EXAM tips
Opentuition
Governance:
Directors
Board sub-committees(audit and nominations)
Statutory duties
Quality of information
Early indicator of at-risk companies
When should institutional investors get involved
Need for corporate governance
Risk:
Identification, assessment, measurement and management
Internal auditors /external auditors comparison of roles in the context of corporate
governance
Business risks
How to ensure that all employees are aware of company strategy and why is it important
Ethics:
Kohlberg scenario
Deontology and teleology
Environmental footprint and accounting
CSR
Kaplan
Corporate governance: stock exchanges/company secretary
Ethical theories
Absolutism / relevativism
Internal control failures
Transaction cost theory
Normative / instrumental stakeholder views
Risk assessment
Risk strategies
Risk map
TARA
Audit committee
Sustainability
Social and environmental footprints
BPP
Internal audit
Governance, internal controls and risks
Becker
Corporate governance concepts-the underlying fundamentals;
CG in other organisations-NGOs, public sector
CG types and forms-rules v principles, insider/outsider, UK codes, SOX
Agency theory-stakeholders, Mendelow
Board structure
Internal control and business risk-Turnbull
Ethical theories and business codes
Professionals and public interest
Corporate citizen, footprints and sustainability
Social and environmental auditing
LSBF
Role of the chairman
Nomination committee
Stakeholder classfications
Audit committee and internal audit
TARA
Tucker’s model
Governance:
Directors
(a)Chairman
Running the board and setting its agenda
Ensuring the board receives accurate and timely information
Ensuring effective communication with shareholders
Ensuring sufficient time is allowed for discussion of controversial(有争论的) issues
Taking the lead in board development
Facilitating（促进） board appraisal
Encouraging active engagement（主动参与） by all the members of the board
Reporting in and signing off accounts
(b) CEO
Business strategy and management
Investment and financing
Risk management
Establishing the company’s management
Board committees
Liaison with stakeholders
(c) Division of responsibilities
CEO run the company, Chairman run the board and take the lead in liaising with
shareholders
Chairman carries the authority of the board, CEO has the authority that is delegated by
the board. Unfettered powers is concentrated into on pair of hands
Avoiding conflict of interest
Board can’t make the CEO accountable for management if it is led by CEO
Board is more able to express its concerns effectively by providing a point of reporting
for the NEDs
Chairman is responsible for obtaining the information that other directors require to
exercise proper oversight(监督) and monitor the organization effectively
Compliance with governance best practice and hence reassures shareholders
(d) Roles of NEDs
Strategy. Contribute to, and challenge the direction of, Strategy
Scrutiny. Scrutiny the performance of executive management in meeting goals and
objectives and monitor the reporting of performance.
Risk. Financial information is accurate and financial controls and systems of risk
management are robust.
People. Determining appropriate levels of remuneration for executives, and are key
figures in the appointment and removal of senior managers and in succession planning
Contribution of NEDs:
Better balanced board(power, skills and experiences)
Representing shareholder interests(put shareholders’ viewpoint in board discussion,)
Monitoring function(monitors risks, controls and operations effectively, the performance
of executive directors)
(e) Advantages of NEDs
External experience and knowledge which executive directors do not possess.
Provide a wider perspective（更广泛的角度） than executive directors
A comfort factor for third parties such as investors or creditors
Certain roles (father confessor(倾听倾诉的人): being a confidant（知己） for the
chairman and other directors; oil-can: intervening to make the board run more effectively;
high-sheriff（高级长官）: if necessary taking steps to remove the chairman or CEO)
Full board members who are excepted to have the level of knowledge that full board
membership implies.
(f) Problems of NEDs
Lack independence (no business, financial or other connection; Cross-directorships;
should not take part in share option schemes and their service should not be pensionable
（有退休金）; Appointments should not be for a specified term and reappointment should
not be automatic; Procedures should exist to ensure NEDs take independent advice)
Prejudice（偏见） and against widening the recruitment of NEDs
High-calibre NEDs may gravitate(倾向于) towards the best run companies
Have difficulty imposing their views upon the board.
Not enough emphasis is given to the role of NEDs in preventing trouble
Limited time
Damage company performance by weakening board unity and stifling entrepreneurship
（扼杀创业精神）
(g) Remuneration package
Basic salary(experience, market rate)
Performance related bonuses(transaction bonuses; loyalty bonuses)
Shares
Share options (align（匹配） management and shareholder interests, particularly held for
a long time)
Benefits in kind (transport（交通工具）/ health provisions / life assurance / holidays /
expenses / loans)
Pensions(养老金)
(h) Remuneration policy
Pay scales
Proportion of different types of reward
Period
Be related to measureable performance
Balance between short and long-term performance elements
Transparency
（i）Responsibilities of the board
Formal schedule（时间表） of matters specifically reserved（专门保留） to it for decision
at board meetings
Monitoring the CEO
Overseeing strategy
Monitoring risks, control systems and governance
Monitoring the human capital aspects of the company, eg succession, morale, training
Monitoring potential conflicts of interest
Ensuring that there is effective communication of its strategic plans.
