CGE101 Exams Notes PDF

CGE101 Exams Notes QUESTION 1 [10 MARKS] Multiple Choice Various Chapters QUESTION 2 [10 MARKS] True and false question Various Chapters QUESTION 3 [20 MARKS] 1. BOARDS AND DIRECTORS 1.1Strategy, Risk, Performance and...

CGE101 Exams Notes QUESTION 1 [10 MARKS] Multiple Choice Various Chapters QUESTION 2 [10 MARKS] True and false question Various Chapters QUESTION 3 [20 MARKS] 1. BOARDS AND DIRECTORS 1.1Strategy, Risk, Performance and Sustainability The board should appreciate that strategy, risk, performance and sustainability are inseparable in achieving good corporate governance. In achieving this, the board should ensure that the strategy of the company takes into account all potential risks and that it will ensure the sustainability of not only of the company, but also of the environment. The board inter alia, should ensure the following to assist in achieving the above: The board should provide effective leadership based on an ethical foundation. The board should ensure that the company is and is seen to be a responsible corporate citizen. The board should ensure that the company’s ethics are managed effectively. The board should ensure that the company has an effective and independent audit committee. The board should be responsible for the governance of risk. The board should be responsible for information technology (IT) governance.  The board should ensure that the company complies with applicable laws and considers adherence to non-binding rules, codes and standards. The board should ensure that there is an effective risk-based internal audit. The board should appreciate that stakeholders’ perceptions affect the company’s reputation. The board should ensure the integrity of the company’s integrated report. The board should report on the effectiveness of the company’s system of internal controls. 1.2 The role and functions of the board of directors To review and guide corporate strategy To monitor the effectiveness of the corporate governance practices of the company and implement changes as needed To select, compensate and monitor management, and oversee succession planning To align key executive and board remuneration with the longer term interests of the company To ensure a formal and transparent board nomination and election process To monitor and manage potential conflicts of interest of management, board members and shareholders To ensure the integrity of the accounting and reporting systems, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards and To oversee the process of disclose and communication. 1.3 The role of independent non-executive directors Independent non-executive directors bring an objective perspective to the activities of the board. They are expected to be involved in the formulation of strategy, the appointment of senior executives, ensuring compliance with legislation, detecting fraud, and measuring and rewarding managerial performance. Boards with a majority of independent directors are perceived to better serve shareholders' interests, although there is no empirical evidence to support this view. There is a risk that the supervisory and compliance roles of a board of directors—and the fulfillment of these roles through independent non-executive directors—can become so dominant that the other roles of the board (to direct, govern and guide) could suffer as a result. An over-reliance on the role and effectiveness of independent non-executive directors does not necessarily result in better governance or better corporate performance. 1.4The Chairman Appointment of the chairperson (chairman) The chairperson fulfils a crucial role as he or she must provide leadership and guidance for the board of directors. The Act makes no provision for the election of the chairperson. Normally the MOI of the company provides that the directors will elect a chairperson of their meetings and will determine the period for which he or she is to hold office. King IV recommends that the board of directors elect a chairperson who is an independent non-executive director. A lead independent director should be appointed in the case where an executive chairperson is appointed or where the chairperson is not independent. The role of an independent lead director is to support and provide a sounding board for the chairperson and to act as intermediary for the other directors when necessary, but without detracting from the authority of the chairperson. King IV recommends that the CEO should not also be the chairperson. It also recommends that a retired CEO should not become chairperson before three years have passed after his or her tenure as CEO The JSE Listing Requirements determine that the CEO and chairperson of a listed company may not be the same person.6S The chairperson must either be an independent non-executive director, or the listed company must appoint a lead independent director. The role and functions of the chairperson The chief role of the chairperson is to provide leadership to the board. He or she sets the tone for ethical and effective decision-making. It is important, though, that the chairperson not accumulate too much power. King therefore recommends that his or her membership of certain critical board committees is curtailed. It recommends that the chairperson should not be a member of the audit committee, and furthermore should not chair the remuneration committee. 1.5 The CEO The Act does not describe the role and functions of the CEO. The CEO is normally appointed by the board. The collective responsibilities of management vest with the CEO, who ultimately bears responsibility for all management functions. He or she is the main link between management and the board. King IV recommends that the CEO should be responsible for implementing the approved strategy formalised by the board, and should report to the board." It also recommends that the CEO should not be a member of the remuneration. audit or nomination committees. 