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Introduction of Tutor
Served Visiting Faculty Quaid-e- Azam University Islamic International University Riphah International University IBA ( FUMICS) Foundation University Bahria University Air University

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 ICMA
SZABIST FAST

MAJU
Fatma Jinnah University

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Permanent Faculty And examiner

Federal Urdu University Isb
Quaid-e- Azam Uiversity Islamic International University

Allama Iqbal University

FPSC

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Professional Teaching
Usman Accountancy college
SKANS ICMA

ICAF

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Trainer
TEVAT
ICAP KSE

Finman

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Paper Pattern
Section A Q:1 Compulsory question case study (50) Section B 2 form 3Questions ( 25 each)

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Areas
Corporate Governance
Risk Management Ethics

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Books
FTC study text
FTC- kit ( Optional) Past 4-6 papers are sufficient

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Chapter 12

Ethical Theories
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Ethics
Is concerned with right and wrong
About how we should live our lives and, how we should behave towards other people

Relevant to all forms of human activity,

Focus the business world.

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Views towards Ethics

Relativism
Absolutism Dogmatic approach

Pragmatic Approach
Deontological Approach Teleological Approach

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Relativism
what is 'correct' in a given situation will depend on the

conditions at the time suggests that all moral statements are essentially subjective and arise from the culture, belief ,emotion The view that right and wrong are culturally determined is called ethical relativism or moral relativism. Ethics changes with respect to time , Society

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Absolutism
A view that there is unchanging set of ethical

principles applicable in every situations, all times and in all societies

Ethics are built on the principle that is objective,

universally applicable moral truths exist and can be known. This is sometimes called ethical absolutism.

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Strengths of Absolutism
Certain unambiguous rules that people are able to

follow, knowing that their actions are right.

absolute rules makes the application of corporate

governance and comparing the performance of business units more achievable. absolute truth does exist

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Criticisms of absolutism
Absolutists does not consider evolving norms within

society and the development of advances in morality. There will never be universal agreement. Two absolutist positions may be incompatible and therefore irreconcilable, e.g. is it permissible to tell a lie in order to save an innocent life?

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Dogmatic Approach
One truth applicable in all situations This must be believed and followed It corresponds to Absolutism

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Pragmatic Approach
Guides moral situation without reference to any

absolute belief Similar to relativism

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Deontological Approach
Non consequentiality theory
Motivation is important. Duties / rule based approach

Ten commandments in Taw rah

Three maxims/ tests for ethical assessment of any

action

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Immanuel Kant Maxims

Any action is right if it passes three tests/maxims
1- Consistency principle Acting to the maxim ,you will desire to become universal law Murder is not allowed otherwise no human will survive

2-Treat Human with dignity Children are not means to produce goods Safe up bringing is their right
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3-Universality principle How performer will feel if the actions are reported to others how managers will feel when Child labour is reported in press

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Teleological Approach
This is a consequentiality theory whether a decision

is right or wrong depends on the consequences or outcomes of that decision. The outcome of an action is important. As long as the outcome is right, then the action itself is irrelevant. Two perspectives of Approach

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Egoism ( Approach to Teleological)

'what is best for me to pursue my interests
greatest good of the oneself alone if each pursues her/ his own interest, then the interest

of everyone is promoted" (Baier, 1991, p. 200). Producer will produce good quality products to make profit ( Pursuing own interest will promote every one interest in society)

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Utilitarianism (Approach to Teleological)

An action is morally right if it results in the greatest

amount of good for the greatest number of people affected by that action. utility or the economic value of actions It applies to society as a whole and not the individual. Example The production and price of different commodities will be decided by Government to pursue collective interests
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Kohlberg's level of CMD

Cognitive moral development theory
Explain the reasoning process behind moral

judgments Three stages further two in each Individuals tend to move from Level 1 to Level 3 as they get older Most Managers fall in Level 2 Page -343

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Level 1 Pre-conventional
Obedience and Punishment

compelled by the threat or application of punishment Moralities are external to them (child) Not treating themselves as part of society What big people say they must do Individualism, Instrumentalism, and Exchange Exchange stage recognition of other interests right behavior means acting in one's own best interests

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Level 2 Conventional level

Good Interpersonal Relationship

"Good boy/girl" view; is an attitude that seeks to do what will gain the approval of others/ immediate peers
Maintaining the social order

Law and Order means abiding by the law and responding to the obligations of duty Respecting authority

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Level 3 Post conventional

Social Contract and individual rights

Individuals account for differing values, beliefs and

opinions of other people Rule of law is important to function but Individuals should be agree to these rules What makes for a good society?"

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They suggested (a) protect certain individual rights and (b) settle disputes through democratic processes. considering the rights and values that a society ought to uphold. Basic human rights for every one Change through democratic process if rules are not acceptable

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Highlights from research

When a man asked if the judge should punish

Heinz, he replied: Usually the moral and legal standpoints coincide. Here they conflict. The judge should weight the moral standpoint more heavily but preserve the legal law in punishing Heinz lightly. (Kohlberg, 1976, p. 38)

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Level 3 stage -6
Universal Ethical Principles
self chosen principles based on universal justice Even if these contradict with rules Civil obedience if not accepted

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Examples
(1) A manager includes an hours overtime on his/her timesheet because all other managers do so. (2) A fishing companys CSR report explains how the welfare of fish is maintained in its fish farms, although there is no statutory or other obligation to provide the information or care for the fish. (3) An employee does not disclose information indicating that financial statements have omitted important liabilities in return for enhanced pension benefits from the company.
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(4) A director does not include some important liabilities in the financial statements because inclusion would damage the reputation of the company.

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Seven position on CSR

1-Pristine Capitalist
At this position interest is about profit but no concern with CSR.

shareholders always concern about their wealth not for anything else.

2- Expedient
AT this position if the business is achieving its objective(profit) then

business needs minimal ethical guidance.

if the business has achieved its interest then will think about some social responsibilities for the society for which the business is.

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 3.Social contract

companies are for society so the companies should serve them properly.
e.g If any company takes decision then the decision

should be for best public interest.

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4.Social Ecologists
Large companies damage environment so they should decrease the

cause of damage.

e.g If a company damages environment (cutting trees) then the

company should reduce the cause or change the resource.

5.Socialists Money should not be dominant on society e.g creation of product should be secondary to individual well being.
If a company produces a product, primarily, the company should think

about society.

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 6.Radiacal Feminists

Companies should have feminine attitude such as love and compassion. Masculine characteristics should be avoided
7.Deep Ecologists

A business has no rights to resources more than any other creatures A company's activates should be sustainable. It means company should think about future generation as well.

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Variables determining cultural context-Ethics & CSR

Economic

focus on Profitability
Legal

Focus on compliance with Law

Ethical

Focus on doing what is right

Philanthropic

focus on what is desired

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USA
More focused on profitability
Less focus on legal aspects greater public trust that organizations act ethically

Highly focused on philanthropic activities

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European countries
Less focused on profitability
More focused on legal aspects Greater focus on ethics -

Less focused on philanthropic activities

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Corporate and Personal ethical Stance

Short term share holder interests

Corporate stance Less focused on ethics Adequate short term return Personal stance Small investors will require short term return Large investors have little or no short term interests

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 Long term share holder interest

Corporate stance Focused on existence of the company Personal stance Require capital growth and Security of investment

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Multiple stakeholder obligations

Corporate stance Satisfying most power full and influential stake holders Personal stance Each stakeholders group expects their interests to be understood and acted on Reduction in dividends can be justified due to investment in workers safety

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Shaper of society
Corporate stance Focused on changing society by using its power For benefits of society Toyota research on solar vehicles Personal stance Group of stake holders can use their powers to influence organizations. Individuals choices will affect companies

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Chapter # 13

Professional

and
Corporate Ethics
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Professional And Corporate Ethic

Profession a body of theory and knowledge which is used to support the public interest. Defining characteristics of profession 1. Body of theory and skills 2. Adherence to common code of values and conduct 3. Acceptance of a duty to society as a whole

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professionalism
taking action to support the public interest
Professional behavior will mean complying with the

ethical standards laid down by the professional body. taking action according to ethical standards laid down by the professional body.

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Reactive and Proactive approach

Taking responsibility for any negative consequences of

accounting practice and, where appropriate amending those practices to remove those consequences. Guidance is provided in the public interest as a benefit to society, rather than waiting until society as a whole requests the guidance.

