P1 All notesCorporate Governance Main Principles Approaches to Corporate Governance Corporate governance is the system by which organisations are directed and controlled. A sound system of corporate governance is capable of reducing company failures in a number of ways: 1. it addresses issues of management This reduces the agency problem and makes it less likely that management will promote their own self-interests above those of shareholders. 2. it helps to identify and manage the wide range of risks These might arise from changes in the internal or external environments 3. it specifies a range of effective internal controls that will ensure the effective use of resources and the minimisation of waste, fraud, and the misuse of company assets. Internal controls are necessary for maintaining the efficient and effective operation of a business 4. it encourages reliable and complete external reporting of financial data By using this information, investors can establish what is going on in the company and will have advanced warning of any problems 5. it underpins investor confidence gives shareholders a belief that their investments are being responsibly managed 6. it encourages and attract new investment make it more likely that lenders will extend credit and provide increased loan capital if needed There are 2 possible systems for trying to get companies to have good corporate governance: These are: 1. Rules based 2. Principle based Rules-based system In the rules-based system, companies adhere to the rules or pay penalties. ADVANTAGES 1. Clarity 2. Standardisation 3. Penalties are a deterrent against bad CG 4. Easier compliance with the rules, as they are unambiguous, and can be evidenced DISADVANTAGES 1. Can create just a "box-ticking" approach 2. Not suitable to all possible situations. 3. Creates unnecessary administration burden on some companies 4. One size does not necessarily fit all. 5. Expensive Principles-based System (Comply or explain) In the principles system, companies adhere to the spirit of the “rule”, or explain why it hasn’t. This does not mean the company has a choice not to adhere. It just means it can TEMPORARILY explain why it has not. The punishment for this non-adherence will be judged by investors. ADVANTAGES 1. Not so rigid, allows for different circumstances. 2. Allows companies to go beyond the minimum required. 3. Less of an admin burden. 4. Can develop own specific CG and Internal controls (For example physical controls over cash will be vital to some businesses and less relevant or not applicable to others. DISADVANTAGES 1. The principles are so broad that they are of very little use as a guide to best corporate government practice 2. Not easier compliance as with the rules, as they are ambiguous, and can not be evidenced Principles v Rules More Detail Principles Some companies. Sarbox compliance can also prove very expensive. and these provisions apply to each company listed in New York. especially larger ones. Rules Rules-based control is when behaviour is underpinned and prescribed by statute of the country’s legislature. usually. and protect market value. On points of detail companies could be in non-compliant as long as they made clear in their annual report the ways in which they were non-compliant and. Remember though that companies are required to comply under listing rules but the fact that it is not legally required should not lead us to conclude that they have a free choice. the reasons why. It is believed that the market mechanism is then capable of valuing the extent of non-compliance and signalling to the company when an unacceptable level of compliance is reached. and this can be very important in the development of a small business where compliance costs can be disproportionately high. Typically. Smaller companies have more leeway than would be the case in a rules-based jurisdiction. not by the listing rules) more latitude than larger companies. smaller companies are allowed (by the market. This meant that the market was then able to ‘punish’ non-compliance if investors were dissatisfied with the explanation (ie the share price might fall). The same detailed provisions are required of SME's as of large companies. Compliance is therefore enforceable in law such that companies can face legal action if they fail to comply. make ‘full compliance’ a prominent announcement to shareholders in the annual report. This is an important difference between rules-based and principles-based approaches. The stock market takes a very dim view of most material breaches. Compliance is required under stockmarket listing rules but non-compliance is allowed based on the premise of full disclosure of all areas of non-compliance.The principle of ‘comply or explain’ means that companies have to take seriously the general principles of relevant corporate governance codes. National differences . In most cases nowadays. comply or explain disclosures in the UK describe minor or temporary non-compliance. US-listed companies are required to comply in detail with Sarbox provisions. especially in larger companies. presumably in the belief that this will underpin investor confidence in management. This would allow those who seek foreign investment to comply more fully than those who don't want it and are prepared to explain why Developing countries may not have all resources that are needed for full compliance (auditors. as well as some developing countries. professional accountants. They are built on solid foundations of