p1 Acca Lesson1

Session Objectives
Topic 1 Define corporate governance

Identify the objectives of corporate
Governance and Responsibility governance
Explain the scope of governance
© accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant © accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant
Reasons for Conflict of Interest

Session Objectives
in an Organisation
Distinguish between corporate Shareholders delegate control to run the
governance requirements of different company on their behalf to:
organisations Professional Managers
Board of Directors
Describe the role of various internal
parties in corporate governance Shareholders normally play a passive
role in the day-to-day management.
There is a separation of control that
leads to conflicts of interest in
organisations.
Company Ownership and
Control What is Corporate Governance
“the system by which companies are

directed and controlled”
-Cadbury Report 1992
Corporate Governance Corporate Governance
Corporate Governance is derived from

Latin ‘gubernare’ or ‘to steer’. It is about:
Steering or directing
Control
Need for Governance Coverage of Governance
Important to enlist management support Direction from within

Increases accountability and maximises • The nature and structure of those who set
direction
sustainable wealth creation • The need to monitor major forces through risk
Better financial performance is achieved analysis
• Need to control operations
through better management and better
managers pay attention to governance Control from outside
• Need to be knowledgeable about the regulatory
framework that defines codes of practice,
compliance etc
• Wider view of corporate position in the world
Purpose and Objective of Supporting Purposes of

Primary Purpose: Ensure that there is suitable balance of
Monitor those parties within a company power on the BOD
which control the resources owned by Ensure Executive directors are
investors
remunerated fairly
Primary Objective:
Make BOD responsible for monitoring and
Contribute to improved corporate
managing risk
performance and accountability in creating
long-term shareholder value
Supporting Purposes of Supporting Objectives of
Ensure external auditors remain Control the controllers by increasing the
independent amount of reporting and disclosures to all
Address other issues such as business stakeholders
ethics, CSR etc Increase level of confidence and
transparency in company activities
Ensure legal compliance
Build in control at the top that will flow
down the organisation
Importance of Ethical Codes in Characteristics of Ethical

Governance Behaviour
Provide the principle to behaviour Fairness
Improves vital public perception and Openness / transparency
support Independence
Operates as a guide to individual, personal Probity / honesty
behaviour as well as the business context. Responsibility
Provides trust in the agency relationship
between the accountant and others such
as auditors
Characteristics of Ethical Operational Areas Affected by
Behaviour (Contd.) Corporate Governance
Accountability Duties of directors and functions of the
Reputation board
Judgement Composition and balance of the board
Integrity and board committees
Reliability of financial reporting and
external auditing
Operational Areas Affected by Duties of Directors and

Corporate Governance (Contd.) Functions of the Board
Directors’ remuneration and rewards Meet regularly to discharge its duties
Responsibility of the board for risk Have a clear list of responsibilities and
management systems and internal decisions
control of shareholders Have formal procedures for appointment
Rights and responsibilities
Duties of Directors and Functions Composition and Balance of Board
of the Board (Contd.) and Board Committee
Chairman should specify a process for Balance of executive and independent
performance evaluation of the BOD as NEDs so that no one can influence a
well as individual directors decision
Directors should submit themselves for At least half of the board, excluding the
re-election at regular interval chair, should be NEDs
Key and strategic decisions must be The chair and the CEO should not be the
reserved for the board same person
Composition and Balance of Board Reliability of Financial Reporting

and Board Committee and External Auditing
NEDs should make up all the Should provide a balanced assessment of the
company’s position
remuneration and audit committees and An appropriate independent, relationship with
majority of nomination committee the auditors is maintained
The directors should include in the annual
Board effectiveness based on time accounts an explanation of their responsibility
available, personal competence, quality for preparing the accounts, a statement that the
of information and boardroom culture business is a going concern and a description
of how they apply the board principles of
corporate governance
The auditors should present, in the annual
accounts, a statement about their auditing
responsibilities
Directors’ Remuneration and Risk Management and Internal
Rewards Control Responsibility
A significant element of remuneration should be Maintain a sound system of internal control to
linked to company performance and rewards for safeguard shareholders investment and
failure should be minimised company’s assets
Remuneration should be sufficient to attract and Is collective responsibility of the whole board
retain directors Need to review the effectiveness of the internal
controls at least one a year
Formal procedures for developing policy on
Risks facing the business need to be regularly
remuneration should be in place including the evaluated
appointment of remuneration committee
Review should include risk management,
No director should be involved in deciding own operation and compliance as well as financial
remuneration controls
Rights and Responsibilities of Rights and Responsibilities of