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Public Interest
Common well being of society as a whole Collective good for society

The public interest can be defined as that which

supports the good of society as a whole (as opposed to what serves the interests of individual members of society or of specific sectional interest groups)

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Accountancy professions public

Clients , credit providers ,governments Employees, employers, investors. clash of Public interests and Human rights
example: Imprisonment to killer

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 Public interest and companies

The differential treatment with minority shareholders Actions of organizations may affect society Pollution Poor treatment with labor

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Accountants & Public Interests

Accountant s are concerned with disclosure of

information to general public In many cases public disclosure is made even in case of no laws

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Influence on organizations
accountancy profession has significant influence on organization
range of services that accountants can provide financial accounting audit management accounting taxation advice consultancy.
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Factors affecting Influence

Auditing organizations in financial difficulties
Selling of additional services Relationship with clients

Size of accountancy firm

competition

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Auditing organizations in financial difficulties

Adverse opinion mean punishing the company
Keeping quiet harm the repute of audit firm Lost of other clients if audit report is adverse

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Relationship with clients

Long term relationship with clients loose

independence of firm Many countries ( 5 years)

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Selling of additional services

Firm provide services other than audit
Auditor treat client and keep good relationship

harming independence

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Size of accountancy firm

Large firm can effectively audit

due to economies of scale Large firm can audit multinational firm

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competition
Big 4 compete for market share
It may be cause of fall in quality of audit It will be against public interests

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Influence in Society
Accountants are seen to act in public interests
not fully entrusted due to past failings Barriers exist those lead accountants to maintain

status quo

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Why accountants tend to enjoy status quo

Nature of accounting- rule following as compared to

making Accountants are busy little time Accountants are employed by organizations-initiatives are not value added activates for employing organization accountants are considered impartial new initiative break impartiality

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Why Accountants may become involved in change

New development in accountancy profession
Errors in existing systems New initiative require the modifications of design and

accounting information system

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Chapter 14

Ethical decision making

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Ethical decision making

IASEB ethics frame work Ethical education is lifelong process It will continue through career of accountant
Stages in Framework 1- ethics knowledge 2- ethical sensitivity 3- ethical Judgment 4-ethical behavior
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1-Ethics knowledge Developing ethical intelligence by obtaining knowledge of ethical theories, concepts and fundamentals 2-Ethical sensitivity Application of ethical concepts to accountant work ( tax, audit) Identification of ethical threats

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3-Ethical Judgment Application of ethical knowledge and ethical sensitivity from stages 1 and 2 to form well informed decisions It is taught by applying ethical- decision model to ethical dilemmas 4- Ethical behavior Explaining accountant should act ethically

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American Accounting Association (AAA) model

The American Accounting Association model provides

a framework within which an ethical decision can be made. The seven question in the model are: (1) What are the facts of the case? (2) What are the ethical issues in the case? (3) What are the norms, principles and values related to the case?

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(4) What are the alternative courses of action? (5) What is the best course of action that is consistent with the norms, principles and values identified in step 3? (6) What are the consequences of each possible course of action? (7) What is the decision? FENABCD

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Tuckers 5question model

Tucker provides a 5question model against which ethical

decisions can be tested. used after the AAA model shown above to ensure that the decision reached is 'correct'. Is the decision: Profitable? Legal? Fair? Right? Sustainable or environmentally sound?

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Stages of ethical decision making

Ethical decision making involves: 1- Recognize moral issue 2-make moral judgment 3-establish moral intent 4-engage in moral behavior

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Factors influencing the Moral decision making

Individual factors: Age, gender, experience Situational Factors: Particular factors related with the decision area Reward/ punishment system expectation of peers / society Related with Kohlberg theory

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Ethical behavior
Factors affecting ethical behavior 1-Issue related factors 2- context related factors
1- issue related 1.1 Moral intensity 1.2 Moral framing

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1.1 Moral intensity

Importance of issue for decision maker Intensity for decision making

Factors affecting moral intensity

Concentration of effects Proximity- Nearness of decision maker to affected Temporal Immediacy- how soon/ late consequences of any

action will occur Magnitude of Consequences- sum of harm or benefits of any actions
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 Social consensus

Degree of agreement on the ethics of any action/problem

Probability of effect

The likelihood that harm or benefits of any action will happen

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1.2 Moral Framing This refers to language in which moral issues are discussed in the work place Ethics discussion open / mute
2- Context related These factors relate to how a particular issue would be viewed within a certain context.

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Key contextual factors

System of reward- punished or not for unethical

behavior
Authority- juniors follow seniors Bureaucracy- rules are followed

Work roles expectation- accountants are supposed to

behave ethically

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 Organizational group norms and culture

How group perceives regardless of overall perception.

National and cultural context.

Different countries have different ethics

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Chapter #15
Social and economic issues Sustainable development Sustainability means meeting our needs today without compromising the ability of future generations to meet their own needs.
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Second definition Maintenance and enhancement of environmental, social and economic resources, in order to meet the needs of current and future generations. Intergenerational equality

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Three perspective
1-Environmental sustainability which requires that natural capital remains intact. Therefore, the extraction of renewable resources should not exceed the rate at which they are renewed, First recognised perspective

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2-Social sustainability
which requires that the cohesion of society and its ability to work towards common goals be maintained. Individual needs, such as those for health and wellbeing, nutrition, shelter, education and cultural expression should be met.

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 Organizations have impact on social make up

This is new perspective Social justice- distribution of wealth

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3-Economic sustainability Limits to economic growth as earth id finite system Sustainability planning for long term growth , existence for foreseeable future

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Example of Unsustainable
Strategies for short term
Paying bribes Forming cartels

Suspect accounting treatment

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Significance of sustainability
It effects every organizations
It is long term maintenance systems Measured empirically and subjectively

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Effects of economic activity

Economic activity effects society and environment

Environmental foot print It is an attempt to measure the impact on the environment in aspects : 1- resource consumption 2-harm to environment (pollution) 3- measurement of above 2 (qualitative, quantitative or replacement terms

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Measuring impact of economic activity

1-Quotient Approach It quantifies sustainability Compares amount used and available For example water usage and generation Water usage is 15 million gallons while production is 10 million gallons

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2- Subjective Approach Assess intentions of organizations to achieve certain objectives Lack of quantification make it difficult to measure progress

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Social Foot Print

Assess sustainability in three areas: Social capital net work & mutually held knowledge Human capital-skills , experience &health Constructed capital- roads, utilities

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Accounting for sustainability

Full cost accounting Triple Bottom Line ( TBL)

Full cost accounting Full cost accounting means calculating the total cost of company activities, including environmental, economic and social costs.
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 Example Car manufacturing

Environmental pollution, Employees time wastage due to location

Disposal cost after useful life of cars

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Triple Bottom Line ( TBL)

TBL accounting means expanding the traditional

company reporting framework to take into account environmental and social performance in addition to financial (economic) performance. People Planet Profit

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People Extend the stakeholder view- by including workers, community TBL company will pay due wages to workers TBL company will promote its surrounding community

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Planet
TBL company will use efficient process in terms of

resource consumption. Efficient in terms of damaging environment such as toxic waste TBL companies will not deplete resources

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Profit
a non TBL company will seek to maximize profit A TBL company will balance profit objective with other two

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Management Systems

1-Eco- Management & Audit Scheme (EMAS)

2-ISO 14000
Systems support the Environmental Accounting system

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Additional
The Eco-Management and Audit Scheme (EMAS) is a voluntary EU initiative designed to improve your company's environmental performance. EMAS acknowledges organizations that improve their environmental performance on a continuous basis.
To achieve EMAS, organisations need to be legally compliant, run an environmental management system and report on their environmental performance through the publication of an independently verified (by a third party like BSI) environmental statement. EMAS participation is available to any organization with environmental impacts, no matter how large or small and regardless of the activity undertaken, and can cover multiple sites within a single EU country.

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 An Environmental Management System (EMS)

provides you with a framework for managing environmental responsibilities efficiently in a way that is integrated into your overall operations.

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 Eco- Management & Audit Scheme (EMAS)

Voluntary initiative to improve companies' environmental performance - ISO 14000 is a series of standards dealing with environmental management and supporting audit program

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Eco Management and Audit Scheme (EMAS)

It is voluntary initiative to improve companies

environmental performance EMAS company regularly produce a public statement on environmental performance Accuracy and reliability is checked by independent environmental verifier

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Four Key elements

Legal requirement

Reporting
Improved environmental performance Employee involvement

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ISO- 14000
Series of standards
Dealing with environmental management and

supporting audit Gain accreditation it must meet a number of requirements Voluntarily

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Benefits of compliance with standard

Reduced cost of waste management
Savings in energy and materials consumption Improved corporate image

Framework for continuous improvement

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Social Auditing

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Environmental Auditing

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Environmental Accounting

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Mass Balance

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M.Farooq Baloch

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Chapter #1

Theory of Governance
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Corporation
Form of business

Issue shares
Shareholders delegate day to day matters to Mgt Shareholders play passive roles

Multiple stakeholders
Potential conflict due to separation of ownership &

management

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Governance
Latin origin meaning Directing, controlling and

management of individuals and groups Notion Steering Corporate governance A system to direct, manage and control a group of individuals or organizations (Cadbury report)

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Purpose / Objective of Corporate governance

To monitor those parties who have control on

resources owned by shareholders

To improve corporate performance and accountability

in creating long term shareholder value

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Underlying Concepts of Corporate Governance

1-Fairness Directors must respect views and rights of stake holders. (minority shareholder) 2-Openness/transparency Open and clear disclosure of relevant information to stakeholders 3-Independence EDs NEDS NEDs should be independent from management influence

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4-Probity/honesty Telling the truth Not misleading Honesty in financial/positional reporting.

5-Responsibility Willingness to accept liability for the outcome of governance decisions.

