OLD (Pre-Period 35) Topic 17 Corporate Governance – RESUBMISSIONS ONLY

Hello,
My research project focus on a local authority which has just incorporated some CG rules 3yrs ago. For example splitting the role of CEO and chair, inclusion of NEds and introduction of various committees and it use the local govt act as its code. It is okay for me to use both local govt act and uk code to assess the quality of CG with in the local authority? What advice can you give me or areas to focus on concerning the CG in a govt institution like a local authority to increase my chances of passing this RAP.

@trephena is it okay to insert pictures and then reference them

@emi -that sounds fine to use the local government act and code. There are some basic rules of CG that apply to all organisations (see agency theory and how to counter the problems of it). A major area you might explore is who is the local authority answerable to? Although the electorate may vote for councillors the appointment of the CEO may not be a position that the electorate have a vote on so it may be appropriate to see who is involved in the appointment process. Depending on which country you live in you may be able to explore aspects of nepotism, corruption and potential bribery as those in authority are often in situations open to these types of problems which if they exist are obviously signs of very weak ethics and poor governance.

@yume – an interesting question. Very few students do CG on US companies but do not let that deter you. I agree that SOX legislation is soporific but may be useful if you are an insominiac 🙂 however as with many things American SOX is perhaps an over-reaction. It mainly came about in the wake of Enron. All that said I think you could do a reasonable RAP on a US company.

I attach a link to a document that discusses many of the theoretical aspects of CG and has some sections on specific issues related to US CG. Just scan through the first part and home in on 2.7 onwards https://www.boeckler.de/pdf/p_arbp_223.pdf

You may be able to find additional material by searching on Google Scholar

You could try to apply the UK code provisions and then compare them with what the US position is and comment accordingly. For example the issue that in the USA the roles of CEO and Chairman are normally combined although there are proposals that this ought to be changed to the UK position where separate roles are the norm and prescribed in the UK Code.

@Emi – you may certainly assess the impact on stakeholders as you suggest above but you will also need to do some sort of benchmarking. You don’t say where you live but in the UK there is some sort of guidelines you would be able to use:

https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://www.cipfa.org/policy-and-guidance/publications/d/delivering-good-governance-in-local-government-framework-2016-edition&ved=0ahUKEwjqxcbFp4bQAhVCL8AKHajxBXsQFggjMAE&usg=AFQjCNFxYJON-js67Rqh383PKXRssoFfXw&sig2=GEoLguRZuZVxKXZoAX_Lhg

@aysha15 – it is about how the quality of corporate governance affects stakeholders. Customers obviously have the power of veto and no commercial company can survive without its customers. However some customers are influenced by the ethics of a company and whether it appears to treat people well in terms of fairness (e.g. it’s employees, it’s environmental policies and its responsibilities towards others). Probably their power from a CG point of view is low but it is not all about low fares etc – the 21st century has seen the rise of the ‘ethical consumer’ who will boycott a product or service if there is adverse publicity about its management policies.

Use graphs for financial information wherever possible. There are various areas you could explore. Directors’ compensation packages are an aspect of agency theory -which have has risen more: their overall remuneration as a percentage of company earnings or returns to shareholders? A graph could show this comparison. EPS is one aspect but some investors seek long term growth in the form of the market worth of their holding. Share price tends to correlate with market confidence so a year on year increase in share price can indicate the company is maximising wealth for shareholders

Hi @trephena

I am also using COSO’s ERM framework for the report. Airasia does utilize the ERM framework, Therefore, I planned on using it to assess how effective has the framework been in ensuring that an effective risk management system is adapted in the organisation although it operates in a dynamic environment.

I planned on talking about the fluctuations in fuel prices and currencies, and how Airasia mitigated these risks by hedging. Would that be okay?

Besides that, I thought of including the recent flight crash which had an effect on the company’s reputation too. Can i talk on how the company tackled its reputation risk due to this incident?

The company was also facing debt risks. So should i talk on measures taken to mitigate this? How do i incorporate the ERM framework in it?

Do i have to include the shareholders too? The share price of the company dipped for 3 years. So should i state how the company managed the falling of the share price?

I’m a bit unsure on what i should touch on regarding the ERM framework. Do let me know if this is the right way. Really confused about this. Thanks.

By the way this query is of a general nature and will be re-posted to Submissions in a day or so as it more appropriate there than here

Ask yourself – which is easier for the marker? I suspect one file containing several worksheets -all with clearly labelled tabs is the short answer as it is quicker and easier to work from. If you have a separate file for each graph and table then the poor marker has to download each and every one individually and they are not going to thank you for making life harder for them 🙁

However if is unrelated information separate files could be justified but that does not seem to be the case here

@aysha15 – the hedging issue is a very good point. However with risk assessment don’t get carried away with things that are outside the board’s control – corporate governance means direction, control and guidance by the people at the top -unless the crash relates to poor maintenance or forcing long hours on pilots it is hard to see how management is responsible.

The dip in share price needs also to be related to performance and tracked to poor decisions if you are to put forward a convincing argument on CG. For example Malaysian Airways had been ‘wobbling’ financially before the MH 370 and 317 incidents and whereas some blame for bad management may be levelled at the Board, the in-flight incidents were really bad luck – being shot down is not within their control and neither is a senior captain allegedly going ‘AWOL’ (this can be contrasted with the German Wings crash where the young co-pilot was known to the company doctors as having suffered from depression so processes and regular checks on him should have been in place and the ultimate responsibly lies with the board)

Dear Trephena,

I am currently in the middle of completing my RAP for May 2017 submission.

I initially started using the annual reports of my organisation for the year ending 27 Feb 2016, however, since I am submitting in May 2017, should I use the annual report for the year ended 27 Feb 2017?

The annual report for year ended 27 Feb 2016 says the accounts were signed by the auditors on 12 April 2016, so this gives us an idea of when the 2017 report will be publicly available. Wouldn’t that mean that I would have too little time for analysis if I am using the Reports that came up about a month or two before the submission period?

I just wanted to confirm this before I continued my evaluation and analysis any further.

Looking forward to your reply. Thanks in advance.

Dear Trephena,

Thank you very much for your prompt reply.

2016 annual report it is!

I will be sure to keep abreast of any new developments and current affairs regarding the corporate governance of my org.

@arathy – I never like to recommend a company as such however where I am able, I am happy to comment on the suitability of a choice made.

I think HSBC would present you with an opportunity to do a very good RAP for T17. You could introduce the topic well by briefly commenting on the failings of the banking system leading to the Financial crash in 2007 and how so many banks have been implicated in a variety of scandals (money laundering, assisting tax evasion, rate rigging etc). For this organisation you could pay less attention to the routine aspects of CG and focus on these more important issues provided you reference well.

This type of organisation allows allows you to develop the issues connected with CG in a practical way and introduce critical thought e.g a discussion on how whisteblowing and leaks brought to light malpractice that the company was either intentionally covering up or top executives were unaware of -either way a failure of their duties. The link is to an article on the ‘Panama Papers’ which may give you some ideas of areas to explore. So good luck!

https://www.thisismoney.co.uk/money/article-3528884/Now-HSBC-executives-facing-calls-resign-Pressure-growns-Panama-Papers-just-latest-scandal-rock-bank.html