trust and so on… so that’s my little heartwarming story . financial accounting to shareholders is underpinned by company law and International Financial Reporting Standards.Developing countries In developing economies . perhaps for them the option to ‘comply or explain’ is better. internal auditors. for a company to be run well. academics and other parties interested in the development of global corporate governance practices What Is a ‘code’ And what is it for? In most countries. For these companies extra regulations would be very costly So. is a bit like all good relationships. The OECD (Organisation for Economic Cooperation & Development) was established in 1961.there are normally many SMEs. etc). international standards help nations become competitive. It is made up of the industrialised marketeconomy countries. and in the best interests of its shareholders. and provides a forum in which to establish and coordinate policies. represents investors. The ICGN (International Corporate Governance Network) was founded in 1995 at the instigation of major institutional investors. and it is in this respect that countries differ in their approaches. To help compliance. ‘Codes’ Are intended to specifically guide behaviour where the law is ambiguous Underpinning concepts of Governance Key Underpinning Concepts of Corporate Governance So what’s all this nonsense about then hey?? Well. companies. Some of the other activities of directors are not. financial intermediaries. pool of NEDs. Development and maintenance of risk management and control systems. Clarity in the definition of roles and responsibilities. Truthful Not misleading . Providing clarity in communication channels with internal and external stakeholders. Fairness Respecting the rights and views of any groups with a legitimate interest. Responsibility Willingness to accept liability for the outcome of governance decisions. This means a lack of bias. Accountability Answerable for the consequences of actions. Conscientious business and personal behaviour.. Honesty/Probity Not simply telling the truth but also not being guilty of issuing misleading statements or presenting information in confusing or distorted way. This is especially important where personal feelings are involved.over… back to the boring stuff… oh but please remember these need memorising as they are a common question! These are the underpinning concepts... Integrity A person of high moral virtue. Straightforward dealing. Independence of the board from operational involvement. Any profession (such as accounting) relies upon a public perception of competence and integrity. Underpins market confidence in the company through truthful and fair reporting. It underpins the relationships that an accountant has with his or her clients. including voluntary disclosure of reliable information. clarity. Meh . auditors and other colleagues. It is an underlying principle of corporate governance and it is vital in all agency relationships. Adheres to a strict moral or ethical code despite other pressures. Importance of transparency: Gains trust with investors and authorities. Transparency/ Openness Means openness (say.-) Independence Independence of NEDs. Reasons for secrecy/confidentiality include the fact that it may be necessary to keep strategy discussions secret from competitors. It provides a basic ethical framework to guide an accountant’s professional and personal life. . Importance of integrity in corporate governance: Codes of ethics do not capture all ethical situations. Helps manage stakeholder claims. lack of withholding of relevant information unless necessary. of discussions). Trust is vital in the normal conduct of these relationships and integrity underpins this. Disclosure. And yet when I wore my transparent lecturing suit when lecturing they said it “wasn’t appropriate”. NEDs are independent and are not involved in the day to day running of the business . Seriously though they have a massive part to play in making sure the company is well run and directed (hence the name!) Executive or non-executive The numbers and split of executives to NEDs will partly depend upon the regulatory regime of the country. Organisation reputation for moral virtues. Reputation Personal reputation for moral virtues.Independence of directorships from purely personal motivation. Accountancy profession reputation for moral virtues. Internal actors (in CG) Directors in Corporate Governance Directors in Corporate Governance These are the most prominent group in corporate governance (and often the most annoying). accounting and governance frameworks. Remember that the execs should be working in the best interests of the shareholders and it’s partly the NEDs job to ensure they do Legal responsibilities So here we are looking at the legal side of what they need to do to help run and direct the company well (corporate governance) In a unitary board structure (the one where there’s just one board .Non executives Investors and regulators prefer there to be more NEDs. all directors are subject to retirement by rotation.it means everyone is looking to ensure each other does the job well (see collective responsibility below) In most countries. where they either step down or offer themselves for re‑election (by the shareholders) for another term in office. all directors share legal responsibility for company activities and all are accountable to the shareholders. controls.see later sections). So there’s no hiding place for them hopefully Board roles 1.this is important . They must comply fully with relevant regulatory requirements that will include legal. 