6-Accountability Board would be answerable in front of stakeholders

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7-Judgment BOD capable of making judgment Knowledge of business environment

8-Integrity Straightforwardness dealing Preparing accounts

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Areas/ Issues/ Focus of Corporate Governance

1-Duties of directors and functions of the board Regularly meeting Formal procedures for appointments to the board Submission for re-election Key and strategic decisions

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2-The composition of Board and board committee Combination of NEDS and EDS At least half NEDs ex. Chairmen CEO and chairman separation NEDs in audit, remuneration and nomination committees

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3-Directors remuneration and rewards Remuneration performance based Sufficient to attract and retain No director should decide own remuneration 4-Reliability of financial reporting and external Auditing Balanced financial position Appropriate internal relationship with auditors

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 Implementation of internal controls

Explanation of their responsibility in preparing

accounts Auditor statement about their audit responsibility

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5-Rights and Responsibilities of shareholders

Company should provide All share holders with notice of meetings Copies of annual reports Have dialogue with institutional investors Make constructive use of annual general meeting Institutional shareholders should Make considered use of their votes Have regular dialogue with the company Give weight to relevant factors drawn to their attention
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6-Responsibility of board for Risk management systems and internal controls Maintain sound system of internal control to safeguard assets RM is collective responsibility of board Board review internal control system once in year Regular risk identification faced by business

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Internal corporate governance stakeholders

Directors Responsible for the actions of the corporation. Control company in best interest of stakeholders. Pay performance linked bonuses, share options, status, reputation, power

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 Company secretary

Ensure compliance with company legislation and regulations and keep board members informed of their legal responsibilities. Advise board on corporate governance matters. Pay performance linked bonuses, share options, status, reputation, power

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Sub-board management Run business operations& Implement board policies. Identify and evaluate risks faced by company Enforce controls & concerns Employees Carry out orders o

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Employees Carry out orders of management. Comply with internal controls Report breaches. Trade unions Protect employee in Highlight and take action against breaches in governance requirements.

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External corporate governance stakeholders

Auditors
Role Independent review of company's reported financial position. Interests Fees, reputation, quality of relationship compliance with audit requirements.

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Auditors
Role Independent review of company's reported financial position. Interests Fees, reputation, quality of relationship compliance with audit requirements.

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Regulators
Role Implementing and monitoring regulations Interests compliance with regulations Effectiveness of regulations

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Government Role Implementing and maintaining laws with which all companies must comply Interests compliance with laws Payment of taxes Level of employment

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Stock Exchange Implementing and maintaining rules and regulations for companies listed on the exchange. compliance with rules and regulations fees.

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Institutional investors Through considered use of their votes can (and should) beneficially influence corporate value of shares , dividend payments, security of funds invested timeliness of information received from company shareholder rights are observed

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Agency Theory
Agency Theory A group of concepts describing the nature of agency relationship arising due to separation of management & ownership.
Key Terms An agent is employed by a principal to carry out a task on their behalf. Agency refers to the relationship between a principal and their agent. Agency costs are incurred by principals in monitoring agency behavior because of a lack of trust in the good faith of agents.

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 Agents( directors) have fiduciary responsibility to the

(principals) shareholders. Fiduciary duty mean agents should operate in the best interests of shareholders. Duties imposed due to position of trust and confidence More onerous than contractual

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Corporate Governance &Agency theory Limited Liability: Less interest by shareholders Stock market: highly liquid ownership Delegation of running the company Separation of goals Possible short term perspective by managers

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The cost of agency relationships

Residual loss expensive cars, plans Agency cost This is more significant since it is the cost of monitoring the agent. Incentive schemes management providing annual report data such as committee activity and risk management analysis cost of meetings with financial analysts and principal shareholders the cost of accepting higher risks than shareholders would like in the

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Agency problem resolution measures

Meetings between the principal and key institutional

investors. Voting rights at the AGM in support of, or against, resolutions. Proposing resolutions for vote by shareholders at AGMs . Accepting takeovers. Divestment of shares is the ultimate threat.

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Key principal- agent Relationship in Corporate Governance

Shareholders and directors The conflict of interests between principal (shareholder) and agent( director) The principals need to find ways of ensuring that their agents act in their (the principals) interests. Fat cat Directors in High profile collapse and abuse of powers legislation in the UK and the US, which seek to reduce agency problem

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Shareholders and auditors

The audit is seen as a key component of corporate

governance Auditors act as agents to principals (shareholders) when performing an audit Agency problem- auditors will have their own interests and motives Close relationship of auditors with Board raises a question of independence?

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Legislations
The Combined Code for Corporate Governance

adopted by theFinancial Services Authority (FSA) in the UK. OECD code on ethics. ACCA codes. Specific regulation regarding director remuneration and city code on takeovers.

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Transaction cost theory

it was pure economic theory( 1937) It dealt with external party particularly purchase and sales of components ( vertical integration) Outside view Transaction costs occur when dealing with another party. 1-Search and information costs: to find the supplier. 2- Bargaining and decision costs: to purchase the component. 3- Policing and enforcement costs: to monitor quality

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Rational decision making: making effective and efficient use of resources

Bounded rationality: our limited capacity to

understand business situations. Examples : selling stocks, buying dollars Jobs

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Opportunism: actions taken in an individual's best interests. Internal view transactions: any promise ,deal ,favour Managers transactions will be based on opportunism and bounded rationality

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Three factors determining decisions

Asset specificity : Amount the manager will

personally gain. Certainty: or otherwise of being caught. Frequency: endemic nature of such action within corporate culture Result senior managers need monitoring and control

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Stakeholder theory
Companies should discharge accountability to many more

sectors of society than solely their shareholders Stakeholders shareholders and employees customers and suppliers creditors and communities governments and the general public/world society environment, animal species and future generations.

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Approaches to corporate governance

A rules based approach
A principles based approach requires the company to

adhere to the spirit rather than the letter of the code.

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Chapter 2 Development of

Corporate Governance

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Development of Corporate Governance

Agency theory
Stakeholders theory Company laws

Govt . legislations

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Development of governance Codes

No need to be conversant with any specific Code SOX US Reports Cadbury (1992)-chairman/ CEO role separation Green bury(1995) Directors remuneration Hampel criticisms on previous reports

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 Turnbull (1999) Internal control

Smith(2003) Audit & Audit committee Higgs(2003)- Role of NEDs

Tyson (2003)- Recruitment & development of NEDs

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Cadbury (1992)
Impetus Black Monday 19 October 1987 Subsequent down turn in Business The Collapse of BCCI (Bank of commerce and credit ) 1991 UKs own corporate scandals(Mirror Group)

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UK Combined Code
Section 1

Directors Directors remuneration Accountability and audit Relations with share holders Section 2 Dialogue with companies Evaluation of governance disclosure Shareholder voting
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Section 1: companies
A: Directors
A.1:The Board

Principle Every company should be headed by an effective board ,which is collectivity responsible for the success of the company

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A.2: chairman and chief executive Principle A clear division of responsibilities must exist at the head of the company No individual should have unfettered powers of decision.

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 A.3: Board and independence

Principle A balance of executives and NEDs should exist on the board so that no one party dominates

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A.4: Appointments to the board Principle There should be a formal, rigorous and transparent procedure for the appointments of new directors to the board.

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 A.5: Information and professional development

Principle The board should be supplied in a timely with information to enable it to discharge its duties. All directors should received induction on joining the board and should regularly update and refresh their skills and knowledge.

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A.6: performance evaluation Principle The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

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A.7: Re-election of directors Principle All directors should be subject to re-election at regular intervals subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board.

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B: Remuneration B.1:The level and make up of remuneration Principle Level of remuneration should be sufficient to attract, and motivate directors. A significant proportion should be structured so as to link rewards to performance.

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B.2: Procedure Principle There should be a formal and transparent procedure for fixing remuneration packages No directors should be involved in deciding his own remuneration

CPE

160

C: Accountability and audit

C.1: Financial reporting Principle
The board should present a balance and understandable assessment of the companys positions and prospects C.2: internet control Principle The board should maintain the sound system of internal control to safeguard shareholders investments and company assets.

CPE

161

C.3: Audit committees and auditors Principle The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and maintaining an appropriate relationship with the companys auditors.

CPE

162

D: Relations with shareholders

D.1: Dialogue with institutional shareholders Principle There should be a dialogue with shareholders based on a mutual responsibility for ensuring that a satisfactory dialogue with shareholder takes places.

CPE

163

D.2: Constructive use for the AGM Principle The board should use the AGM to communicate with investors and encourage their participation.

CPE

164

Section 2: Institutional shareholders

E: Institutional shareholder E.1: dialogue with companies Principle Institutional shareholders should enter into a dialogue with companies based on a mutual understanding objectives.

CPE

165

 E.2: Evolution of governance disclosures

Principle When evaluating companies governance arrangements, particularly relating to board structure and composition, institutional shareholder should give due weight to all relevant factors drawn to their attention.

CPE

166

E.3: shareholders voting Principle Institutional shareholders have a responsibility to make considered use of their votes.