Nomination Committee
(a)Consist mainly of NEDs, to consider:
The balance between executive and independent NEDs
The skills, knowledge and experience possessed by the current board
The need for continuity and succession planning
The desirable size of the board
The need to attract board members from a diversity or backgrounds
(b)Induction
Build an understanding of the nature of the company, its business and its markets;
Build a link with the company’s people
Build an understanding of the company’s main relationship including meetings with
auditors
(c) Continuing professional development
Extend their knowledge and skills continuously;
Concentrate on the role of board, obligations and entitlements of existing directors and
the behaviors needed for effective board performance.
Audit committee
(a)Function
Improve the quality of financial reporting
Reduce the opportunity for fraud
Enable the NEDs continue an independent judgement and play a positive role
Help the finance director (raise issues of concern; get difficult things done)
Strengthen the position of the external auditor
The External auditor can assert(坚持) his independence when dispute with management
Strengthen the position of the internal auditor
Increase public confidence
(b) Review of financial statements and systems
Considering performance indicators and information systems that allow monitoring of
the most significant business and financial risks.
(c) Liaison with external auditors
Being responsible for the appointment or removal of the external auditors
Any other threats to external auditor independence (non-audit service; conflict of
interest)
Discussing the scope of the external audit
Acting as a forum for liaison between the external auditors, the IAs and the finance
directors
Helping the external auditors to obtain the information
Making themselves available to the external auditors for consultant
Dealing with any serious reservations.
(d)Review of internal audit
Standards including objectivity, technical knowledge and professional standards
Scope including how much emphasis is given to different types of review
Resources (enough hours, personal technical and skills)
Reporting arrangements
Work plan (review of controls and coverage of high risk areas)
Liaison with external auditors
Results
Relate to external auditor (increase the independence of external auditor; act as liaison
person to facilitate the communication between the executive directors and external
auditors; Act as coordinate the work between external auditor and internal auditor; To
monitor the independence and quality of work of external auditor)
Related to internal audit function (To approve the appointment or termination（结束） of
appointment of the head of internal audit; To review the work of the internal audit function)
(e)Review of internal control
Monitor the adequacy of internal control systems in mitigating（减轻） risks (control
environment, management’s attitude)
Cover legal compliance and ethics
Address the risk of fraud (report fraud, frand to be investigated)
Reviewing the company’s statement on internal controls
Consider the recommendation of the auditors in the management letter and
management’s response
Active supervisory role (review major transactions)
(f)Review of risk management
Confirming a formal policy in place for risk management, risk management is updated to
reflect current positions and strategy.
(g) Independence of internal audit committee:
Only be effective if NEDs are independence.
Crucial to discuss the management’s competence and judgement with the external
auditors, if not, they may feel loyalty towards management
Investors’ confidence
Reporting of the internal audit committee need the NEDs’ independence, otherwise
influence the integrity of the auditors.
Internal auditors/external auditors comparison of role in the context
of corporate governance
(a)Assess the need for internal audit
Scale, diversity and complexity of the company’s operations
Number of employees
Cost-benefit considerations
Changes in organizational structure
Changes in key risks
Problems with internal control systems
Increased number of unexplained or unacceptable events
(b)Role of internal audit function
Independent checking, examination and evaluation the internal control system
established by executive director.
Internal control over financial reporting
FS whether show true and fair
Internal control over operation
Operational information(management information)
Review of “3E”
Review of compliance with laws and regulations
Review of safeguarding of the organization’s assets
Review of implementation of corporate goals and objectives
Review of significant risks to the organisation, monitoring risk management policy and
risk management strategies.
(c) Advantages of appointing internal auditor from outside the company:
External appointment would bring detachment and independence (reduce or avoids the
independence and familiarity threats)
An external appointment would help with independence and objectivity. Own no
personal loyalties nor ‘favours’( 偏 爱 ) from previous positions. Have no personal
grievances nor conflicts with other people. (Increase the confidence of investors)
Some benefit would be expected from the “new broom effect’ in that the appointment
would see the company through fresh eyes .(bring a fresh pair of eyes to the task)
Come in with new ideas and expertise gained from other situations
The possibility exists for the transfer of best practice in from outside.(best practice and
current developments can be introduced)
(d) Review of the risk management
Identification. Risks comes and go with the changing nature of business activity, and
with the continual change in any organization’s environment.
Assessment. The probability of the risk being realized; the impact or hazard.
Review. Analyses the controls that the organization has.
Report. A report on the review is produced and submitted to the principal.
(e)Social and environmental audit: Why
There is a growing belief that environment issues represent a source of risk in terms of
unforeseen liabilities, reputational damage, or similar.
The ethical performance of a business, such as its social and environmental behaviour,
is a factor in some people’s decision to engage with(建立友好关系) the business in its
resource and product markets.
An increasing number of investors are using social and environmental performance as
a key criterion for their investment decisions.
(f)Environmental audit: what
Is a systematic, documented, periodic and objective evaluation of how well an entity, its
management and equipment are performing, with the aim of helping to safeguard the
environment by facilitating( 促 进 ) management control of environment practice and
assessing compliance with entity policies and external regulations.
Three stages:
Establishing the metrics（度量）.
