P5 PRINCIPLES AND DEVELOPMENT OF CG 1.1

No universal 

the system by which companies are directed and controlled (Cadbury 1992)

IIA - ... combination of processes and structure implemented by the board in order to inform, direct, manage and monitor activities of organisation toward achievement of its objectives 

Why - Aim to solve separation between owners (shareholders) and manager (those running business)

Board, an organisation's governing body, is a mechnism of corporate governance in place to control managers mitigating activity. Others include regulators, auditors, media- public opinion, pressure grups, stakeholder, government, credit reference agencies.

QUALITIES IMPORTANT TO CG 

Transparency - evidence in annual report, CG code, TOR > creating openness Competency - evidence resource, right staff 3 line defence > to meet objective need effective workforce Intergrity - evidence is ethical beh, CSR,right thing & way> sense of credibility Accountability - eviden in a Board structure, sub commitee held to account, responsibities documented >culture of trust and good behavior encourage

Shareholders - individual who legally own one or more share of stock in joint company

Key driver of CG to ensure ongoing protection os shareholder's ownernership and ongoing interest

3 key concepts:

Stewardship theory - manager act as responsible steward of asset controlled - Board is facilitative assisting manager, not control

Agency theory - manager act as agents, with self-interest at shareholders expense - Board monitor and control management e.g.separation chairman and CEO source of theory

Issues/challenge - access to information supplier by agent, as principal in charge may be spun

Shareholder theory - consiers a businesses moral responsibilities beyond law to all stakeholdes, not just shareholders but staff, suppliers, communities - 3rd party interest given time, effort, energy by SM. ALL IMPACT DEVELOPMENT LINK BIZ ETHICS WITH CSR ISSUES

Principles - in UK corporate governance code, provision are voluntary for premium listed companies listed on L stock exchange

Code address vary incl operation of board, directors remuneration and role of audit committees> requirement to comply or explain deviation to adopt a non compliant stance. application is decision for Board>reason clearly explained to shareholders in annual report & accounts

Version of CG code applicable to other sector have been issued: public sector - CG in central government department: code of good practice 2011>not-for-profit - Good Governence: A code for the voluntary and community sector - to develop good practice

Rules  - USA with laws that govern listed companies. Sarbanes-Oxley Act prescribes rules. Securities law governs disclosure by listed co. under the Government agency Securities & Exchange Commission>focus improving quality & transparency of financial reporting. Section of legislation govern adequate internal controls esp financial reporting and officer certify financial statements

Europe Federation of Accounting concluded no single code approach but active promotion of audit committed discharged by NEDS and review similar to UK compliy and explain model

Principle - pro and cons

• flexibilty to adopt principle relevant to org e.g. small compnay onerous to comple can explain deviaton (may be lipservice)     
• reduce box ticking and posiitive
• interpretation based on culture, size and ownership
• highlights ability and powers of shareholders - act when voting or exercising right market forces
• incentivise improvment and transparency 
• encourge paticipation, buy in with market forces to compensate 

Rules - pro and cons

• whereas rules forced to take seriously or penalty 
• less oppuntity to defraud or mislead board as rules of beh defined
• clear sanctions and penalites/force less well managed org to operate prescriptively
• bench marking and performance measurable, clearly define, stakeholder confidence small co. exempt
• will not influence less well managed org not concerned by public opinion

Barings Bank - Vehicle to enable Barings grp to trade in singapore lack of segregation of duties > Nick leeson held front and back office roles. lack of technical undertanding - open unauthorised accounts. IA and EA failures

HBOS - High exposure to corporate lenging, board room disagreements and overeager sales cultures

ENRON - manipultion finacial figures, false accounting, complexity of trading. EA failure

World com - largest telecommunication - overstated profits resulted in value of $180 billon lost almos all it value overnight

Coran Black - press baron - stole millions from shareholders - convicted 2007 resigned as CEO

Europe - 1999 - 15 member commission resigned indictment by 5 independent experts. widespread fraud and mismanagement tolerated and all member responsibile.

SSE - fined10.5million for mis-selling energy tariffs using misleading script and failure to give accurate estimates and comparisons to customers. Barclays fined for LIBOR fixing, rate bank lend to one,  another, result resignation of CEO, Bob Diamond and distorting trust in market confidence

Reason for failure

Greed/ lack of segregation - document division of responsibility to reduce risk and error

Insensitiviy to stakholder/Over-expansion

Poor financial management/Corporate complecency

maniputlaiotn of financial records

supression of information/poor risk management and controls - seek to comply with regulators have regular review of assurance provided by compliance team

Incompetent management/fraudualent activity

IA and EA failues - embed QAIP and risk based approach in strategic and periodic plan, include areas for IA to review, to priorities activity/resource and skills around key risk