CPE

167

Reasons forGovernance Codes

Reduce fraud and corruption
Improved shareholder perception Statistical evidence poor governance equals to poor

performance Investors are willing to pay premium for well governed companies Event it does not add value, how ever it reduces huge risk and potential losses

CPE

168

Practical problems with Governance code

Reactionary rather than proactive
Impact varies on the nature of company and global

view point. It add red tap and bureaucracy It adds cost It cannot stop fraud Adherence to CG harm competitiveness

CPE

169

Focus of Cad bury BOD separation of CEO & chairman roles Institutional investors- greater dialogue Audit &Accountability- disclosure Stock exchanges listing rules

CPE

170

Chapter # 3
The Board of Directors

CPE

171

Cadbury Report (1992)

Recommendations Split of roles Independent Chairman

CPE

172

Higgs Report
Post Enron
Emphasized non-executive directors

Conclusion At least half of board should be NEDs Proper remuneration of NEDs Link b/w board and shareholders Regular communication to key shareholders

CPE

173

Tyson Report(2003)
Recruitment and Development of NEDs Expand gene pool Diversity in background ,skills and experience Improved relationship and communication with stakeholders

CPE

174

BOD- Roles And Responsibilities

Director A director is an officer of the company charged by the board of directors with the conduct and management of its affairs provide entrepreneurial leadership of the company represent company view and account to the public decide on a formal schedule of matters to be reserved for board decision determine the companys mission and purpose (strategic aims)

CPE

175

 select and appoint the CEO, chairman and other board

members set the companys values and standards ensure that the companys management is performing its job correctly establish appropriate internal controls that enable risk to be assessed and managed

CPE

176

 ensure that the necessary financial and human

resources are in place for the company to meet its objectives ensure that its obligations to its shareholders and other stakeholders are understood and met meet regularly to discharge its duties effectively

CPE

177

For listed companies: appoint appropriate NEDs establish remuneration committee establish nominations committee establish audit committee assess its own performance and report it annually to shareholders submit themselves for reelection at regular intervals (maximum of three years).

CPE

178

Capabilities of Effective Board

Clear strategy aligned to capabilities
Strict implementation of strategy Key performance drivers monitored

Sharp focus on key stakeholders

Regular evaluation of Board performance

CPE

179

Directors skills
Listening
Questioning Negotiating

Leadership (CEO/ Chairman)

Technical knowledge (EDs) General business Knowledge ( Eds &NEDS)

CPE

180

Characteristics of directors
Motivated
Proactive Experienced

CPE

181

Job Description Finance Director

Will vary according to the size of company In general Over seeing Financial matters Responsible for financial information to CEO and BOD

CPE

182

Specific Control of companys accounting functions

CPE

183

Potential problems for BODs

Largely reliance on management to report

information, they may obscure Members occasionally meet and may be unfamiliar rarely question management CEOs often are forceful persons, exercising too much influence over the rest of the board. CEO's performance is judged by the same directors who appointed him/her making it difficult for an unbiased evaluation.
CPE 184

Board structures
Two tier boards
Germany &France Management board: responsible for managing day to day affairs of the business. Supervisory board: appoints, supervises and advises members of the management board. A separate chairman coordinates the work and members are elected by shareholders at the annual general meeting(AGM).
CPE 185

 Supervisory board consists of different stakeholders(

employees, banks).NEDs are not independent

CPE

186

Advantages of a two tier board

Clear separation between those that manage the company and

those that own it or must control it for the benefit of shareholders. worker representation.

Wider stakeholder involvement implicit through the use of

Independence of thought, discussion and decision since board

meetings and operation are separate. members of the management board.

CPE

Direct power over management through the right to appoint

187

Problems of Two Tier Board

Dilution of power through stakeholder involvement.
Isolation of supervisory board through non

participation in management meetings. Agency problems between the two boards. Added bureaucracy and slower decision making

CPE

188

Unitary board
NED expertise: Involvement of NEDs in the running

of the company rather than just supervising. Responsibility: a cabinet decision making unit with wide viewpoints, better decisions making Reduction of fraud, malpractice: this is due to wider involvement in the actual management of the company. Improved investor confidence:

CPE

189

Key Roles of NEDs

Strategy Role- right & responsibility to contribute

strategic success, challenge strategy and giving direction Scrutinizing role- Account for executives for their actions Risk Role- ensuring effective internal control & risk management systems People Role-Appointing and remunerating the EDs

CPE

190

Effective NED
Be informed about company and its environment
Should have strong command on business issues Insists on comprehensive formal induction Continually develop knowledge and skills Ensure timely and relevant information Uphold highest ethical standards of integrity

CPE

191

 Question intelligently
Debate constructively Challenge rigorously and

Promote highest standards of corporate governance

CPE

192

Suggestions for Board Meeting

Agenda should strike between long term and short

term issues Topics should have relevant information regular meetings Chairman should direct proceedings Provide ample time to every one before making any decisions

CPE

193

General Board Agenda

Companies Act requirement Approval of interim and final financial statements Approval of interim and final financial Dividends Approval of significant changes to accounting Policies Appointment and removal of Key staffs

CPE

194

 Remuneration of auditors ( when shareholders allow)

Recommendation of appointment and removal of

auditors. Stock Exchange Approval of press release concerning significant matters decided by the board.

CPE

195

Management Approval of groups commercial strategy Approval of groups annual budgets Approval of groups annual capital expenditure plan Changing the group structure Terms and conditions for services of Directors

CPE

196

 Major changes to groups management and control

structure

CPE

197

Independence
Balance b/w NEDs & Eds
To reduce powers of EDs Half board should consist of NEDs, excluding

chairman One senior Independent director should available for shareholders if their concerns are not dealt by Chairman,CEO and finance director

CPE

198

Reasons for Independence

To provide a detached and objective view of board

decisions. To provide expertise and communicate effectively. To provide shareholders with an independent voice on the board. To provide confidence in corporate governance. To reduce accusations of self interest in the behavior of executives.

CPE

199

Threats to independence
Not being an employee of the company within the last 5

years Not having a material business relationship with the company in the last 3 years Not receiving any remuneration except a director's fee (including share options) Not having any family ties with the directors Not holding cross directorships in other firms

CPE

200

 Not being a significant shareholder

Not having served on the board for over nine years. No cross directorship

CPE

201

NEDs on Board
Advantages Monitoring Expertise Communication Watchdog perception Discipline

CPE

202

Disadvantages of NEDs on board Unity: lack of trust & needless input can affect board operations Quality: poor gene willing to serve Liability: with equal liability in the law for company operations question NEDs whether they want or not to want in job

CPE

203

Chairman and CEO

Separate the roles of CEO & chairman
Division of responsibilities b/w chairman & CEO

should be established and agreed by board CEO Most say over appointment of EDs Chairman most say over NEDS

CPE

204

Chairman Responsibilities
Provide leadership to board, supplying vision
Take a leading role in determining the composition

and structure of board Size of board Balance between EDS & NEDs Interaction , harmony & effectiveness of directors

CPE

205

 Chair all board meetings directing debate toward

consensus Ensure the board receive appropriate ,accurate , timely and clear information Facilitate effective contribution from NEDs Hold meetings with NEDs in absence of EDs

CPE

206

 Chair the AGM & other shareholders meetings

Discuss governance and major strategy with major

shareholders. Ensure that the views of shareholders are communicated to board as a whole

CPE

207

CEOResponsibility
Specific responsibilities of CEO are Develop and implement policies to execute strategy established by board Assume full accountability to board for all aspects of company operations, control and performance Manage financial and physical resources Build and maintain an effective management team

CPE

208

 Put adequate operational , financial , planning , risk

and internal control system in place Closely monitor operations and financial results in accordance with plans & budgets Interface between board & employees Assist in selection and evaluation of board members

CPE

209

 Represent the company to major suppliers, customers

professionals Splitting the roles Clear division of responsibilities b/w chairman and CEO

CPE

210

Reasons for Splitting the Role

Chairman is solely representative of shareholders with

no conflict of interest CEO &its team has clear accountability to chairman removal of joint role reduces the temptation to act in self interests rather than in the interests of shareholders

CPE

211

Reasons Against Splitting the Role

Unity: Two leaders rather than one
Ability: difficult to find two able leaders Human Nature: more chances f conflicts b/w two high

powered persons.

CPE

212

Induction
NEDs induction principles but same for EDS Induction program is necessary for board strategy

development board know the new NED, and he/she build relationships with the existing board and employees

CPE

213

Characteristics of induction program

Comprehensive
Tailored to companys needs Contain important written information, presentations,

meetings, site visits Give balanced over view of company Not overload the information

CPE

214

Objectives of induction
Communication of vision and culture
Communication of practical procedural duties To make new appointee sooner effective

To ensure retention of individuals for future periods

CPE

215

Induction Pacakge
ICSA suggested following provisions Director Duties Brief outline of directors role and responsibilities Advice on share dealing and disclosure of price sensitive information. Company information on matters reserved for the board, Delegated authority Fire drill procedures

CPE

216

Director's duties:
Brief outline of directors role and responsibilities

under codes of best practice. Advice on share dealing and disclosure of price sensitive information. Company information on matters reserved for the board, delegated authority, policy for obtaining independent advice. Fire drill procedures

CPE

217

Company strategies Current strategies, plans and budgets/ forecasts. Annual accounts, interims and KPIs. Company structures, subsidiaries and joint ventures. Treasury issues such as financing and dividend policy. Company brochures, mission statements

CPE

218

Board Operations Memorandum and articles. Minutes of 4-6 previous meetings. Board composition/profiles of members. Details of committees, meeting procedures and schedule for future meetings

CPE

219

Few months latter Companys history plus products and services brochures. Details of advisors and contacts (lawyers, auditors, banks). Details of major shareholders and shareholder relations policy. Copies of AGM circulars from 3 last years. Copies of management accounts.