Measuring planned or desirable performance against actual performance
Reporting the results of the audit.
Statutory duties(法定职责)
(a)Duty to act within powers
Act in accordance with（依照） the company’s constitution, have a fiduciary duty to the
company to exercise their powers bona fide(善意地) in what they honestly consider to be
the interests of the company. Act in accordance with decisions reached at board and
company meetings and in compliance with the law.
(b) Duty to promote the success of the company
The consequences of decisions in the long term
The interests of their employees
The need to develop good relationships with customers and suppliers
The impact of the company on the local community and the environment
The desirability（愿景） of maintaining high standards of business conduct（商业行为
准则） and a good reputation
The need to act fairly as between all members of the company
(c) Duty to exercise independent judgement
Delegate their functions to others, must continue to make independent decisions
(d) Duty to exercise reasonable skill, care and diligence
Reasonably diligent person（相当勤奋的人） with:
The general knowledge, skill and experience that may reasonably be excepted of a
person carrying out the functions
The general knowledge, skill and experience that the director has
(e) Duty to avoid conflict of interest
Retain their freedom of action and not fetter their discretion（束缚自由判断）by agreeing
to vote as some other persons may direct
Avoid a conflict of duty and personal interest
Not obtain any personal advantage from their position as directors without the consent
of the company for whatever gain of profit they have obtained.
Type of remedy（补救） with breach of duty: account for（对。。。作出解释） a personal
gain; contracts that conflict of interest, the contract may be rescinded(被废止); court
declare that a transaction is ultra vires（超越权限） or unlawful.
(f) Duty not to accept benefits from third panties
(g)Duty to declare interest （ 申 报 利 益 ） in proposed transaction or
arrangement
(h) Insider dealing/trading
Inside information means that information that is specific and precise, has not yet been
made public, and if made public would have a significant effect on the share price.
Close period: A specific period before the publication of annual or period results
Quality of information
(a)Reporting requirements
Board of directors: composition, independence of NEDs, frequency / attendance of
board meetings, performance;
Remuneration / audit / risk / nomination committees reference(介绍) / composition /
frequency(频率)
Reports on the directors’ and auditors’ responsibilities in relation to the accounts and
significant issues.
Relations with auditors ( reasons to change and steps taken to auditor objectives and
independence)
The bases that the company generates or preserves value and the strategy
Statement that directors have reviewed the effectiveness of internal controls, including
risk management
Statement on relations and dialogue with stakeholders
Going concern
Sustainability
A business review or operating and financial review
(b) Voluntary disclosure
Wider information provision (better idea of the environment, more informed analysis of
the strategies, reducing information asymmetry)
Different focus of information (future strategies and objectives, different perspective to
compulsory information（强制批量信息的不同视角） that tends to be focused on historical
accounting data)
Assurance and management (further yardsticks to judge the performance of
management, demonstrates（论证） that managers are actively concerned with all aspects
of the company’s performance
Consultation with equity investors (institutional shareholders)
Principles when deciding what to include:
Planned and transparent , and communicated to everyone responsible for preparing the
information
Involve consultation within the business, and with shareholders and other key groups
All relevant information should be taken into account
Be comprehensive, consistent and subject to review
Early indicators of at-risk companies
Duties of directors (best interests of the company, proper purpose（正当目的）, avoid
conflicts, duty of care)
Composition and balance of board (balance of skills and talents, age)
Reliability of financial reporting and external auditors (Fear of losing audit, determine by
CFO)
Directors’ remuneration and rewards (excessive salaries and bonuses, proportion,
period)
Responsibility of the board for risk management and internal control systems (lack of
information, inadequate system of management and reporting of risk)
Rights and responsibilities of shareholders
Corporate social responsibility and business ethics
Public and non-governmental bodies corporate governance
Composition of boards (tow boards)
Conduct of directors (be subject to organization or sector-specific (特定行业)controls)
Compulsory regulations vs voluntary best practice
Disclosure of internal control (risk registers, training, key performance indicators and
reporting systems)
Internal control
(a)Process of control(six stages):
Identification of objectives;
Setting targets (includes budgets or cost standards)
Measuring achievements / outputs
Comparing achievements with targets (compare the actual outcomes with the plan)
Identifying corrective action (take actions so that failures to meet objectives can be
reduced or eliminated)
Implementing corrective action (action involved changing objectives, resource inputs, the
process or the whole system)
(b)Purpose of control systems:
Facilitate its effective and efficient operation(促进有效运作) by enabling it to respond
appropriately to significant business, operational, financial, compliance and other risks to
achieving the company’s objectives.
Help ensure the quality of internal and external reporting (maintenance of proper
records and processes that generate a flow of timely, relevant and reliable information)
Help ensure compliance with applicable laws and regulations.
(c)Characteristics of internal control systems:
Be embedded in the operations of the company and form part of its culture
Be capable of responding quickly to evolving risk within the business
Include procedures for reporting immediately to management significant control failings
and weaknesses together with control action being taken.
Reduces but does not eliminate the possibilities of losses arising from poorly-judged
decisions, human error, deliberate circumvention of controls, management override of
controls and unforeseeable circumstances.
