure effective corporate governance by providing a monitoring mechanism on the performance of managers and directors. Chapter 2 Corporate Governance 1. What is the underlying focus of the shareholder aspect of corporate governance? Value creation for the shareholder through corporate governance effectiveness 2. What types of managerial failures prevent management from acting in the best interest of the shareholders? Failure of managerial competence resulting from unintentional mistakes or negligence in discharging fiduciary duties. Failure of managerial integrity caused by willful or opportunistic behaviors (fraudulent activities, fabrications, embezzlement, illegitimate earnings management) that have detrimental effects on the value of the firm’s assets 3. Is value creation or value protection the primary goal of corporate governance? Value creation is the primary goal of the shareholder aspect of corporate governance. Value protection is the primary goal of the stakeholder aspect of corporate governance. 4. What is the basic cause of corporate agency problems? Hypothetically, what are the agency problems that exist in your work and school environment? The separation of control and ownership is the basic cause of corporate agency problems. The agency problems in each work place and school environment may vary. Possible agency problems may arise between corporate governance participants with differing goals and objectives. Agency problems within a school may arise from differing goals and objectives between those funding the school and those actually running the day-to-day operations in the school. 5. What are the versions of corporate governance mechanisms? How are they effective? How can they be ineffective? Internal and external corporate governance mechanisms exist to aid and improve corporate governance. Internal mechanisms are designed to manage, direct, and monitor corporate activities in order to create sustainable and enduring stakeholder value. Examples of internal governance mechanisms are the board of directors, particularly independent directors, the audit committee, management, internal controls, and internal audit functions. External governance mechanisms are intended to monitor the company’s activities, affairs, and performance to ensure that the interests of insiders (management, directors, and officers) are aligned with the interests of outsiders (shareholders and other stakeholders). Examples of external mechanisms are the capital market, the market for corporate control, and the labor market, as well as state and federal statutes, court decisions, shareholder proposals, and best practices of investor activists. These mechanisms may be helpful in aligning management incentives with shareholder interests, and also controlling management behavior. Corporate governance mechanisms may be ineffective in situations in which independence is removed, or in which corporate governance participants fail to perform their duties. 6. Corporate governance reforms are intended to reduce many potential conflicts of interest among corporate governance participants, including directors, management, auditors, financial analysts, corporate counsel, and investors. What conflicts of interest are possible among these groups? Conflicts of interests may arise among directors, management, auditors, financial analysts, corporate counsel, and investors in instances in which personal goals of such participants are at odds with those of others. For example, conflicts of interest may arise among management and shareholders or the board of directors as to the operationof the organization. Also, management may experience conflict with corporate gatekeepers acting on behalf of the shareholders, such as auditors, corporate counsel, and the board of directors. 7. As an investor, would you find use in corporate governance reports? Explain. Corporate governance reporting reports the effectiveness, responsiveness, and credibility of an organization’s corporate governance measures. Corporate governance measures and performance indicators that could be included in CGR are: (1) descriptions of an organization’s culture, appropriate tone at the top, board of directors, internal controls, and commitment to economic, social, and environmental goals; (2) major risks facing the organization in achieving its economic, social, and environmental goals and measures taken to address such risks; (3) the percentage of the board of directors who are independent and nonexecutive directors; (4) the existence of an audit committee comprising all independent and financially literate directors; (5) the adequacy of internal controls; (6) corporate governance principles and mechanisms to which the organization adheres; and (7) the status of the organization’s compliance with applicable laws, rules, regulations, and standards, and disclosure of areas of noncompliance. All of these reported phenomena would be helpful in assessing the future viability of the organization. 8. Use your research skills to search the Internet for information regarding the most recent GMI ratings. Do the ratings show an improvement in corporate governance procedures? Briefly comment on your findings. Information on recent GMI ratings may be found at www.gmiratings.com or via the use of a popular Internet search engine. 9. Many “best practices” are mentioned in the text. Which three best practices do you agree with, and which three best practices do you disagree with? Explain. Answers will vary. Corporate governance best practices suggested by professional organizations and investor activists are nonbinding corporate governance guidelines intended to improve corporate governance policies and practices of public companies above and beyond state and federal statutes and listing standards.