CPE

220

 Details of risk management procedures and disaster

recovery plans. Policies: health and safety, whistleblower, environmental, ethics and charitable. Recent press releases, reports, articles, cuttings. Details of five largest customers and suppliers

CPE

221

Continuous Professional Development

CPD to run board effectively Chairmen should take initiative to develop the board NEDs should devote time for development

CPE

222

Objectives of CPD
To ensure directors have sufficient skills and ability to

be effective in their role. To communicate challenges and changes within the business environment. To improve board effectiveness and corporate profitability. To support directors in their personal development.

CPE

223

Legal rights and responsibilities

Legal duties are base line Breach of these duties means crime Law protects shareholders

Power Directors do not have unlimited power Articles of association: 3year rotation. Shareholder resolution: this curtails director action in a legal sense. Provisions of law: these could be health and safety or the duty of care. Board decisions: it is the board that makes decisions in the interests of shareholders, not individual directors, but rather a collective view
CPE 224

Fiduciary duties The duty to act in good faith The duty of skill and care Penalties In case of breach: any contract made by the director may be void they may be personally liable for damages in compensation for negligence they may be forced to restore company property at their own expense.

CPE

225

Appointment and retirement of directors

Retirement by rotation All retires at first AGM One third retires at subsequent meetings Retirees are those who stay longest Directors should be re-elected at least every three years

CPE

226

Advantages of retirement by rotation

Not all retire at one time
Orderly replacement Increase directors accountability

CPE

227

Directors service contract

This is a legal document covering the terms of service

(employment) of a company director.

Key dates Duties Remuneration details Termination provisions Constraints Other ordinary employment terms.

CPE

228

Removal of director
The office of director may be vacated by statute death under a provision in either the articles of association of the company or through shareholder resolution such as failure to be reelected by rotation personal bankruptcy resignation from office by notice to the company absence for more than six consecutive months, without permission of the directors, from meetings of directors held during that period and the directors resolve that the office be vacated.

CPE

229

Disqualification of directors
Potential causes of disqualification include: allowing the company to trade while insolvent (wrongful trading/fraudulent trading) not keeping proper accounting records failing to prepare and file accounts being guilty of three or more defaults in complying with companies

CPE

230

 Failing to send tax returns and pay tax

Taking actions that are deemed to be unfit in the

management of a company.

CPE

231

Conflict and disclosure of interests

A conflict of interest is a breach of this duty. The

breach is in relation to the existence of the conflict and not in relation to the outcome of a situation

CPE

232

Key areas of Breach

Directors contracting with their own company
Substantial property transactions- more than 10% of

net worth asset sale Contracts with listed companies- agreed by ordinary resoulation. Loans to directors: generally, loans to directors are prohibited

CPE

233

Insider dealing/trading
Inside information which is not available to the market

or general public and is supposed to remain confidential. These types of transactions in the companys own shares are considered to be fraudulent. The director insider, simply by accepting employment, has made a contract with the shareholders to put the

CPE

234

shareholders interests before their own, in matters related to the company. When the insider buys or sells based upon company owned information, he is violating his contract with, and fiduciary duty to, the shareholders.

CPE

235

Performance Evaluation
At least once a year, the performance of the board as a

whole, its committees and its members should be evaluated.

CPE

236

 Evaluation should be tailored to suit the needs of

company disclosure in t annual reports about evaluation Chairman is responsible for effective evaluation & acting on the feedback Third party for objectivity

CPE

237

 evaluation process will be used constructively as a

mechanism to: improve board effectiveness maximise strengths tackle weaknesses. Results of board evaluation should be shared with the board as a whole.

CPE

238

 The results of individual assessments should remain

confidential between the chairman and the executive/NED concerned.

CPE

239

Evaluation of board
Performance against set objectives
Contribution toward strategy Contribution toward internal controls

Board elationship :inside & outside

Board diversity Right matters are reserved for board discusssion Communication with stakeholders

CPE

240

 Effective utilization of AGM & Annual report

How effective are board committee Board & committee meetings are sufficient

CPE

241

chairman
Effective leadership
Communication with shareholders Communication with management constructively

Optimal usage of company secretary

CPE

242

NEDS
Informed & prepare about meetings
Willingness to devote time Value & quality of contributions

Contribution to strategy development

Knowledge & experience utilization Relationship with colleagues

CPE

243

Board committees
Committees are part of board operations

Advantages reduces board workload improved decision making in key areas Increase shareholders confidence Shows seriousness of board on different issues Satisfy Combined code requirements

CPE

244

Nomination committee
CC focus on Proper & rigorous procedure for

appointment in board It requires Creation of nomination committee Majority NEDs & chaired by Board Evaluation of Individual's skills Chairman s other committee should be shown in annual reports

CPE

245

 Availability of NEDs terms for inspection and other

commitments stated Other commitments of NEDs be stated EDs should no member of other FTSE100 companies.

CPE

246

Responsibilities of Nomination committee

Review regularly structure, size and composition of

board Consider balance b/w EDs&NEDs Ensure appropriate diversity of board Reduce CEO/ Chairman power in selection of EDs Regularly review the balance of knowledge, skills &experience

CPE

247

 Full consideration to board Succession planning Preparation of description of roles & responsibility of the

board members Bee seen to operate independently Making recommendation about standing for reappointment of Directors Identify & nominate for approval by board, candidates to fill board vacancies

CPE

248

Chapter # 4

Directors Remuneration
CPE 249

 Green bury report (1995) focused on directors

remuneration it focused link b/w salary & performance

CPE

250

Role of remuneration committee

Appropriate reward policy to
attract Retain

& Motivate directors to achieve shareholders long term objectives

CPE

251

Objectives of Committee
It should be independent
Access to external consultants Clear remuneration policy with shareholders support

Performance packages should be aligned with long

term interests & targets Reporting to shareholders should be clear, concise about remuneration policy

CPE

252

Responsibilities of remuneration committee

Determine & review remuneration policy, employment

terms and conditions for chairman &EDs Recommend and monitor the remuneration of senior managers Establish pension policy for all board members Set detailed remuneration for all EDs & chairman

CPE

253

 Ensure that Eds & senior mgt are fairly rewarded

Ensure disclosure relating to directors remuneration

including pension according to good CG practices

CPE

254

Directors remuneration
Payments or compensation for services and

employment It includes Basic salary Bonuses Other benefits

CPE

255

 Each component should be designed to motivate

directors and improve performance Balanced package Appropriate in size Efforts related

CPE

256

Guidelines for companies

Pay optimal package to attract, retain & motivate but

not pay more Position package relative to other firms Be aware what comparable companies are paying & also consider relative performance

CPE

257

Remuneration strategy
Strategy should consider Offering more benefits in kind to compensate for low basic salary Non cash motivators for company employees- children vouchers, car scheme Availability of company resources- stock options in case of insufficient cash Encouraging long term loyalty share purchase schemes

CPE

258

Remuneration committee should ensure Board should increase performance Adequately rewarded when performance improvements are achieved Not criticized for excessive pay Retained through market based pay levels

CPE

259

Basic Pay
Set while considering Job it self Skills of individuals doing the job Individuals performance in job Individuals contribution to company strategy Market rates for the job

CPE

260

Performance- related elements of remuneration

Performance- related elements should be significant

part of remuneration Bases for Short term performance 1- operating profit / pre-tax profits 2- Earnings per share 3- Total shareholder return 4- Economic value added

CPE

261

 Bases for Long term performance measure

executives share options Guidelines for companies relating to share options consider whether shareholders are eligible for long term incentives compare ESO with other long term incentives

CPE

262

 ESO are not offered at discount

At least not exercisable with in 3 years Encourage that directors hold shares for further period

after the exercise

CPE

263

Pension Contribution
Only basic salary should be pensionable
Committee should consider pension costs for company

Benefits in Kinds (Perks) Various non wage compensation provided to directors along with wages. Company car, insurance, health care

CPE

264

Guaranteed bonus and golden hellos

Awarding bonus without any performance effort

CPE

265

Loans
BODs loans are not allowed
They can get financial institutions In some countries allowed

Justification if non interest bearing or non payable

CPE

266

Deferred payments and transaction bonus

In down market ,share option is the viable alternative
Transaction bonus should be given on conclusion of

deal , take over

CPE

267

Retirement benefits
All rewards should be performance based

CPE

268

Other Issues
1-Legal 2-Ethical 3- Competitive 4- Regulatory

CPE

269

Legal
What are the implications of director remuneration if

things go wrong Remuneration ( pension and other elements in case of early retirement)

CPE

270

Ethical
Aim to avoid rewarding poor performance. Public perception of excessive pay and rewards in

relation to performance By the 2006 Companies Act directors are legally required to act asgood corporate citizens.