(d)Risk and corporate governance:
Establish appropriate control mechanisms for dealing with the risks the organization
faces;
Monitor risks themselves by regular review and a wider annual review
Disclose their risk management processes in the accounts
(e)Purpose of internal control framework:
Achieving orderly conduct of business（达到有序的商业行为）
Adherence(遵守) to internal policies and laws(comply with laws, regulations, internal
policies)
Safeguarding assets
Prevention and detection of fraud
Accuracy and completeness of accounting records (timely, relevant and reliable
information)
Timely preparation of reliable financial information
(f)Limitations of internal controls:
The cost of control not outweighing their benefits.
Poor judgement in decision-making
The potential for human error or fraud
Collusion between employees
The possibility of controls being by-passed or override by management or employees
Controls being designed to cope with routine and non-routine transactions（处理日常事项）
Controls being unable to cope with unforeseen circumstances
Controls depending on the method of data processing
(g)Assessment of control systems
Objectives (conducting its operations efficiently and effectively; safeguarding assets
and responding to the significant risks its faces)
Links with risks (risk appetite; identifying and assessing the magnitude of risks)
Control system compatibility(control procedures should be supported by other aspects
of the control systems)
Mix of controls(pyramid of controls: corporate->management->process->transaction)
Human resource issues(job description; requisite knowledge and skills; training and
documentation)
Control environment(company’s culture; overriding control; collude)
Review of controls(commitment to control by reviewing internal control)
Information sources(regular reporting by subordinates and control functions, and
reports on high risk activities.)
Feedback and response(feedback received should be used to take action to change the
controls or modify the overall control systems; rapid response)
Costs and benefits(the costs of operating controls are worth the benefits of preventing
and detecting problems)
(h) Indictators of control failures:
Poor decision taking due to failures of judgement
Human error
Deliberate circumvention( 蓄 意 规 避 ) of controls, including collusion between
employees
Management override
Costs of controls exceeding benefits
The extent to which control can cope with routine(常规) and non-routine transactions
Degree of independence of controls from data processing
Unforeseen circumstances
Institutional investors:
(a)When should involved
Fundamental concerns about the strategy being pursued in terms of products, markets
and investments
Poor operational performance, particularly if one or more key segments has persistently
unperformed
Management being dominated by a small group of executive directors, with the
non-executive directors failing to management to account
Major failures in internal controls, particularly in sensitive areas such as health and
safety, pollution or quality
Failure to comply with laws and regulations or governance codes
Excessive levels of directors’ remuneration
Poor attitudes towards corporate social responsibility
(b) Roles in corporate governance
Dialogue with companies
Evaluation of government disclosure
Shareholder voting(remove directors)
Need for corporate governance
Corporate governance is the system by which companies are directed and controlled in
the interests of shareholders and other stakeholders.
Include development by the board of the appropriate risk assessment and response,
successful strategic direction of the company and effective control of operations via an
internal control systems. To ensure any relevant regulatory frameworks or codes of
practice are followed and wider social and ethical responsibilities of the company are met.
Risk:
Risk management
(a) Framework:
Establish risk appetite;
Assess risks;
Risk identification (inspection/enquiry/monitoring etc);
Risk analysis (consequences and effects);
Risk profiling 风险预测(likelihood, consequences);
Risk quantification(level of risks and consequences, quantify the expect results,
chances of losses);
Risk consolidation (aggregate risks have been identified or quantified ate the
subsidiary or division level);
Develop and implement risk response;
Monitor risks and controls;
Obtain feedback and refine processes
(b) Responsibilities
Roles of risk management committee:
Approving the organisation’s risk management strategy and risk management policy;
reviewing reports on key risks;
Monitoring overall exposure to risk and ensuring it remains within limits; providing early
warning to the board;
Reviewing the company’s statement on internal control;
providing general and explicit guidance to the main board on emerging risk and to report
on existing risks.
(c)Risk management personnel
The board: determining risk management strategy and monitoring risks; setting
appropriate policies on internal controls and seeking assurance that the internal control
system is functioning effectively.
Internal audit focus on the controls that are being operated or the overall risk
management process
Middle managers: business control. Set a good example; preparing reports.
Operational managers: operational controls. Include quality standards and defect
management, troubleshooting and acting on exception reports.
Staff: be alert for any conditions or events that may result in problems. Report concerns
(d) Comment on NEDs in risk management committee
Advantages:
Separation and detachment(分离) from the content bring independence scrutiny
Sensitive issues to executive can be aired without vested interests being present
NEDs bring specific expertise that will be more relevant to a risk problem than more
operationally-minded executive directors will have.
Bring a range of perspectives and suggested strategies which may enrich the options
open to the committee
Disadvantages:
Have little specialist knowledge of products, systems and procedures being discussed;
less likely to be able to comment intelligently during meeting.
Limited experience that an executive member could provide
Report findings to the executive board, slow down the process, requires more time
before actions can be implemented, possibility of some misunderstanding.