1.6 Board Committees 1 The audit committee Every public company and state-owned company (subject to certain exemptions) must appoint an audit committee. 119 The MOI of a private company can also provide that the company must have an audit committee. The Act provides that the audit committee must be elected at each AGM Of the company. The audit committee is therefore appointed by the shareholders and not the board. The primary purpose of the audit committee is to focus on financial issues that are crucial to the company but cannot be fully dealt with by the board because of time constraints. It should be noted that the appointment of an audit committee does not affect the duties and liabilities of the board of directors, le the fact that a company has an audit committee does not release the rest of the board of its duties and liabilities relating to financial Controls, risk management and reporting Duties and responsibilities The Act provides that an audit committee of a company has the following duties: to nominate a registered auditor who is, in the opinion of the committee, independent or the company, for appointment as auditor of the company to determine the fees to be paid to the auditor and the auditor's terms of engagement; to ensure that the appointment of the auditor complies with the provisions of the Act and any other legislation; to determine the nature and extent of any non-audit services that the auditor may provide to the company; to pre-approve any proposed agreement with the auditor for the provision of non- audit services to the company; to prepare a report, to be included in the annual financial statements, describing how the committee carried out its functions, stating whether the committee is satisfied that the auditor was independent of the company, and commenting in any way the committee considers appropriate on the financial statements, the accounting practices and the internal financial controls of the company; to receive and deal appropriately with any concerns or complaints relating to the accounting practices and internal audit of the company, the content or auditing of the company's financial statements, the internal financial controls of the company, or any other related matter; to make submissions to the board on any matter concerning the accounting policies of the company, the financial controls, records and reporting, and to perform such other oversight functions as may be determined by the board. In addition. the JSE Listing Requirements determines that the audit committee of listed companies must consider and satisfy itself on an annual basis of the appropriateness of the expertise and experience of the financial director of the company. King IV describes the role of the audit committee as to provide independent oversight of the organisation's assurance functions, and the integrity (reliability and usefulness) of reports. It recommends that the audit committee should also oversee financial and other reporting risks, whether oversight of risk has been assigned to the audit committee or not. 2. The social and ethics committee The Act provides that certain companies, as determined by the Minister in the regulations to the Act, must have a social and ethics committee. In terms of the regulations every state-owned company, every listed public company, and any other company that has in any two of the previous five years scored a public interest score above must appoint a social and ethics committee. (a) Membership The committee must comprise not less than three directors or prescribed officers of the company, one of whom must be non-executive. (b) Functions The functions of the social and ethics committee are to monitor the company's activities with regard to: social and economic development; good corporate citizenship; the environment; health and safety; consumer relationships; and labour and employment; draw matters within its mandate to the attention of the board as occasion requires; and report to the shareholders at the AGM of the company on the matters within its mandate King IV recommends that companies not obliged to establish a social and ethics committee should nevertheless consider doing so to monitor and report on organisational ethics, responsible corporate citizenship, sustainable development and stakeholder inclusivity. 3. The risk committee King IV recommends that the board should consider appointing a risk committee (a) Membership The committee should comprise a majority of non-executive directors. (b) Functions The role of the risk committee should be to advise the company on the risks an opportunities it is facing, and to oversee the implementation of a risk management plan 4. The remuneration committee The remuneration packages of directors and senior executives in listed public companies have been a highly debated and contentious issue in the corporate governance debate. King IV recommends that the board considers appointing a remuneration committee to assist it in setting and administering remuneration policies. It recommends that the committee should comprise of non-executive director only of whom the majority should be independent. It should be chaired by an independent non- executive director. The purpose of the remuneration committee is to ensure that directors and executives are appropriately rewarded in a fair, responsible and transparent way. The remuneration policy set by the committee would normally address: base pay and bonuses; employee contracts; severance and retirement benefits; and share- based and other long-term incentive schemes 5 The nomination committee The main purpose of a nomination committee is to ensure that the board of directors contains the appropriate mix of skills and experience to lead the company. The role of the nomination committee is to review, on a regular