Corporate Governance - Question AND Answer PDF

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Corporate Governance Define corporate governance. It is simply defined as the system in which the business corporations are directed and controlled. It is the primary responsibility of the board to ensure a good corporate governance within the business organization. Corporate governance is not simpl...

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Corporate Governance 1. Define corporate governance. It is simply defined as the system in which the business corporations are directed and controlled. It is the primary responsibility of the board to ensure a good corporate governance within the business organization. Corporate governance is not simply complying with responsibilities, it is significant because it serves as a road towards achieving objectives of the business. Further, good corporate governance is one of the reasons for long-term success of a company. Thus, management puts in a lot of hard work to establish a good structure of corporate governance. Corporate governance paves the way of building business integrity through transparent and equitable rules, procedures and control that will encourage potential investors. 2. What does corporate governance structure involve? It involves the allocation of rights and responsibilities among different participants in the corporation- the board, managers and shareholders. Further, it clarifies the rules and processes for efficient and effective decision making. Hence, it will lead the business to create a well-built objective and procedure on how it will be attained. 3. State the purpose of corporate governance. The primary purpose of corporate governance is to direct and control the corporation’s participants towards success of the business. Moreover, it establishes business integrity through transparent and full disclosure of the business performance reports, proper ethical standards within the management and responsiveness with assigned roles as a participant of the corporation. Therefore, potential investors will be induced to work with the firm as it is the matter of integrity and proper control not only earning high profits. 4. Explain the basic objectives of corporate governance. There are many objectives of establishing good corporate governance. It includes transparency and full disclosure that pertains to financial reporting; increase shareholder’s wealth which is also the primary goal of every business organization- to earn profit; self-assessment that primarily pertains to internal control; and fair and equitable treatment of shareholder that is exercise through proper ethical behavior and fair view of every participants of the company. To specify each objective: 

Transparent and full disclosure It is to be transparent to all participants within or outside the corporation. In business, transparency is a foundation of trust and will make the participants to be more engaged in attaining the goals of the company. It is presenting the full disclosure of the business performance through transparent reporting. Transparency simply means communication that will lead to the highest level of integrity of the organization.

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Increase shareholder’s wealth When there is good corporate governance, then there will be a high possibility of earning high profits or what we called wealth maximization. It is therefore important to have a good corporate governance to satisfy the goal of the business which is to earn profit.

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Self-assessment It pertains to the management assessment of its performance. Corporate governance aids to assess the internal control before the regulatory agency scrutinizes it. Hence, internal control will have time to perform action and resolve the problem early.

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Fair and equitable treatment of shareholders A good corporate governance aims to perform fair and equitable treatment that is deserved of all participants within the corporation- the board, managers and shareholders. It is not the matter of high numbers of shares to acquire good treatment, it is simply attained because all deserve to be treated fairly.

5. Explain the three basic principles of effective corporate governance. The three basic principles of effective corporate governance are as follows: 

Transparency and full disclosure Transparency means that there is sound disclosure of information needed by the internal and external users of information such as potential investors. It means that they show honest and timely data that will benefit all. There is transparent and full disclosure of information when the users of information can clearly analyze the organization’s performance through the given report of business information.

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Accountability

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Accountability is defined as willingness to be responsible with your actions. It is one of the principles of effective corporate governance because business participants should be accountable. All is trusted to provide accountability as to their roles and work in the business firm. If it is not practiced inside the management, then practices and acts inside the business will be held secret which is unfair and unethical in a firm. If it is a right of every member to be accountable and to give the information they need from each member. Corporate control Corporate control is composed of power and effective directing of management’s control. The main aim of this principle is to ensure a long-term sustainable growth that will induce potential investors. Moreover, corporate control is applying a policy of proper remuneration that is fair and reasonable among management members. It is also about setting a guidance in compliance of acquiring ownership

or shares in the firm. Lastly, corporate control is enhancing the performance through regular evaluation to ensure management effectiveness. “Responsiveness usually results to effectiveness and efficiency” Problems are normal in managing a business but the action you will do will lessen these setbacks. One of the underlying issues why businesses start to fail is the lack of responsiveness. Responsiveness is the state of being able to react quickly in a certain event. Thus, it is essential for the business to practice responsiveness in issues concerning the firm. The statement mentioned above is true, responsiveness results in effectiveness and efficiency. The main reason is that you cannot move forward when you are lacking in knowledge of business concerns because you neglect the idea of responding quickly. Effective means accomplishing a work in expected time while being efficient is performing in the best possible manner with least waste of time and effort. Therefore, to attain both of these, business should be responsive to business concerns, innovative ideas, customers’ feedback and so on. Likewise, in all aspects of life, time is very important.