Identification, assessment, measurement and management
Identification: pre-requisite is an understanding of the organization , its market ,
the business environment and an understanding of its objectives. To ensure that all
significant activities within the organization have been identified and all the risks flowing
from these activities defined. Consider strategic / operational / financial / knowledge
management / compliance risks. Prioritise the key risks.
Risk measurement: quantitative, semi-quantitative or qualitative in terms of the
probability of occurrence and the possible consequence.
Risk analysis: techniques to gather detailed information and the rigorously(严厉地)
interrogate(审问) the data to form a complete view of each risk.
Strategic risk:
Affects the overall mission
Arising from the possible consequences of strategic decisions taken by
organization, the way an organization is strategically positioned within its environment
Be identified and assessed at senior management and board of director
level
Operational risks: Affects the day-to-day activities
Refer to potential losses that might arise in business operations;
Include fraud risk, employee malfeasance, poor quality production, lack of inputs for
production; Be managed by internal control systems.
Fundamental risks: are those that affect society in general, or broad groups of people,
and are beyond the control of any one individual.
Particular risks: are risks over which an individual may have some measure of control.
Speculative risks: are those from which either good or harm may result.
Pure risks: are those whose only possible outcome if harmful.
Business risks:
Market risks: the business is operating, and from customers
Product risk: customers not buy, sales decline
Dommodity price risk: unexpected increases(falls) in the price
Product reputation risk: brand image, product reputation, adverse event
Credit risk: non-payment, or late payment by customers
Currency risk: the possibility of movements in foreign exchange rate
Interest rate risk: gains or losses arising from a rise or fall in interest rate
Gearing risk: exposures to high financial gearing and large amounts of borrowing
Political risk: political stability, the attitude of governments towards protectionism(保障)
Legal, or litigation risk: the regulations will affect the way and organization has to operate
Compliance risk: losses, possibility fines, no-compliance with laws or regulations.
Technology risk: technology change will occur
Economic risk: changes in economic conditions
Environmental risk: changes to the environment
Business probity risk: governance and ethics of the organization
Derivatives risk: the risks due to the use of financial instruments.
Assessment:
Risk appetite: the nature and strength of risk that an organization is prepared to bear.
(Personnel views; Response to shareholder demand; Organisational influences(size,
structure, stage of development); national influences)
Risk attitude: consider desirable
Risk capacity: risks that an organization is able to bear
TARA:
Consequences; likelihood
Avoidance: savings from losses avoided be greater than the advantages that can be
gained by not taking any measures
Reduction: risk policies and techniques; contingency planning(应急计划); loss control;
diversification of risks
Acceptance: self-insurance; captive insurance;
Transfer: Hold harmless agreements; limitation of liability; legal and other restrictions on
transferring risks; risk sharing
Business risks
How to ensure that all employees are aware of company
strategy and why is it important
Embedding risk means ensuring that risk awareness and management are innate(固有的)
elements of the systems and culture of an organization. It means that systems should be
designed and operated according to the risk management objectives of the organization.
Staff are thinking about risk issues, the severity and frequency of risks, as an integral part
of their work.
Method of embedding risk
Management example and communication
Staff commitment(acknowledge their commitment; signing a risk management code; job
description)
Induction and training
Information systems(Exception reporting; data about risks and performance indicators
that demonstrate to directors and managers how well risks are being managed)
Assessment and remuneration(staff assessment and remuneration packages need to
be influenced by how staff handle risk issues)
Changing the culture
Importance of control environment
Risk awareness and communication(be an explicit or implicit part of everyone’s job
description; resist pressure from superiors to participate in improper activities, and
channels outside normal reporting lines)
Training and involvement
Performance appraisal and measurement( be built into organizations’ human resource
systems; annual performance objectives)
Changing risk attitude(learning new knowledge; self-interest; misunderstand the nature
of the change; mistrust management)
Risk policy statement
Risk register(lists and prioritises the main risks; who is responsible for dealing; actions
taken)
Factors will influence the control environment
Management philosophy and operating style
Culture of organization
The organisation structure
Methods of control
Integrity, values and competence depend on the quality of management and staff
Ethics:
Kohlberg scenario
Level 1 pre-conventional (rewards/punishment/self-interest)
The decisions individuals make on ethical matters will have nothing to do with the
ethical issues involved but instead will depend on the personal advantage or
disadvantage to the individual. Stage1: punishment-obedience orientation; stage 2:
Instrumental-relativist orientation(accept the behavior of others if it means that others will
support them)
Level 2 conventional
Live up to the expectations of others. Stage 3: Good-boy-nice girl
orientation(Excepted by immediate circle); Stage 4: Law and order orientation(in line with
the rules laid down by society, complying with the law)
Level 3 Post-conventional
Making their own decisions in terms of what they believe to be right, not just
acquiescing in what others believe to be right.
Stage 5: Social contract orientation. Act according to their own interpretation of what the
basic values are.
Stage 6: Universal ethical principle. Base their decisions on wider universal ethical
principles such as justice, equity or rights.
Deontology and teleology
Deontology is concerned with the application of absolute, universal ethical principles in
order to arrive at rules of conduct. The criteria of judgement are separate from the facts of
the situation, and are determined on the basis of consistency, universal application and
human dignity.