Shareholders Shareholders
Company should: Institutional shareholders should:
Provide all shareholders with statutory notice Make use of their votes
of meetings and copies of annual reports Have regular dialogue with the company
and accounts Give weight to relevant factors drawn to their
Have regular dialogue with institutional attention
investors
Make constructive use of the AGM
Governance Issues More Governance Issues
Code of Governance for Voluntary Code of Governance for Public

and Community Sector Services
Board leadership Focus on organisation’s purpose and on
Board in Control outcomes for citizens and service users
Perform effectively in clearly defined
High performance board functions and roles
Board review and renewal Promote values for whole organisation
Board delegation Take informed and transparent decisions
Board and trustee integrity and manage risk
Board openness Develop the capacity of the governing
body to be effective
Internal Corporate Governance Internal Corporate Governance
Stakeholders Stakeholders
Directors Company Secretary
Operational Role: Responsible for actions of Operational Role: Ensure compliance with
the corporation legislation and regulations and keep board
members informed of their legal
Corporate governance role: Control responsibilities
Company in best interest of the stakeholders Corporate governance role: Advise board on
Main Interests in Company: Pay, corporate governance matters
performance linked bonuses, share options, Main Interests in Company: Pay,
status, reputation, power performance linked bonuses, job stability,
status, working conditions, career
progression
Internal Corporate Governance Internal Corporate Governance

Stakeholders Stakeholders
Sub-board Management Employees
Operational Role: Run business operations Operational Role: Carry out orders of
and implement board policies management
Corporate governance role: Identify and Corporate governance role: Comply with
evaluate risks, enforce controls, monitor internal controls, report breaches
success, report concerns Main Interests in Company: Pay,
Main Interests in Company: Pay, performance linked bonuses, job stability,
performance linked bonuses, job stability, status, working conditions, career
status, working conditions, career progression
progression
Internal Corporate Governance External Corporate
Stakeholders Governance Stakeholders
Employee Representatives Auditors
Operational Role: Protect employee interests Main Role: Independent review of company’s
reported financial position
Corporate governance role: Highlight and Main Interests and claims in Company: Fees,
take action against breaches in governance Reputation, Quality of relationship, Compliance with
requirements audit requirements
Main Interests in Company: Power, status Regulators
Main Role: Implementing and monitoring regulations
Main Interests and claims in Company: compliance
with regulations, effectiveness of regulations
External Corporate External Corporate

Governance Stakeholders Governance Stakeholders
Government Small Investors
Main Role: Implementing and maintaining laws with Main Role: None
which all companies must comply Main Interests and claims in Company:
Main Interests and claims in Company: compliance maximisation of shareholder value
with laws, payment of taxes, level of employment, Institutional Investors
levels of imports/exports
Main Role: Through considered use of their votes
Stock Exchange can beneficially influence corporate policy
Main Role: Implementing and maintaining rules and Main Interests and claims in Company: Value of
regulations for companies listed on the exchange shares and dividend payments, security of funds
Main Interests and claims in Company: compliance invested, timeliness of information received from
with rules and regulations, fees company, shareholder rights are observed.

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Session Objectives

Topic 1 Define corporate governance

Reasons for Conflict of Interest

“the system by which companies are

Corporate Governance Corporate Governance

Corporate Governance is derived from

Important to enlist management support Direction from within

Purpose and Objective of Supporting Purposes of

Importance of Ethical Codes in Characteristics of Ethical

Operational Areas Affected by Duties of Directors and

Composition and Balance of Board Reliability of Financial Reporting

Rights and Responsibilities of Rights and Responsibilities of

Code of Governance for Voluntary Code of Governance for Public

Internal Corporate Governance Internal Corporate Governance

External Corporate External Corporate

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