PERFORMANCE TASK 2

1. Does good governance require absolute rules that must be adopted by all organizations? Good governance does not require absolute rules to be adopted by all organization. Organizations are different from each other in terms of size, venture and types. For that reason, a set of rules which works in one organization may not be suitable from another organization. Further, good governance does not pertain in business alone, governance should be exercised with different types of organizations such as politics, faculty and more. Each organization can implement rules based on the approval of authorized person or agreement of all of the members.

2. What is management’s responsibility as far as financial reporting is concerned? Management comprises the group of people running the day to day operations of a business. Thus, management has the responsibility to make and present accurate and timely financial report of the normal operation of the business. Also, it should keep on mind that an acceptable financial reporting framework should be used in preparation of financial statement. Moreover, management should implement and maintain the internal controls that are relevant in preparing financial statements to see the misstatements. Other than these, management should make an accounting estimation reasonably.

3. What is the essence of any system of corporate governance? Corporate governance is defined as the system in which the business corporations are directed and controlled. The essence of having a corporate governance is it serves as a step forward to achieve the objectives of business – long-term success or earning profit. Moreover, corporate governance builds the integrity of one company that is the foundation of trust. In addition, it ensures that stakeholders’ interests are protected and balanced. Corporate governance also helps in good decision-making process of the management and in managing the business risks.

“Small business enterprises do not need good governance” I strongly disagree in this statement because all business enterprise regardless of size needs good governance. Without governance, then it will surely result to chaotic business because there is no recognized and generally accepted set of rules and procedures implemented. Businesses don’t work alone; it works by the contribution of everyone relevant to the company. If there is no good governance even in small or large enterprise, then there will be doubtful financial reports and fraud may be committed. Small business enterprise should ensure that its business has good governance because no matter what size of business you have, both has the same objective which is to earn profit. When talking about money, do you think you can trust everybody? No. For that reason, good governance is advisable to any business regardless of size and type in order to achieve the business goals and a good business environment.

Below is summary of the SEC Corporate governance requirements of companies publicly- listed in the stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in publicly traded organizations a. Boards need to consist of at least 3 independent directors or 1/3 of the board which is higher It is necessary to have at least 3 independent directors in the composition of the board because they also act as a guide to the company and have an active role in risk management. Independent directors are member of the board who do not have pecuniary relationship with company. Having them will ensure that there is a proper and unbiased decision making.

b. Boards need to hold regular executive sessions of independent directors without management present. It is needed to hold regular executive sessions of independent directors without management present so that audit committees can guarantee the executive committee that no internal fraud is happening. They should discuss about the appropriateness, quality and integrity of the company’s accounting principles and financial disclosure practices.

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Boards must have a corporate governance committee composed at least of 3 independent directors It is fundamental to monitor and assess the qualifications of all persons nominated to the board and such other appointments which require board approval. Moreover, it must have corporate governance committee to evaluate the adequacy of the Board’s processes and procedures in the election and replacement of directors.

d. Boards must have an audit committee with a minimum of three independent members Audit committee is made of members of a company’s board of directors and oversees the financial statements and reporting. It should include a minimum of three independent members to ensure the honest and accurate reports about financial status of the company.

e. The audit committee must have a written charter that addresses the committees’ purpose and responsibilities, and the committee must produce an audit committee report; there must also be an annual performance evaluation of the committee. Written charter formally authorizes the existence of the company. Thus, it will include those things mentioned above so it will be transparent to all the members of the company. In addition, committee must produce an audit committee report because as we discussed in previous lesson, it is the right of stakeholders to have a transparent financial statement disclosure.

Below is a summary of the SEC listing requirements for audit committee responsibilities of companies listed on this stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in publicly traded organizations a. Obtaining each year, a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor Yearly report by the external auditor is helpful for the management in order to be aware and responsive of the internal control procedures. It is a way to encourage the management to improve its internal control for detecting errors and procedures that need to be amended for future benefit. b. Discussing the company’s financial statements with management and the external auditor Discussion between management and external auditor is essential to address risk of fraud because through discussion with external auditor who is independent, there will be no unbiased financial data and the interest of the stakeholders will be protected from misstatements and fraud. c. Meeting separately with management, internal auditors, and the external auditors on a periodic basis.