CPE

271

 Ethical outcomes may form part of a directors

performance criteria.

CPE

272

Competitve
Company should have
Motivated Dedicated

Acting in the shareholder's interests BOD

Balanced package Neither small nor big

CPE

273

Regulatory
Directors submit remuneration report at AGM
Full remuneration details in this report This report should be clear, transparent and

understandable for shareholders

CPE

274

Impact on remuneration of increased regulation

Remuneration increased
Additional demand on directors Additional responsibilities

Potential liability of directors

CPE

275

Chapter #5
Share holder Relation And disclsure

CPE

276

Cadbury Report
First recognized role of institutional shareholder
Greater dialogue & involvement of institutional

shareholder

CPE

277

Instituional shareholder
Pension funds
Life Insurance company Unit Trust

Investment Trust

CPE

278

Importance
Greater contribution ,
better performance to CG

by the involvement since power retains in few hands Professional managers contribute to strategy& direction of company

CPE

279

Potential Problem
Complex Web

Investor- lack of influence Pension fund trustee-lack of skills Pension fund manager- shortermism Company

CPE

280

Share holder Activism

It can be in the form of Making positive use of votes Involvement & dialogue with directors of investee companies Consideration to board composition/ governance of investee Presenting resolutions for voting at AGM Requesting for EGM & presenting Resolutions

CPE

281

Institutional Shareholder Intervention

Areas /conditions for intervention
Strategy

Operational performance
Acquisitions &disposal Remuneration policy

CPE

282

 Internal controls Succession planning

Social responsibility
Failure to comply

CPE

283

AGM
Once in a year
Legally required Not less than 21 days notice

First no more than 18 months

On wards no more than 15 months All shareholder must be entitled & notified Approval for annual accounts & appointment of

auditors

CPE

284

EGM
Not set time table
No legal obilgation Separate resolution for each issue

Not less than 14 days notice

All shareholder must be entitled & notified

CPE

285

Proxy Voting
System to give opinion for shareholders who cannot

attend meetings

CPE

286

Disclosure Shareholders need information to make investment decisions. AGM is the opportunity to communicate Annual accounts &reports are legally required for shareholder

CPE

287

Disclosure of CG Arrangemnets

Board Function Statement of scope of board Name of BODs Meetings of board &committee Performance evaluation of board Names of NEDs How Board communicates to shareholders

CPE

288

Committee function Work of the nomination committee Work of the nomination committee
Accounting Board responsibility for accounts preparation Statement identifying company as going concern

CPE

289

 Reasons for absence of internal audit if applicable

Reasons for not approving auditors if applicale Statement of board relating to effectiveness of internal

controls Explaination of audiotrs non audit services if applicable

CPE

290

Disclosure
Mandatory
Volunatray

CPE

291

Annual report
Chairman &CEO statements regarding company

positions Business Reviewc The Accounts Governance AOB

CPE

292

Chapter # 6
Approaches to Corporate Governance

CPE

293

Rule based
Code are laws Penalties are there in case of breach

US A

CPE

294

Principles- based
Codes are principles Comply or explain basis UK Spirit is emphasized

CPE

295

Factors affecting choice of Governance regime

Dominant ownership structure Legal system and its power

Government structure and polices

State of the economy Culture and history Level of capital inflow or investment

CPE

296

Advantages of rule based approach

More emphasis on definite achievements
Cleary determined compliance Binding requirements

Standardization for all companies

Greater confidence of stakeholders

CPE

297

Criticism of rule based approach

Check list approach
Letter of code not sprite Exploitation of Loop holes

Flexibility is lost
huge Cost and time No room for improvements

CPE

298

Advantages of principle based

Companies avoid inflexible legislation
Flexibility to Develop their own approach suitable to

their circumstances Less burdensome in terms of time and cost Enforcement is on comply or explain basis

CPE

299

Criticism of principle based

Less clarity
Difficult to assess compliance Less objective

More manipulation

CPE

300

Sarbanes -Oxley (SOX)

In 2002 after Enron
Rule based CG Detailed and full force of the law

Applicable US companies, subsidiaries of US

companies

CPE

301

Reasons of corporate scandals

lack of transparency in accounts In effective corporate governance arrangements Inadequate scrutiny by external auditors in effective Executive compensation methods

CPE

302

Measures introduced By SOX

Rotation of lead or reviewing audit partners every five

years Prohibition from carrying out non-audit services without the approval audit committee strict regulation ( off balance sheet transactions) CEO and CFO should certify the appropriateness of the financial statements.

CPE

303

continued
Auditors should review internal control systems Retain working papers at least seven years Reasonable assurance that recorded transactions are in

accordance with GAAP Assurance about Receipts and payments should be according to Management Authorization

CPE

304

Key effects of SOX

Personal liability of Management
Improved communication with shareholders Improved public and investor confidence

Improved internal control

Improved governance through audit committees Better relationship with auditors

CPE

305

Negative reactions of SOX

Increased audit fee
Onerous documentations & internal control Reduced flexibility and responsiveness of companies

Provides a legal minimum standard ( no

improvement)

CPE

306

Insider dominated Structure

Extension of family related structure
Listed companies dominated by a small group of

shareholders May be family owned May be banks, other companies

CPE

307

Benefits of insider
Fewer agency problems
Lower cost of capital Greater

access to capital
Less chances of suffering short-termism Greater stable expert input to managerial decisions

CPE

308

Problems of insider dominated

Lack of minority shareholders protection
Opaque operations and lack of transparency in

reporting Misuse of power Shareholder cannot express their discontent

CPE

309

International Convergence
Two organizations published CG codes to apply to

multiple national jurisdiction OECD (organization of Economic cooperation and development) ICGN( international corporate governance Network)

CPE

310

Objectives of OCED
Improve CG practices in all companies
Assist countries to improve CG framework To develop common CG codes

To develop suitable codes for international community

CPE

311

Contents of OECD
Ensuring effectives CG framework
Rights of shareholders Key ownership functions

Equitable treatment of shareholders

The role of stakeholders in corporate governance Disclosure and transparency Responsibilities of board

CPE

312

ICGN principles
Corporate objective
Disclosure and transparency Audit

Shareholders ownership, responsibilities Voting

rights, corporate boards, Corporate remuneration polices Corporate citizenship Corporate governance implementation

CPE

313

Chapter #7
Corporate Social Responsibility & corporate Governance

CPE

314

corporation
Artificial person Citizen of country Notionally owned by shareholders Independently existence

CPE

315

Milton Friedman
Corporations only have economic responsibilities
Managers pursue shareholders interests Moral responsibility rests on government

CPE

316

Nature of CSR
Carroll has devised four part model Economic Legal Ethical Philanthropic

CPE

317

Economic
Shareholders return Employees safe and fair paid job

Customer demand quality at a fair price

Legal responsibility Base line for operating in society Accepted rule book

CPE

318

Ethical Responsibility Doing what is right Beyond previous levels

Philanthropic Responsibility Discretionary behavior to improve other lives Charitable donations

CPE

319

Social Responsiveness
Carroll has suggested four responses

Reaction- company denies Defense-admits and does least Accommodations- admits and does what is required Pro action- go beyond industry norms

CPE

320

Stakeholders
Freeman defines any person or group that can affect or be affected by policies, activities of an organization Example customers, suppliers, shareholders and employees , Govt, Civil society and competitors

CPE

321

Stakeholders claims
Demands or desire from organization to act in certain

way. Direct Claims- unambiguous and clear Indirect Claims- claims made by those stakeholders who are unable to express or have no voice Due to less powers: individual customer or shareholder No voice- natural environment or Future generation

CPE

322

Internal & External Internal - employees &management External- customers, employees

Narrow & wide Most affected- most dependent on company out put- mgt, shareholders, employees Wide- less affected or dependent on company out put- Govt, society as a whole

CPE

323

Primary & Secondary: Primary: Who directly affect and without their involvement would be difficult to operate- Govt, shareholders Secondary: Have limited effect on organization and would survive without their involvement- community & Mgt

CPE

324

Active & Passive Wish to participate Wish not to participate local communities, Govt, suppliers
Voluntary & Involuntarily Involved in decision making- Mgt, employees, Do not involved in organizational decision making

CPE

325

 Legitimate and Illegitimate

Those with economic relationship with an organization. Those without such link terrorists

CPE

326

Stakeholders Mapping
Level of Interest L Power L Minimum Effort H keep satisfied key players

keep informed

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327

Power: Amount of influence on corporation

Level of Interest: interest in corporate performance

CPE

328

 Low interest Low power

Small shareholders and general Public

Highest interest- Low Power Environmental pressure groups

Low interest- High Power institutional shareholders Govt
CPE 329

 High interest High Power

Directors Major shareholders

CPE

330

Assessing stakeholder Importance

Attributes may be assessed

Power- perceived influence Legitimacy- perceived claims are legitimate or not Urgency- claims call for immediate actions

