July 2009AA - Intro to CG - L4a 1 Audit and assurance Introduction to corporate governance regulatory frameworks - UK Lecture 4a (Hong Kong SAR, Malaysian and Singaporean institutions may study equivalent structures in their countries)

July 2009AA - Intro to CG - L4a 2 Cadbury Report, 1992 ‘The way companies are directed and controlled’ –Definition used by Solomon (2007) Corporate Governance and Accountability 2 nd edn. ‘…principally a study of the mechanics of capitalist systems’ Solomon, 2007

July 2009AA - Intro to CG - L4a 3 The Combined Code on Corporate Governance 2008 (FRC) Directors are in a privileged position –They run the business –For owners and other stakeholders Good CG means that all stakeholders’ needs are appropriately taken into account OECD –‘Principles’ of CG In the UK –‘The Code’

July 2009AA - Intro to CG - L4a 4 The Combined Code on Corporate Governance 2008 (FRC) (cont.) Main Principle –‘Every company should be headed by an effective board, which is collectively responsible for the success of the company’ The ‘Turnbull Guidance’ and ‘Smith Guidance’ –Detailed guidance that accompanies ‘the Code’ (revised September, 2005)

July 2009AA - Intro to CG - L4a 5 The Combined Code on Corporate Governance 2008 (FRC) (cont.) Some key areas  Directors’ remuneration  Going concern  Internal control  Audit committees An ‘independent’ sub-committee of the Board of Directors Non-executive directors (NED’s)

July 2009AA - Intro to CG - L4a 6 Agency theory ‘Stewardship accounting’ –Owners, shareholders… –Directors, stewards, managers… Agency theory –Principal (P) –Agent (A) ‘The agency problem’ –Separation of ownership and control –Objectives of P and A may be different

July 2009AA - Intro to CG - L4a 7 Agency theory (cont.) Short-termism –Agents Bonuses, salaries, benefits-in-kind… ‘Residual losses’ –Principals (institutional investors) ‘Churning’ Long term investment –Relies on optimum NPV from projects wealth maximisation for shareholders

July 2009AA - Intro to CG - L4a 8 Agency theory (cont.) Control –AGM Time for agents to account for themselves? Practical problems –Large ownership base –Interested in return not control

July 2009AA - Intro to CG - L4a 9 Other theoretical viewpoints Transaction cost theory Stakeholder theory –The ‘Corporate Report’ (ASSC*, 1975) Specifically considering financial reporting questioned: –Who should report what to whom –Public accountability –Users of corporate reports  Equityholders  Loan creditors  Employee  Analysts and advisors  Business contacts  Government  The public * The original UK accounting standards body, now the ASB

July 2009AA - Intro to CG - L4a 10 References Combined Code (2008) /Combined%20Code%20Web%20Optimized%20June%202008(2).pd f /Combined%20Code%20Web%20Optimized%20June%202008(2).pd f OECD Principles of Corporate Governance (2004)

July 2009AA - Intro to CG - L4a 11 References (cont.) Hong Kong – The Code on Corporate Governance Practices (2005) – – –