Consequentalist is approach to ethics is to make moral judgement about ethical
decisions on the basis of their outcomes. Right or wrong then become a question of
benefit or harm. Utilitarianism-result in a greatest good, egoism-result in self interest.
Environmental footprint and accounting
Environmental footprint be defined as the evidence of the impact a business’s activities
have upon the environment. Direct input(resource usage) and outputs(emission causing
pollution).
Importance (Good governance practice: provide a balanced and understandable
assessment of the company’s position; impact on operations: specify the impact on the
environment builds environmental reporting into internal control systems; stakeholders:
investors and stakeholders concern; reputation building)
The size of a company’s impact on the environment:
Resource consumption (input such as energy, feedstock ,water and land)
Pollution emissions(emissions of carbon and other chemicals, noise pollution, wildlife)
Measurement of resource consumption and pollution emissions.
CSR
(a)Pressures on organizations:
Governance requirements (sustainability)
Stakeholder expectations (increasing expectation of stakeholders and the consequence
of ignoring such pressures)
Reputation risks (being a responsible business)
(b)Significance of SCR:
Economic: shareholders-wanting dividends/capital gains; employees-wangting fair
employment; customer-good quanlity products
Legal: Obeying the law
Ethical: acting in fair and just way
Philanthropic: Voluntary contribution to society (charitable donation; contributions
to local communities; providing good conditions)
(c) Impact of CSR on strategy and cg
Objectives and mission statements: mention of social objectives impact on strategy
Ethical codes of conduct
Corporate social reporting and social accounts
Corporate governance
(d)Corporate citizenship: is the business strategy that shapes the values
underpinning a company’s mission and the choices made each day by its executive,
manager and employees as they engage with society. Three core principles: minimizing
harm; maximizing benefit; being accountable and responsive to stakesolders.
Limited view: limited projects undertaken in the business’s self-interest(stakeholders:
local communities and employees)
Equivalent view: the corporation responds to the demands of society and focuses
on balancing the interests of different stakeholders.
Extended view: based round a partly voluntary, partly imposed view of active social
and political citizenship. Promote: social rights of citizens; civil rights; political rights. It
emphasises the political role of the corporation and therefore the importance of its
accountability. It also provides perspectives on the organisation as a global participant,
having to cope with different concepts of citizenship worldwide.
(e)Environmental footprint is the impact that a business’s activities have upon the
environment including its resource environment and pollution emissions.
Sustainability
Sustainability is ensuring that economic activities and development meet the needs of the
present without compromising the ability of future generation to meet their own needs.
(a)GRI(the global reporting initiative)
Is a reporting framework and arose from the need to address the failure of the current
governance structures to respond to changes in the global economy. Aims to develop
transparency, accountability, reporting and sustainable development.
(b)Consists:
Vision and strategy. (strategy with regard to sustainability)
Profile.(Overview of the reporting organisation’s structure and operations and of the scope
of the report)
Governance structure and management systems.
GRI content index.
Performance indicators.
(c)Indicators in the GRI framework:
People: balancing up the interests of different stakeholders and not automatically
prioritizing shareholder needs.
Planet: environmentally sustainable
Profit: the returns of the business
(d)Accounting:
Full cost accounting: total costs of company activities, including environmental,
economic and social costs. Include all the costs of an action , decision or manufacture of a
product into a costing system, and as such will include many non-financial costs of certain
action.
Triple Bottom Line(TBL) accounting: take into account environmental and social
performance in addition to financial performance.
Kaplan Financial
Corporate governance:
stock exchanges
Provide a means for companies to raise money and investors to transfer their shares
easily. Private information about company value, derived from the supply of, and demand
for, the shares that they trade.
Provide regulatory frameworks in principle-based jurisdictions. Stock exchanges have a
significant impact on the way corporate governance is implemented and companies
report.
company secretary
(a) Duties:
Arranging meeting of shareholders and the board of directors(Notice, agenda,
procedures, communicating, advise the board)
Signing, authentication and maintenance of documents and registers
General administrative duties(compliance constitution, statutory and regulation,
maintaining the accounting records, corresponding with legal advisers, tax authorities etc)
Independence and competence of the secretary: (ultimate loyalty, reflect the conflicts of
interests,)
Statement of best practice(responsible to the board; report to the CEO; salary, share
options and benefits be settled by the board)
Contributions (protecting the probity, protect the interests of other stakeholders; legal
compliance; Governance)
(b) Roles
Has a role to play in advising the board of directors in all the necessary procedures,
laws and regulations in the governance of companies. (show loyalty to the company)
(a) Assisting the chairman of the committee of the board
(b) Liaising with external auditors and internal auditors (attending the audit committee
meeting)
(c) Arranging insurance (involved in an aspect of risk management)
(d) The chief administrator officer, concentrate on the effective running of the business
(e) Arranging board meetings, drafting and circulating board meeting minutes.
(f) Organize and provide notice to members of the annual and any EGM.
(g) Induction package of new directors
Ethical theories, Absolutism / relevativism
Absolutism is the view that there is an unchanging set of principles that will apply in all
situations, at all times and in all societies. The principles should be applied whatever the
pressures on the decision-maker.