basis, the composition of the full board, and where it appears that the board is lacking in skills or experience in a certain area, to identify how best to rectify the situation. This may involve identifying skills that are required, and those individuals best suited to bring these to the board. King III  suggests that the committee should only comprise members of the board. The majority of the members should be non-executive, of which the majority should be independent. The ideal situation is for the chairperson of the board to also chair the nomination committee, failing which an independent non-executive director should be the chairperson. QUESTION 4 [20 MARKS] 1. The Recommendations of the Code Regarding the Governance of Risk The board should be responsible for the governance of risk. A policy and plan for a system and process of risk management should be developed. The integrated report should contain the view of the board regarding the effectiveness of the system and process of risk management. The board charter should set out the board‘s responsibility regarding risk management and the responsibility should manifest itself in a documented risk management policy and plan which is approved by the board and widely distributed throughout the company. The board should review the implementation of the risk management plan on an annual basis and continually monitor it. Induction and development programmes for directors should focus on risk management. Risk Tolerance The board should determine the levels of risk tolerance. The board should set the levels of risk tolerance once a year. The board should also determine the risk appetite of the company. The board should continuously monitor whether risks taken by the company are within the tolerance and appetite levels. The Risk/Audit Committee’s Role in the Governance of Risk The risk committee or audit committee should assist the board in carrying out its risk responsibilities. The board should appoint a committee, which is responsible for risk, specifically to consider the risk management policy and plan and to monitor the risk management process. The committee should consist of a minimum of three members who could be executive and non-executive directors, members of senior management, and independent risk management experts as invitees. The committee should meet at least twice per year and the board should evaluate its performance at least once a year. The Risk Management Plan The board should delegate to management the responsibility to design, implement and monitor the risk management plan. Management should execute the board’s risk strategy through the implementation of systems and processes. Management is accountable to the board for the integration of risk management into the day-to-day activities of the company. The chief risk officer (CRO) should have regular access and interaction with the board or the designated committee and executive management on strategic issues. The CRO should also be suitably qualified and experienced. The board should ensure that risk assessments are performed on a continual basis. The company should perform a systematic and formal risk management assessment at least once a year. Risks should also be prioritised and ranked in order to enable the company to focus properly on risk strategies and interventions. The assessment of risk should be in the form of a top-down approach. The board should receive a risk register highlighting the key risks, which the company faces with on a regular basis. The board should review the register and ensure that the key risks are quantified. The board should ensure the implementation of frameworks and methodologies to increase the probability of anticipating unpredictable risks. The board should ensure that management considers and implements appropriate risk responses. Risk responses should also provide for the utilisation of opportunities. The board should ensure continual risk monitoring by management. The risk management plan should assign responsibility for the monitoring of risks.  Assurance Regarding the Risk Management Process The board should receive assurance regarding the effectiveness of the risk management process. Management should assure the board that risk management is integrated into the day-to-day activities of the company. Internal audit should also provide a written assessment regarding the effectiveness of the system of risk management and the related internal controls. Disclosure to Stakeholders The board should ensure that there are processes in place enabling complete, timely, relevant, accurate and accessible risk disclosure to stakeholders. The board should disclose their view on the effectiveness of the risk management process in the integrated report. The integrated report should also deal with undue, unexpected or unusual risks. 2. Ethical Leadership The board should provide effective leadership based on an ethical foundation. The board is ultimately responsible to provide strategic direction to the company: The strategy of the board should ensure the long-term sustainability of the company with due consideration for the impact of the strategy on the economy, the environment and other stakeholders of the company. The strategy and actions of the company, therefore, should promote an inclusive approach to governance, meaning that the company should always acts in the best interest of all stakeholders. The strategy and actions of the company should also always be based on the four characteristics of good corporate governance, namely transparency, accountability, responsibility and fairness. The company should conduct its business in an ethical manner. The board should set the values of the company and ensure the formulation thereof in a code of conduct. The Company as a Responsible Corporate Citizen The board should ensure that the company is and regarded as a