CPE

331

Organizational motivation regarding stakeholders

Instrumental view Organizations have only economic and legal responsibility towards share holders. Contractual obligation
Normative view moral duties What is right for society as compare to company pursuing profit maximization

CPE

332

Impact of stakeholders on corporate governance

Inclusion of social accounting in Business review of annual accounting report Ethical Accounting- internal management system at an individual level Environmental Accounting- natural environment Social Accounting- employee health, safety & conditions Sustainability accounting Triple bottom line

CPE

333

Organization as a corporate citizen

Corporate citizenship Extended view of corporate role beyond shareholders relation Corporate Accountability whether corporation is answerable for consequences of its actions beyond its relationships with shareholders

CPE

334

Sources of corporate accountability

Government Failure Beyond the control of a single government difficult to change lifestyle Electoral dampens political will Some times they are part of the problem
Corporate power Liberalization and de-regulation privatization of state-owned monopolies complex cross border legal agreement Countries struggling with their economic fronts providing more power to corporations
CPE 335

Conti..
Are difficult so companies self regulate
Views of Corporate Citizenship Limited View-Philanthropic view Equivalent View- CSR (ELEP) Extended View- corporate has rights and responsibilities beyond four

CPE

336

Shareholder ownership Property &responsibility

O has the right to use P
O has the right to regulate anyone use of P- e.g (cross

the boundary) O has the right to transfer rights of P on whatever terms he wishes O is responsible his use of P does not damage others

CPE

337

Ownership of share in a large corporation is different

shareholders do not own corporation
Shareholders participate in the risk & rewards of

ownership but in limited degree

CPE

338

Share holders rights

To Sell shares
To vote in meetings To certain information about the company

Certain residual rights in case of liquidation

CPE

339

Shareholders responsibilities
Shareholder democracy-Shareholder use their positions to influence corporate accountability Shareholders Activism Voice at AGM make shareholders aware Ethical investment Use of ethical ,social and environmental consideration in portfolio selection and management

CPE

340

Criteria for selection of cmpanies

Positive animal rights Child Labor Nuclear power Poor employment practices weapons

CPE

341

 Negative

conservation and environmental protection Ethical employment practices Inner city renovation Green Technologies

CPE

342

Chapter #8
Internal control systems

CPE

343

 Cadbury (1992) Bod should establish and review

internal control system Turn bull (1999) Bods should review and report to shareholders

CPE

344

Internal control and RM in CG

Internal control and RM are fundamental components

of CG Good CG means that BOD identify and manage risk RM and IC spans all activates of companies

CPE

345

IC &COSO
1985 guidelines
Three aspects of ICS Effectiveness and efficiency of operations

Reliability of financial statements

Compliance with applicable laws and regulations

CPE

346

Internal control and Turnbull

Requirement of the report were

1- implement a sound system of internal controls 2- systems should be checked regularly Establish business objectives. Identify the associated key risks. Decide upon the controls to address the risks. Set up a system to implement the required controls, including regular feedback.

CPE

347

Internal control
Controls minimize the risks( which stop a company to achieve objectives) Internal control system whole network of systems established to provide reasonable assurance that organizations will achieve its objectives

CPE

348

Objectives of internal control system

Misconception: Error & fraud
Lack of effective internal control system means

defective RM strategy 1- Efficient conduct of business 2- safeguard of assets 3-prevention of error and frauds 4- accuracy of accounting records 5- the timely presentation of financial information

CPE

349

Benefits of ICS
Efficiency and effectiveness of operations
Reliability of financial reporting Compliance with laws

CPE

350

COSO objectives
As discussed in 210

CPE

351

Limitations of internal control system

Cannot turn a poor manger into a good one
Only reasonable assurance Deal with routine transactions

Resources constraints
Management override

CPE

352

Sound control systems

Turnbull have discussed with three features of sound

internal control system Embedded with in operations Able to respond to changing risks Includes procedures for reporting control failings or weaknesses

CPE

353

Roles in RM and internal control

Every one in company CEO setting tone for internal control BOD ensure adequacy &effectiveness of ICS Senior Executive Management Setting IC policies Monitoring effectiveness of IC

CPE

354

Head of Business Units: establishing specific control policies and procedures All employees operating and adhering to internal controls

CPE

355

Review of IC
Review delegated to RMC
Information on review should be included in annual

accounts At least once in a year

CPE

356

COSO framework
Review against five elements 1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. monitoring

CPE

357

Control environment
Tone at the top
Overall top attitude towards internal control Management philosophy

Organizational structure
Assignment of authority and responsibility HR policies Competence of personnel

CPE

358

Risk Assessment
Having established objectives

Assess risk factors exposed by firm Internal factors- org,changes, staff tun over External factors- changes in industry , technological changes RA should distinguish b/w ControllableUn Controllable

CPE

359

Control Activates
Policies and procedures that ensure decisions of

management are carried out. APB list of internal control Segregation of duties Physical Authorization & approval Management-Top level reviews, activity control Supervision-oversight of work Organization- structure Arithmetic & accounting personnel
CPE

360

Information and communication

Effective & timely information Effective channels of communication External and internal information for Mgt team Information needs depend on level of Mgt

CPE

361

Management Level
Strategic
Tactical Operational Level

CPE

362

Information systems for mgt control

Types of information system Executive information system Management information system`````````````````````````````````````````````````` `````````````````````````` Decision support system Transaction processing system

CPE

363

Chapter #10
Risk and Risk Management Process

CPE

364

 Risk is important dimension of CG

OECD Principles of CG Risk of not protecting the rights of shareholders Risk of not treating equally to all shareholders Risk of not providing proper disclosure and transparency

CPE

365

 Risk of not fulfilling the responsibility of board

Risk defined

Unrealized future gains/ losses arising from present action or inaction Down side Vs Up side

CPE

366

Why Incur risk

Gain competitive advantage
Increase financial return

CPE

367

Competitive Advantage

Activity Risk

Low
Low 1-Routine

High
2-Avoid

High
CPE

accept

examine duly
368

Why manage Risk

Determination of appropriate RM strategy
Amending Risk management strategy due to known

changes Making best use of opportunities

CPE

369

Managing the Up side Risk

Risks are opportunities to be availed
Accepting more risks to get benefits RM is to increase chances of positive out comes and

maximize returns Effective RM is a way of enhancing shareholder value by

CPE

370

Risk Management
Process of reducing the possibility of adverse

consequences either by reducing likelihood of an event or its impact

CPE

371

Risk Management Process

Risk identification list of potential risk
Risk Assessment prioritized Risk List ( chances and impact)

Risk Planning- Risk avoidance / contingency planning

Establishing appropriate risk policies Risk monitoring Risk Audit

CPE

372

Enterprise Risk Management

RM is Holistic approach

( integrated and coordinated process)

Drivers are globalization, regulatory compliance, CG

developments
Board should have thorough understanding of risks

affecting organization

CPE

373

ERM
A process, effected by an entity's board of directors, management and other personnel, applied in strategysetting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives."

CPE

374

Principles of ERM
Consideration of RM in business Strategy
RM is responsibility of every one in the company Creation of RM culture

Comprehensive and holistic approach to RM

Consideration of broad range of risks( strategic,

financial , operational and compliance)

CPE

375

COSO ERM framework

Three dimensions
Four objectives of business

( strategic, operations, reporting and compliance) Four organizational levels( subsidiary, business unit, division and entity) Eight components

CPE

376

The ERM Framework

Entity objectives can be viewed in the

context of four categories:

Strategic Operations Reporting Compliance

Internal Environment

Establishes a philosophy regarding risk management. It recognizes that unexpected as well as expected events may occur. Establishes the entitys risk culture. Considers all other aspects of how the organizations actions may affect its risk culture.

Objective Setting

Is applied when management considers risks strategy in the setting of objectives.

Forms the risk appetite of the entity a high-level view of how much risk management and the board are willing to accept.
Risk tolerance, the acceptable level of variation around objectives, is aligned with risk appetite.

Event Identification
Differentiates risks and opportunities. Events that may have a negative impact represent risks. Events that may have a positive impact represent

natural offsets (opportunities), which management channels back to strategy setting.

Event Identification
Involves identifying those incidents, occurring internally or externally, that could affect strategy and achievement of objectives. Addresses how internal and external factors combine and interact to influence the risk

profile.

Event Identification
Involves identifying those incidents, occurring internally or externally, that could affect strategy and achievement of objectives. Addresses how internal and external factors combine and interact to influence the risk

profile.

Risk Assessment
Allows an entity to understand the extent to which potential events

might impact objectives.

Assesses risks from two perspectives:

- Likelihood - Impact
Is used to assess risks and is normally also used to measure the

related objectives.

Risk Assessment
Employs a combination of both qualitative and

quantitative risk assessment methodologies.

Relates time horizons to objective horizons. Assesses risk on both an inherent and a residual basis.

Risk Response
Identifies and evaluates possible responses to risk. Evaluates options in relation to entitys risk appetite, cost vs.

benefit of potential risk responses, and degree to which a response will reduce impact and/or likelihood.
of risks and responses.