Relativism is the view that a wide variety of acceptance ethical practices exist. The ethics
that are most appropriate in a given situation will depend on the conditions at the time.
Transaction cost theory (交易成本理论)
States the way the company is organised or governed determines its controls over
transactions. Company will try to keep as many transactions as possible in-house, in order
to reduce uncertainties about dealing with suppliers, and about purchase prices and
quality. To do this ,they will seek vertical integration.
Managers are opportunistic（机会主义）(be influenced by amounts gain, bad behaviour,
be tolerated actions)
Management may play safe, concentrate on easily understood markets and individual
transactions. Focus on low risk activities discourage potential investors looking for large
return.
Transaction cost theory is a framework used to evaluate the nature of agency costs or
the agency relationship between directors and owners.
Normative / instrumental stakeholder views
Deontological viewpoint / normative approach (commit to ethical behavior as
an end in itself, to be a given principle to which all society should aspire(渴求))
Normative stakeholder views: based on the idea that organizations have moral
duties towards stakeholders. Thus accommodating stakeholder concerns is an end in
itself. This suggests the existence of ethical and philanthropic responsibilities as well as
economic and legal responsibilities and organizations focusing on being altruistic.
Based on the ideas of Immanuel Kant, Kant argued for the existence of civil duties that
are important in maintaining and increasing the net good in society. Duties include the
moral duty to take account of the concerns and opinions of others. Not to do so will result
in breakdown of social cohesion leading to everyone being worse off, and possibly
economically worse off as well.
Consequential viewpoint / instrumental approach(increase the prospect of
the business)
Instrumental stakeholder views: organizations have mainly economic
responsibilities(plus the legal responsibilities that they have to fulfil in order to keep
trading). Fulfillment of responsibilities towards stakeholders is desirable because it
contributes to companies maximising their profits, or fulfilling other objectives such as
gaining market share or meeting legal or stock exchange requirements. It merely reflects
whatever the concerns are of stakeholders it cannot afford to upset. The organization is
using shareholders instrumentally to pursue other objectives.
Principle-based approach / rules-based approach
(a) Characteristics
Focus on objectives rather than the mechanisms by which these objectives will be
achieved.
Lay stress on those elements of corporate governance to which rules can’t be easily be
applied. The requirement to maintain sound systems of internal control, organizational
culture and maintaining good relationships with shareholders and other stakeholders.
Comply or explain basis
The governing bodies of stock markets have had the prime role in setting standards for
companies to follow.
(b) Advantages
Avoids the need for inflexible legislation that companies have to comply with
Less burdensome in terms of time and expenditure
Allow to develop their own approach to corporate governance.
Comply and explain basis means that businesses can explain why then have departed
from the specific provision
Disclosure requirements puts the emphasis on invests making up their own minds
about what businesses are doing.
(c) Criticisms
So broad that they are very little use as a guide to best corporate governance practice
Box-ticking are incorrect (shareholders do not apply the approach; disasters are not
disclosed)
Investors cannot be confident of consistency of approach
Confusion over what is compulsory and what isn’t
Non-binding(不具约束力) and fail to comply without giving an adequate or perhaps
any explanation
Be suggested that require a regime that shareholders have meaningful rights in law to
vote individual directors off the board.
(d) Characteristics of a rules-based approach
Place more emphasis on definite achievements rather than underlying factors and
control systems.
Compliance with laws
Easy to see whether there has been compliance with the rules.
Difficult to deal with questionable situations that are not covered sufficiently in the
rulebook.
Obeying the letter of the law rather than the spirit.
（e）Differences between Sarbanes-Oxley and Eu approaches
Non-audit services (SOX prohibits; EU, left to the judgement of audit committee)
Audit partner rotation (SOX, rotation of the lead partner every five years; EU, be rotated
after a pre-defined period, not more than 5 years)
Internal control reporting (SOX, an audit assessment of the effectiveness of the internal
control structure and procedures for financial reporting; EU, don’t need opinion on control
effectiveness)
Certification of accounts (SOX, CEO and CFO certify the FS, restated will forfeit their
bonuses; EU needn’t)
Costs (SOX, high; EU, low)
Raising monies ( SOX, big market and stock exchange)
Investor reaction (transfer due to a latitude to corporate governance, influence public
relations)
Gray, Owen and Adams viewpoint of social responsibilities:
Pristine capitalists: wealth maximation
Expedients: have to accept some social legislation and moral requirements so as to
maximise profits
Social contract position: Organisations should behave in a way broadly in conformance
with the ethical norms in socity bcause there is effectively a contract or agreeement
between the organisation in power and those who are affected by the exercise of this
power
Social ecologists: business has a social and environmental footprint and therefore bears
some responsibility and therefore bears some responsibilities in minimising the footprint it
creates.
Socialists: Business should be conducted in a very different way that recogmises and
redresses the imbalances in society and provides benefits to stakeholders well beyond
the owners of capital
Radical feminists:
Deep ecologists: believes that humans have no more intrinsic right to exist other
speces,they argue that just because humans are able to control and subjugate social and
environmental systems does not mean that they should.