responsible corporate citizen. Responsible corporate citizenship equates to the adoption of an inclusive approach to governance. The company should engage with stakeholders in order to protect, enhance and invest in their well-being and to ensure an ethical relationship of responsibility between the company and the society in which it operates. The company must develop corporate citizenship policies and implement measurable programmes in this regard. Managing the Company’s Ethics The board should ensure that the company’s ethics are effectively managed. The board should ensure that: An ethical corporate culture is built and sustained in the company. It determines ethical standards which are clearly understood by the company and that the company ensures adherence in all aspects of its business. Adherence to the ethical standards is measured. The ethical performance of external business partners is aligned around the ethical standards of the company. The risk management process incorporates ethical risks and opportunities. The company introduces a code of conduct and that ethics-related policies are implemented. The company’s operations are based on compliance with the code of ethics. The company assesses, monitors, reports, and discloses its ethical performance. Principle 2 of King IV discusses ethical issues in an organisation. It clearly recommends how the directors of a company should show, individually and collectively, ethical leadership. The King IV report Principle 1 to 3 also recommends how the board should apply ethical governance and act as a responsible corporate citizen QUESTION 5 [20 MARKS] 1. The Recommendations of the Code regarding Audit Committees The Audit Committee’s Role Regarding Integrated Reporting The audit committee should, as part of its oversight role over the integrated report: consider all factors and risks which could impact on the integrity of the integrated report; review and comment on the financial statements; review the disclosure of sustainability issues to ensure its reliability and that no conflict exists with the financial information; recommend to the board the engagement of external assurance providers on material sustainability issues The audit committee should consider the need to issue interim results and the content of any summarised information should be reviewed by the committee. The external auditors should be engaged to provide assurance on the summarised financial information. The audit committee should ensure that a combined assurance model is applied to provide a coordinated approach to all assurance activities. The audit committee should monitor the relationship between the external and internal auditors and ensure that the combined approach addresses all the significant risks that the company faces. The Audit Committee’s Role Regarding the Finance Function The audit committee should satisfy itself of the expertise, resources and experience of the company’s finance function. The audit committee should perform an annual review of the finance function and the results should be published in the integrated report. The Audit Committee’s Role Regarding Internal Audit The oversight role of the audit committee includes its responsibility to appoint and dismiss the chief audit executive (CAE); to take responsibility for the performance appraisal of the CAE;  to approve the internal audit plan; to ensure that the internal audit function is subject to an independent quality review as and when the committee determines it appropriate The Audit Committee’s Role Regarding Risk Management The audit committee should be an integral component of the risk management process. The responsibility of the audit committee regarding risk management should be set out in its charter. The committee should specifically have oversight of: financial reporting risks; internal financial controls; fraud and IT risks as it relates to financial reporting The Audit Committee’s Role Regarding External Audit The audit committee is responsible for recommending the appointment of the external auditor and overseeing the external audit process. The audit committee is responsible to: nominate the external auditor for appointment; approve the terms of engagement and remuneration of the external auditors; monitor and report on the independence of the external auditors; define a policy dealing with the provision of non-audit services by the external auditors; approve contracts for non-audit services; and review the quality and effectiveness of the external audit process The committee should be informed of any reportable irregularity identified and reported by the external auditors in terms of Section 45 of the Audit Profession Act. The Audit Committee’s Role Regarding Reporting The audit committee should report to the board and shareholders on how it has discharged its duties. The audit committee is required to report internally to the board and externally to the shareholders. Reporting to the board will include how the  committee has discharged its statutory duties as well as the duties assigned to it by the board. Reporting to the shareholders will relate to how its statutory duties were discharged and will include: how its duties were carried out; whether the committee is satisfied with the independence of the external auditors; the committees view on the financial statements and the accounting practices; and whether the internal financial controls are effective. The integrated report should contain a section that summarised the role of the committee, its composition, number of meetings held, and details of other activities. The audit committee should recommend to the board whether the integrated report should be approved. 