Selects and executes response based on evaluation of the portfolio

Control Activities
Policies and procedures that help ensure that the risk

responses, as well as other entity directives, are carried out. all functions.

Occur throughout the organization, at all levels and in

Include application and general information

technology controls.

Information & Communication

Management identifies, captures, and communicates pertinent information in a form and timeframe that enables people to carry out their responsibilities. Communication occurs in a broader sense, flowing down, across, and up the organization.

Monitoring
Effectiveness of the other ERM components is monitored through:

Ongoing monitoring activities.

Separate evaluations.

A combination of the two.

Benefits of ERM
Enhanced decision making by integrating risks
Improvements in Investor confidence Focus of management on most significant risks

Common language of ERM under stood by all

employees in organization Reduced cost of finance through effective management of Risk

CPE

389

Risk identification
Strategic Risks
Affecting the overall mission Arising from possible consequences of strategic decisions Identified and assessed at senior management Level PESTEL SWOT

CPE

390

Operational Risks
Affected by day to day operations

Risk of fraud due to Failed internal process, people and system Can be managed by internal control system

CPE

391

Risk Identification: Business Risk

Business risks are strategic threatening the health and

survival of whole business

CPE

392

 Market risks. Risks which derive from the sector in

which the business is operating, and from its customers. Product risk. The risk that customers will not buy new products (or services) provided by the organization, or that the sales demand for current products and services will decline unexpectedly.

CPE

393

 Commodity price risk. Businesses might be exposed to

risks from unexpected increases (or falls) in the price of a key commodity. Product reputation risk. Some companies rely heavily on brand Image and product reputation, and an adverse event could put its reputation (and so future sales) at risk. Credit risk. Credit risk is the possibility of losses due to nonpayment, or late payment, by customers.

CPE

394

 Currency risk. Currency risk, or foreign exchange

risk, arises from the possibility of movements in foreign exchange rates, and the value of one currency in relation to another. Interest rate risk. Interest rate risk is the risk of unexpected gains or losses arising as a consequence of a rise or fall in interest rates.

CPE

395

 Gearing risk. Gearing risk for nonbank companies is the risk

arising from exposures to high financial gearing and large amounts of borrowing.

Legal, or litigation risk arises from the possibility of legal

action being taken against an organisation.

Political risk. Political risk depends to a large extent on the

political stability in the countries in which an organisation operates and the attitudes of governments towards protectionism.

CPE

396

 Regulatory risk arises from the possibility that

regulations will affect the way an organisation has to operate.

Compliance risk is the risk of losses, possibly fines,

resulting from noncompliance with laws or regulations.

CPE

397

 Technology risk arises from the possibility that

technological change will occur. Economic risk refers to the risks facing organisations from changes in economic conditions, such as economic growth or recession, government spending policy and taxation policy, unemployment levels and international trading conditions.

CPE

398

 Environmental risk arises from changes to the

environment over which an organization has no direct control or for occurrences for which the organization might be responsible. Business probity risk is related to the governance and ethics of the organization. Derivatives risk refers to the risks due to the use of financial instruments.

CPE

399

 Liquidity Risk

Company is not able to pay its debts as they become due

Entrepreneurial Risk is the risk associated with new business venture or opportunity

CPE

400

 Generic Risk

Macro economic variables Interest rate Inflation rate

Specific Risk

Specific to company or industry

CPE

401

The impact on stakeholders

Shareholders Directors

Managers
Employees Customers Suppliers

CPE

402

 Trade Union
Communities Government

Banks

CPE

403

Assessing Risks
Risk mapping
Likelihood and Impact Qualitative way of measurement

CPE

404

Dynamic nature of Risk Assessment

Static environment
Dynamic environment

CPE

405

Risk Perception
Objective
Subjective

CPE

406

Tools and techniques for Quantifying Risk

Scenario Planning
Sensitivity Analysis Decision trees

Computer Simulation
Software package for risk identification & assessment

CPE

407

Chapter 11
Controlling Risk

CPE

408

 Having established objectives

Identified risks Risk assessment

Risk Management

CPE

409

Risk Appetite
Amount of risk an entity is willing to accept to fulfill business strategy
Determined by Risk Capacity: amount of risk entity can bear Risk Attitude: overall feelings about risk

CPE

410

Risk Attitude
Risk Averse

Seeking to avoid risk Less sophisticated RM system

Risk seeking

Actively seek risk RM is strategically importance Invest in comprehensive RMS

CPE

411

Risk Appetite Factors

Nature of product High risk of product failure should be avoided The need to Increase sales Entering in new market is more riskier Increasing sales in existing market is low

CPE

412

Back ground of Board Risk attitude of Individuals will be reflected Amount of change in the market more changes more risk appetite Reputation of the company Good reputation less risk

CPE

413

Risk attitude and organizational factors

Size

Small Vs large Structure Functional Vs Divisional Development product life cycle New product launch is risky

CPE

414

Risk Committee
Separate risk committee ( not required by law)
Audit committee performs RCs roles

composition of Risk committee Both NEDs & Eds Majority NEds

CPE

415

Roles of Risk committee

Raising risk awareness
Ensuring appropriate RM Establishing RM policies

Ensuring adequate identification, reporting and

monitoring of risks updating company s risk profile Reporting to board Making recommendations on risk appetite

CPE

416

Responsibilities of risk committee

Assess RM procedures for risk identification& measurement in accordance with changes in operating environment Emphasize and demonstrate benefits of Risk based approach Risk assessment of new ventures and strategic initiatives

CPE

417

 Consider risk audit reports on key business areas if

appropriate Ensure that public disclosure about RM & IC are in accordance with statutory requirements Make recommendations to full board on all significant matters relating to risk strategy and policies

CPE

418

Role of Risk manager

Member of RMC Implementation of RM policies Supported and monitored by RMC More operational rather than strategically Policy is set by board &RMC & implemented by RM

CPE

419

Risk Management Activites

Provide overall leadership to risk management team
Ensuring compliance with laws & regulations Identification& evaluation of risk affecting

organization s business, operations & policies Improving RM methodologies and practices

CPE

420

 Implementation of Risk mitigation strategies Implementation of internal control to manage

identified risks Implementing a set of risk indicators & reports Liaising with Insurance companies Working with external auditors to provide assurance and assistance relating to appraising risks and control

CPE

421

 Producing reports on RM (statutory reports)

CPE

422

Risk Awareness
Risk awareness mean appropriate risk management

strategy Proper risk identification Adequate risk monitoring and awareness RM strategies are up dated

CPE

423

 Strategic level

Monitoring of risks affecting the organizaion as a whole Tactical level Monitoring of risks affecting one unit / division Operational level Monitoring of risks affecting day to day running of the business

CPE

424

Sources of information on risk

Reports from departmental managers
Whistleblowers Reports on key project &new business

Results of internal audit reviews

Customer feedback Performance monitoring system Directors own observations

CPE

425

Embedding Risk
Aim: part of the way we do business Two levels: Embedding risk in system Embedding risk in culture

CPE

426

Embedding risk in system

RM is included in control system
Ensure that other systems are working correctly RM is not seen as a separate system

to be Successful, embedding RM needs support and

approval of board

CPE

427

Process of embedding RM
Identify existing Controls with in the organization
Monitor these as they are working Improve and refine controls if required

Document evidence of monitoring and control

operation

CPE

428

Embedding Risk in culture

RM embedded into policies & procedures in any

organization Acceptance by all workers in a compny It shows that RM is normal for organization

CPE

429

Methods of embedding RM in culture

Aligning individual & org goals
Include RM responsibility in Job Description Establishing reward system for risk taking

Establishing performance indicators that can monitor

risks and provide early warnings Telling stories how embedded RM benefited both Org & employees

CPE

430

Success of embedding risk in culture

If supported by board, management and employees
Incorporated with in whole organization Linked to strategically and operational objectives

CPE

431

Risk Management (TARA)

Transfer/ Sharing Insurance Acceptance
Reduction Avoidance

CPE

432

Risk Mapping and Management Strategies

Likelihood Impact L Accept H Transfer

H
CPE

Reduce

Avoid
433

Spreading Risk
Diversifying into different industries
When Returns are negative correlated

CPE

434

Diversification Market/ product Management

Related diversification Backward Integration Forward Integration Horizontal Integration
Unrelated diversification

CPE

435

Problems with diversification

Many business compete by specializing
difficult to manage more diversified business Relative little advantage to share holders as they do

by themselves by holding diversified portfolio Organizations lack management skills to diversify

CPE

436

Ansoff-Matrix or Product-Market Expansion Grid

Dimensions Existing Products New Products

Existing Markets

1.1.

Do nothing 2. Withdraw 3. Consolidate 4. Penetrate

Product Development (risky + expensive)

New Markets

Market Development (when product is very competitive)

Diversification assuming new activities

Risk Auditing
Systematic way of understanding the risks faced by

companies

CPE

438

Purpose of risk Auditing

Helps in Overall risk monitoring activity
A fresh pair of eyes identify errors or omission in risk

monitoring process Risk audit may be obligatory

CPE

439

Stages of a Risk Audit

Identify Risks
Assess Risks Report on inadequately Controlled Risk

Review Controls and risk

CPE

440