2. This gives shareholders a chance to not re-elect rubbish directors! Collectively responsible Directors are collectively responsible for the company’s performance. compliance and behaviour. The board of directors must discuss and agree strategies to maximise the long-term returns to the company’s shareholders. due to their independent scrutiny of the company. . Notice that directors are all responsible for each others decisions . So as well as making sure her nails are well manicured it is his/her legal responsibility to ensure all the admin that comes with PLCs are adhered too. The legal frameworks are there to try and protect the stakeholders Advises legal responsibilities The company secretary often advises directors of their regulatory and legal responsibilities and duties. the appointment of a company secretary is a compulsory condition of company registration. In any conflict with another member of the company (such as a director). Even though I joke about this . the company secretary must always take the side most likely to benefit the company Technical knowledge In many countries’ he (get me being all modern!) must be a member of one of a list of professional accountancy or company secretary professional bodies . including the responsibility for the timely filing of accounts and other legal compliance issues.it is actually a vital role. Loyal to company His or her primary loyalty is always to the company.Company secretary Company secretary Compulsory In most countries. This is because the company secretary has important responsibilities in compliance. Maintaining the statutory registers 2. Providing members (eg shareholders) and directors with notice of relevant meetings 4.Major roles include: 1. ‘Strategic drift’ can occur. when this vital control and coordination is ineffective. Ensuring the timely and accurate filing of audited accounts and other documents to statutory authorities 3. led by sub‑board management. managers below board level are a crucial part of the governance system. It is the sub management which can prevent the strategic drift by making sure the policies decided by the board are actually followed through . Effectiveness Depends on the extent to which organisational activities are controlled and coordinated. that implement strategies. Organising resolutions for and minutes from major company meetings (like the AGM) Sub board management Sub-board management Sometimes referred to (ambiguously) as ‘middle’ management. meet compliance targets and collect the information and data on which board‑level decisions are made. especially in large organisations. It is the employees. How do they do this? United front This can also mean that management and workforce are seen as united by external stakeholders. Keeps management abuses at bay A trade union can be a key actor in the checks and balances of power within a corporate governance structure. a union can help to unite the workforce behind the strategy and ensure everybody is committed to it. incompetence and greed Help to control the employees Where a good relationship exists between union and employer. If a strategy needs a high level of commitment. making the achievement of strategies more likely.Employee Representatives Employee representatives Trade unions represent employees in a workplace. then productivity of employees tends to increase . membership is voluntary and its influence depends on how many of the workforce are members Corporate Governance role Trade unions are able to ‘deliver’ the compliance of a workforce. Help effectiveness of company Unions are often good at highlighting management abuses such as fraud. waste. especially when the abuse has the ability to affect productivity. This can often work to the advantage of shareholders. for example. for example. it is the Hang Seng index. it is a stock exchange requirement that listed companies comply with the Combined Code on Corporate Governance Procedure for obtaining a listing on an international stock exchange Normally. it is the Dow Jones index and in Hong Kong. In the UK. Each keeps an index of the value of shares on that exchange. Role in Corporate Governance Listing rules are sometimes imposed on listed companies often concerning governance arrangements not covered elsewhere by company law. the FTSE All Share (Financial Times Stock Exchange) index is a measure of all of the shares listed in London. In London.External Actors (in CG) Stock exchanges Stock exchanges Shares are bought and sold through stock exchanges. obtaining a listing consists of three steps: . In New York. 3. A distributed shareholding does place the firm in the market for corporate control increasing the likelihood that the firm will be subject to a takeover bid. 3. The disadvantages of seeking a public listing 1. Financial accounts must be prepared in accordance with IFRS or FASB and with the relevant GAAP as well as the Companies Acts. It opens the capital market to the firm 2. There is also a much more public level of scrutiny with a range of disclosure requirements. In principal it is open to any company to seek a listing on any exchange where shares are traded. 5. Enhances its credibility as investors and the general public are aware that by doing so it has opened itself to a much higher degree of public scrutiny than is the case for a firm that is privately financed. 