2. The Recommendations of the King IV Report regarding the Governance of Stakeholder Relationships and Integrated Reporting & Disclosure As per the King III report it has become international practice for principles-based codes to be based on the following principles: i. Transparency Transparency is the ease with which an outsider is able to make meaningful analysis of a company’s actions and its economic fundamentals. Management must make the necessary information available in a candid and accurate manner and on a timely basis. It should be possible to obtain a clear and true picture of what is happening inside a company from the information supplied by the company. ii. Accountability Individuals or groups in a company who make decisions and take actions on specific issues need to be accountable for their decisions and actions. Mechanisms must exist and be effective to allow for accountability, thus facilitating both transparency and responsibility. This provides investors with the means to query and assess the actions of the board and its committees.  iii. Responsibility Responsibility pertains to management behaviour that follows internal mechanisms to allow for corrective action, and sanction of mismanagement. Responsible management would, when necessary, put in place what it takes to set the company on the right path. iv. Fairness The systems that exist within the company must be balanced in taking into account all those who have an interest in the company and its future. The rights of various groups have to be acknowledged and respected. Minority shareholder interests must receive equal consideration to that of the dominant shareholder(s). There are nine governance elements discussed in King III on Governance for South Africa 2009: Ethical leadership and corporate citizenship. Boards and directors. Audit committees. The governance of risk. The governance of information technology. Compliance with laws, rules, codes and standards. Internal audit. Governing stakeholder relationships. Integrated reporting and disclosure QUESTION 6 [20 MARKS] CASE STUDY 1. In South Africa the corporate governance framework consist of the common law, The Companies Act 71 of 2008 (the Act), the King IV Report on Corporate Governance for South Africa, 2016 (Kind IV), the Johannesburg Stock Exchange (JSE) Listings Requirements and other applicable legislation and regulations (KING III Report and Wiese, 2017:15). The Common Law The common law is not written legislation of a country, but attains the status of law through court decisions (legal precedent). Legal precedent is establish when court decisions establish a particular legal principle. Once a legal precedent has been established, it forms part of the common law. South African common law on companies draws heavily on English law. The Companies Act Based on the review of the company law by the Department of Trade and Industry which publish the Guidelines for Corporate Law Reform in May 2004. Firstly, the Guidelines concluded that the South African context and the mandates of the Constitution require that company law needs to take into account the interests of both shareholders and other stakeholders such as the community with which the company operate, its customers, its employees, its suppliers and the environment. Secondly, the Guidelines also made certain recommendations regarding the reform of corporate governance. It recommend that a unitary board structure be retained, as opposed to the two-tier board structure prevalent in Europe, and that other stakeholder representation be optional. Thirdly, the Guidelines proposed greater disclosure of information. It was proposed that not only shareholders be entitled to information about the activities of the company, but the other interest stakeholders. Lastly, the Act resulted from the Guidelines, was signed into law on 8 April 2009 and came into effect on 1 May 2011. Both the Companies Act 46 of 1926 and the Companies Act 61 of 1973, which preceded the Act primarily based on English Law. But the Act introduced other foreign, especially American concepts into South Africa. The King IVTM Report on Corporate Governance for South Africa, 2016 The fundamental underlying approach of King IV TM towards corporate governance is the theme of creating value in a sustainable manner. It advocates an outcome-based approach to corporate governance to achieve the following goals which are an ethical culture, good performance, effective control, and legitimacy. King IVTM makes use of the concepts of corporate citizenship, sustainable development, stakeholder inclusivity, and integrated thinking and reporting. As a corporate citizen in a wider society, a business organisation not only has rights in but also obligations and responsibility towards that society. Sustainability means the use of resources in such a way that current needs are met without compromising the ability of future generations to meet their need. This is both an ethical and economic imperative. King IVTM advocates a stakeholder-inclusive approach to corporate governance. This requires the board to take into account the legitimate and reasonable needs, interests and expectations of all material stakeholders of the company. Integrated thinking requires consideration of the interdependence and connectivity between all the stakeholders of an organisation. It also requires the governing body to integrate strategy, risk and sustainable development when making decisions and reporting on its activities. JSE corporate governance requirements In addition to disclosing compliance with King IVTM listed companies must also comply with certain specific requirements concerning corporate governance and must disclose compliance therewith in their annual reports. JSE deals with appointment of directors, balance of power, board committees, and the company secretary. Other legislation The bank Act The Competition Act The Consumer Protection Act Labour legislation The National Environmental Management Act The Public Finance Management Act The Promotion of Access to information Act