Board structure
(a)Advantage of insider systems
It is easier to establish ties between owners and managers
The agency problem and costs of monitoring are reduced
It is easier to influence company management through ownership and dialogue
More able to take a long-term view.
(b)Disadvantage of insider systems
Discrimination against minority shareholders
The control families may not be monitored effectively
Do not develop more formal governance structure
Unwilling to recruit independent NEDs
More prone to opaque financial transactions and misuse of funds
No investors on such size can influence prices
Institution investors hesitate to invest in
Succession issues.
(c) Advantage of outsider systems
Develop more robust legal and governance regimes to protect shareholders
Share holders have voting rights to exercise control
Hostile(敌对的) takeovers are far more frequent
(d) Disadvantage of outsider systems
Agency problem and significant costs of agency
Larger shareholders have short-term priorities, preferred sell their shares.
(e) Advantages of unitary boards
All directors have equal responsibility, a more active approach to the NEDs
NEDs are less likely to be excludes from decision-making and given restricted access to
information. Boards take all views into account in decision making.
The presence of NEDs lead to better decision being made.
Relationship between different types of directors may be better.
(f) Disadvantage of unitary boards.
NEDs may be difficult to monitor objectively if they are significantly involved in
decision-making.
Time (board meetings and obtain sufficient knowledge)
Be seen as emphasizing a division between directors and employees who are not
represented on the board.
Emphasises the divide between the shareholders and the directors.
(g) Advantages of multi-tier boards
Clear and formal separation between the monitors and the executive directors being
monitored
The supervisory board has the capacity to be an effective guard against management
inefficiency or worse.
The supervisory board should take account of the needs of stakeholders other than
shareholders. Encourage transparency within the company; involves the shareholders
and employees.
A small strategic board may be able to act more quickly and decisively.
(h) Disadvantage of multi-tier boards
Confusion over authority and therefore a lack of accountability
The executive management board restrict the information passed on to the supervisory
board and the boards may only liaise infrequently.
The supervisory board may not be as independent as would be wished, depending on
how rigorous the appointment procedures are
Exclusion of board members those with operational responsibilities from important
strategic discussions, may result in decisions that do not take full account of all the
important factors.
Tucker’s model
Profitable (compared with what?)
Legal (depends on the jurisdiction’s involved)
Fair (In whose perspective? Need to consider who stakeholders are and impact upon
them of the decision)
Right (this depends on the ethical position. In particular the distinction between
deontological and teleological approaches of whether account should be taken of the
consequences of the transaction is significant)
Sustainable( environmentally sound or sustainable in other ways)
AAA model
What are the facts of the case?
What are the ethical issues in the case?
What are the norms, principles, and values related to the case?
What are the alternative courses of action?
What is the best course of action that is consistent with the norms, principles and values
identified in step3
What are the consequences of each possible course of action?
What is the decision?
Fundamental principles
Professional competence and due care: Members have a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employee
receives competent professional service based on current developments in practice,
legislation and techniques. Members should act diligently and in accordance with
applicable technical and professional standards when providing professional services.
Integrity: Members should be straightforward and honest in all business and professional
relationship.
Professional behavior: Members should comply with relevant laws and regulations and
should avoid any action that discredits the profession.
Confidentiality: Members should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any such
information to third parties without proper or specific authority or unless there is a legal or
professional right or duty to disclose. Should not be used for the personal advantage of
members or third parties
Objectivity: members should not allow bias, conflicts of interest or undue influence of
others to override professional or business judgements.
Corporate governance concepts
Fairness: the directors’ deliberations(审议) and also the systems and values that underlie
the company must be balanced by taking into account everyone who has a legitimate
interest in the company, and respecting their rights and views. All shareholders should
receive equal considerations.
Transparency: means open and clear disclosure of relevant information to shareholders
and other stakeholders, also not concealing information when it may affect decisions. It
means open discussions and a default position of information provision rather than
concealment. (agency problem; information asymmetry; underpin stock market
confidence)
Independence: is the avoidance of being unduly influenced by vested interests and being
free from any constraints that that would prevent a correct course of action being taken. It
is an ability to stand apart from inappropriate influences and be free of managerial capture,
to be able to make the correct and uncontaminated decision on a given issue.
(independence of mind; independence of appearance)
Probity/honest: telling the truth, not misleading shareholders and other stakeholders.
(should not accept gifts or hospitality which may seem likely to influence their decisions)
Responsibility: means management accepting the credit or blame for governance
decisions. Executive managers are responsible for the operation of the business, and the
ultimate responsibility rests with the CEO.
Accountability: an organization are answerable in some way for the consequences of
their actions. Individuals who make decisions in a company and take actions on behalf of
a company on specific issues should be accountable for the decision they make and the
actions they take.
Integrity: means straightforward dealing and completeness. What is required of financial
reporting is that it should be honest and that it should present a balanced picture of the
state of the company’s affairs. (fair and equitable dealing with shareholders; agency
relationships; market confidence)
Reputation: is determined by how others view a person, organization or profession.
Reputation includes a reputation for competence, supplying good quality goods and
services in a timely fashion, and being managed in an orderly way.