4. regulatory 3. The company must then meet the regulatory requirements of the Listing Agency which. The London Exchange imposes strict requirements and invariably the applicant company will need the services of a sponsoring firm that specialises in this type of work. 2. . compliance Steps: 1.1. in the UK. 2. The advantages of seeking a public listing 1. 3. is part of the Financial Services Authority (FSA). These requirements impose a minimum size restriction on the company and other conditions concerning length of time trading. Once these requirements are satisfied the company is then placed on an official list and is allowed to make a public offering of its shares. It offers the company access to equity capital from both institutional and private investors and the sums that can be raised are usually much greater than can be obtained through private equity sources. Once the company is on the official list it must then seek the approval of the Stock Exchange for its shares to be traded. In the UK a firm seeking listing must register as a public limited company. legal 2. This entails a change in its memorandum and articles agreed by the existing members at a special meeting of the company. “Other Investors” include fixed‑return bond‑holders Agency relationship The shareholders are the principals . They expect agents (directors) to act in their best economic interests An agency relationship is one of trust between an agent and a principal which obliges the agent to meet the objectives placed upon it by the principal. As one appointed by a principal to manage. after all. the primary purpose of agency is to discharge its fiduciary duty to the principal Agency costs .4. own the business that we are looking to run and direct properly. They do. Under the rules of the London Stock Exchange companies must also comply with the governance requirements of the Combined Code Shareholders Shareholders and other investors Now time for the big boys… the most important external actors in corporate governance. oversee or further the principal’s specific interests. shareholders therefore encourage directors’ rewards packages to be aligned with their own interests so that they feel less need to continually monitor directors’ activities. the total agency costs can be prohibitive. dominating the share volumes on most of the world’s stock exchanges. Examples include Pension funds. They also often have narrower portfolios. Fund managers have some influence over the companies so need to be aware of the performance and governance of many companies in their funds.Shareholders incur agency costs in monitoring the agents (directors). If they didn’t have to keep checking the managers then there would be agency costs. which can mean that agency costs are higher. They typically buy and sell small volumes and tend to have fewer sources of information than institutional investors. as the individuals themselves study the companies they have invested in for signs of changes in strategy. Making direct contact with companies Types of Investor Small investors Individuals who hold shares in unit trusts. governance or performance. Attending relevant meetings (AGMs and EGMs) 2. When a shareholder holds shares in many companies. funds and individual companies. so agency costs can be very large indeed. insurance companies and unit trust companies each fund being managed by a fund manager. Institutional investors The biggest investors in companies. When should institutional investors intervene in company affairs? . Studying company results 3. So let’s look at some examples of costs of monitoring and checking on directors’ behaviour 1. Other services These sometimes include social and environmental advice and audit. A qualified audit report is an important signal to markets about the company.Concerns over strategy Consistent underperformance (without explanation) NEDs not doing their job properly Internal Controls persistently failing Failure to comply with laws and regulations Inappropriate remuneration policies Poor approach to social responsibility (reputation risk) Auditors and regulators in CG Auditors The most obvious role of audit in corporate governance is to report to shareholders that the accounts are accurate (‘a true and fair view’ is the term used in some countries. . For a nationalised rail service.Regulators and governments This usually applies to companies or sectors involved in areas considered strategically or politically important by governments Examples The control of monopolies The supply of water or energy Non Corporates "Non corporate" Corporate Governance ‘NON-CORPORATE’ CORPORATE GOVERNANCE Public sector organisations Public sector organisations are state controlled. Government likes to keep control over such parts. or local government authorities. as it is deemed so important it cannot be trusted to private shareholders and their profit motive alone. hospitals and schools). nationalised companies and non-governmental organisations (NGOs) Their aim is to implement parts of government policy. some loss-making route services may be retained in order to support economic development in a particular region. Such service delivery objectives are often underpinned by legislation. They can be parts of government departments (eg. . for example. It changes the skills needed by executive directors. It is normal to have a limited audit of public sector organisations to ensure the integrity and transparency of their financial transactions. Moving from state control to having to comply with company law and relevant listing rules. Many