Accounting theory & Accountability essay on stock exchange
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Powerpointslides-CorporateGovernance2.pptxAccounting Theory
Corporate Governance and Development and Issues and role of ethics Part 2
( Chapter 8)
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Learning Objectives
Have an understanding of voluntary disclosure
Explain what is good corporate governance and why good corporate governance is needed
Recent developments and issues in corporate governance
Role and impact of accounting on corporate governance
WHAT IS CORPORATE GOVERNANCE?
The procedures and processes according to which an organisation is directed and controlled.
The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation — such as the board, managers, shareholders and other stakeholders — and lays down the rules and procedures for decision-making.
Advantages of Good Corporate Governance
In a globalised and competitive environment good governance can be a significant advantage.
Good governance can
Reduce the cost of capital
Increase shareholder base
Manage increased scrutiny
Increase consumer confidence
Facilitate economic growth
THE NEED FOR CORPORATE GOVERNANCE SYSTEMS
The corporate structure requires governance
Separation between capital contributors and management
Under the best circumstances managers should act as though they had contributed the capital
It would appear this does not happen and managers may ‘bias’ or distort the financial statements
CORPORATE GOVERNANCE GUIDELINES AND PRACTICES
It is generally acknowledged that there is no ‘one’ system of corporate governance.
The practices and procedures required or desired will be affected by:
The nature of the particular corporation and its activities.
The environment in which the corporation operates.
THE GROWING INTEREST IN CORPORATE GOVERNANCE
Interest in corporate governance appears to be driven by
Highly publicised corporate misconduct
Agency problems
Realisation of other benefits
Elements of Corporate Governance
Review Table 7.1 in the text.
Key elements
Controlling and directing the directors (and senior management)
ensure that the key managers make appropriate decisions
Role of shareholders (and other stakeholders)
ensure that shareholders have the ability to protect their interests in the corporation
Transparency and accountability
ensure that the stakeholders (including shareholders) are sufficiently informed about the activities of the company and its management
The Rules-Based Approach to Corporate Governance
Advantages
Provides a set of minimum corporate governance practices that must be followed by all corporations.
Aids enforcement and clarifies potential liability.
Disadvantages
Lowest common denominator approach
Encourages form over substance
Focus on legal liability not stakeholder interests
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The Principles-Based Approach to Corporate Governance
Identifies general principles or objectives for the corporate governance system to aim to achieve.
Responsibility is placed on the managers to consider which practices are appropriate, given their circumstances.
The Principles-Based Approach to Corporate Governance
Advantages
Places a higher level of duty on directors to determine which corporate governance practices are required.
Its flexibility means that practices can be adapted for the particular circumstances and environment of the entity.
Disadvantages
Directors must interpret these principles and decide which corporate governance practices are needed.
It relies on their honesty, integrity and commitment to good governance.
DEVELOPMENTS AND ISSUES IN CORPORATE GOVERNANCE
The global financial crisis has provided an impetus for regulators, corporations themselves and other organisations to reconsider aspects of corporate governance.
An OECD review concluded that while the espoused principles of corporate governance were sound, there was a ‘gap’ between the principles and their implementation.
Executive Remuneration
This is a contentious issue regularly scrutinised by public and the media.
Concerns have been raised about
The size of executive remuneration.
The apparent disconnect between performance and pay.
The use of public (bail-out) money to pay bonuses.
The connection between remuneration packages and rewarding short-term focus
Executive Remuneration Cont
In Australia, recent legislation includes
Increased disclosure
A ‘two-strikes’ rule where if more than 25% of shareholders vote against the remuneration report for two consecutive years, the board itself can be put up for re-election
ROLE OF ACCOUNTING AND FINANCIAL REPORTING IN CORPORATE GOVERNANCE
Accounting clearly has a central role in directing and controlling a corporation.
Management accounting provides a signicant part of the information on which company operations will be decided.
Financial accounting provides the means for outsiders to monitor the corporation and to assess how well those responsible for managing the corporation have performed.
There are two key ways in which accounting is used to direct and control the managers of a corporation.
Encourage appropriate decisions
Linking managers performance to rewards
Transparency and disclosure
Requiring specific disclosure about areas relevant to corporate governance. E.g.
AASB 124 Related Party Disclosures
AASB 2 Share-based Payment
Deterring, Preventing and Encouraging Certain Actions and Decisions
INTERNATIONAL PERSPECTIVES AND DEVELOPMENTS
The Anglo-Saxon model placing emphasis on shareholders interest dominates in the United States, Australia, Canada and the United Kingdom.
Asia is increasingly adopting the Anglo-Saxon shareholder model.
In Europe, there is more direct recognition of alternative stakeholders (such as employees in France and creditors in Germany).
What have we covered today?
Corporate Governance is a system of directing and controlling the corporation
Corporate governance principles and practices concentrate on directing and controlling directors and management, shareholders interests, and rights, transparency and accountability.
Corporate governance is influenced by the environment in which it operates
Accounting information is an important part of any corporate governance system
Good corporate governance is about people doing the right thing.
The End