This meeting intends to open discussion about financial statement of the management and if it fairly presents the true and fair view in all material respects. Meeting separately with the management, internal auditors and external auditors will prevent fraud to happen for the discussions is segregated and filtered but the main objective of presenting the financial statement will be attained fairly. d. Reviewing with the external auditor any audit problems or difficulties that they had with management As the main purpose of external auditor, he will present fairly the true information of financial statement. He will give unbiased judgement that will prevent fraud that may happen if this work will be designated to internal auditors and management alone. Also, internal auditors will give an effective solution for the difficulties of the business. e. Reporting regularly to the board of directors.

It is important to have a report regularly submitted to the board of directors because by this, each and every one will have the opportunity to communicate. Moreover, Board of directors should be updated of what is going on in the operation of business. For that notion, the board as well as the whole management will become transparent and this will alleviate the fraud to happen within the management. Kindly explain the following: a. What is the basic purpose of a code of ethics for a profession? Code of ethics refers to set of rules to conduct proper practices, behavior and responsibilities for an organization. On the other hand, the word “professional” is defined as someone who displays high level of expertise and efficiency in his profession. Moreover, they are those people who serve the public using their knowledge and skills. Therefore, professionals must be guided by code of ethics specifically for them in order to enhance their competence, competitiveness, character and to assure that the public will get the best service for their needs.

b. What are some of the reasons why people act unethically? It is important to note that some people judge another act as unethical just because it doesn’t match his perspective of what ethical is. Hence, we should understand that some people act unethically because of two primary reasons- the person’s ethical standards are different from those of society as a whole and/or the person chooses to act selfishly. The first reason occurs because people believed that what they are doing is ethical and

acceptable which makes it harder to be resolved. For instance, cheating on people’s tax return, dishonesty in someone’s job experience for applications, and performing below their competence level. Another reason is that person chooses to act selfishly, this happen when they believe that their actions will not harm others and people will not condemn their actions. They are those people who emphasizes self-gain more and have less concern about their act and its consequences. For instance, the desire for political power and wealth that enable politicians to do corruption, vote buying and more.

c. What does business ethics mean? Business ethics primarily as the word connotes, is an ethical standard in the field of business. Hence, it refers to standards of moral conduct, behavior and judgment in business. Furthermore, it also helps businessmen to make moral and right decision while engaging in such busines activities, for instance, rendering service to the public. To reiterate, business ethics is considered as corporate responsibility where businesses are legally bound and socially obligated to conduct business in an ethical manner to provide highest degree of service to the public.

d. What is the main objective of observing ethical behavior in business? First, we need to know what is the objective of business, primarily, it is to gain profit. Therefore, to achieve a success in operating services and to earn profit, the business needs to have effective and efficient decision-making. This is where the business ethics plays its role, which is to determine the right and wrong business practices. This is essential as to determine what knowledge is appropriate to guide them in making the right decision that results to attaining business goal- to gain profit.

e. What is the economic impact of observing business ethics? We are aware that business ethics affects the society socially, environmentally and even, economically. It has a great impact economically through the wages it pays to its

employees, the materials that it buys from their suppliers and the prices it charges its customers. It’s like a cycle of proper behavior and conduct to attain a certain impact. First, the proper remuneration and giving benefits is a positive impact as to employees. In terms of suppliers, it will have a positive impact if they are paid fairly and on time for their supplies of goods and services. Lastly, if the company provides the best quality of products and service equivalent to what the customer paid for, then, it is also considered as its positive impact.

Understanding Directed Access Kindly explain the following: a. Why ethical behavior is necessary Ethical behavior is defined as an application of the moral principles in a given situation. Thus, the primary reason why it is necessary is because it makes the society function properly may it be in school, workplace, and government. Through proper ethical behavior, a good and effective communication is taking place. Moreover, the result of acting unethically will normally lose trust and confidence to other people. Without knowing what proper ethical behavior is will be a hindrance for a unified society. It is true that it is incorporated with law hence, it is legal and should be obeyed. Yet, ethical behavior has its own part that is not been comprised by law which should be given also a highly importance. b. Why ethical behavior is necessary in the practice of one’s profession It is similar to what is the purpose of ethical behavior in the practice of one’s profession. Therefore, as mentioned above, the importance of it is connected to the definition of the word “profession”. To reiterate, a “professional” is defined as someone who displays high level of expertise and efficiency in his profession who serves the public using their knowledge and skills. Therefore, professionals must be guided by code of ethics

specifically for them in order to enhance their competence, competitiveness, character and to assure that the public will get the best service for their needs.

c. How business managers could act ethically? Generally, business managers could act ethically if they execute their responsibilities considering the proper conduct of business. Thus, business managers should serve the business enterprise and the community; disclose whenever his personal business of financial...