nationalised companies have recently been privatised. a charity must demonstrate its benevolent purpose and apply for recognition by the country’s charity commission or equivalent. the first two being business and the state. elected and non-elected. environmental. This causes a problem however. are likely to seek objectives other than long run profit maximisation. charities and voluntary organisations. The millions of taxpayers and electors in a given country are likely to want completely different things from public sector organisations. though. These exist for a particular social.Agency relationship in the Public Sector In private companies. This change means competition. religious. humanitarian or similar benevolent purpose and often enjoy tax privileges and reduced reporting requirements. but this does not always extend to an audit of its performance or ‘fitness for purpose’. the owner/manager split creates an agency problem . Management serve the interests of the taxpayer who. In exchange. will want them to do much less or perhaps not to exist at all. This can be called the problem of ‘fitness for purpose”. water. The taxpayer/electorate does not have one simple goal (like shareholders have that of profit maximisation). Some will want them to do much more while others. perhaps preferring lower rates of tax. transport and minerals.this still exists within the public sector. . so is usually accompanied by a substantial internal culture change Charities and voluntary organisations There is often a third sector. in the process creating large new companies in industries such as energy. try to interpret the taxpayers’ best interests So there will be a problem of establishing strategic objectives and monitoring their achievement. So public servants. in a democracy. taxpayers and.Then there is the agency problem between the donors and the charity. Will the donations be used fully for the purpose? Hence the need for very strong regulation Some charities voluntarily provide full financial disclosures and this places increased pressure on others to do the same. A common way to help to reduce the agency problem is to have a board of directors overseen by a committee of trustees (sometimes called governors). donors. voters (the two are often similar) Complex political structures seeking to interpret the wishes of taxpayers and the best way to deliver services Charities and voluntary organisations Achievement of benevolent purposes Directors and service managers Donors and other supporters provide the Ideally. including a regular and transparent report on how the charity is run and how it has delivered against its stated objectives. The trustees here act in a similar way to NEDs. regulators and trustees and reduces the agency problem Purpose Agents Principals Typical governance arrangements Public listed companies Maximisation of long-term shareholder returns Directors Shareholders Executive board monitored by nonexecutive directors and non-executive chairman. and will generally share the values of the charities purpose Charities can exhibit their effectiveness by using a social or environmental audit-type framework. This increases the confidence and trust of all of the main stakeholders: service users. Public sector Implementation of government policy Various layers of service and departmental managers Ultimately. an executive board accountable to independent . The agent is doing this job on behalf of someone else. the principal is a shareholder and the agents are the directors. Footballers. Service users or consumers benefit from charities. The star hopes that the agent is working in their best interest and not just for their own commission… Principals and Agents A principal appoints an agent to act on his or her behalf. What?! Well all this means is an owner (principal) lets somebody run her business (manager).provide the resources. independent trustees. however. Open to interpretation and abuse in some jurisdictions. In the case of corporate governance. They work on behalf of the star. film stars etc all have agents. Agency Relationships and Theories Agency Relationship Agency Agency is defined in relation to a principal. The directors are accountable to the principals Agency Costs A cost to the shareholder through having to monitor the directors . there are no transaction costs Analysing these costs can be difficult because of: Bounded rationality . therefore. If items are made within the company itself.actions taken in an individual’s best interests Company will try to keep as many transaction as possible in-house in order to: reduce uncertainties about dealing with suppliers avoid high purchase prices manage quality Are the transaction costs (of dealing with others and not doing the thing yourself) worth it? The 3 factors to take into account as to whether the transaction costs are worthwhile are: .Over and above normal analysis costs A result of comprised trust in directors Transaction Cost Theory Transaction cost theory General Transaction costs occur when dealing with another party.our limited capacity to understand business situations Opportunism . the more worthwhile the transaction / agency cost is Applied to Agency theory This can be applied to directors who may take decisions in their own interests also: 1. Frequency how often will this be needed The less often. the lower the transaction / agency cost 2. Asset specificity . Asset specificity How unique is the item The more unique the item. Frequency . the lower the transaction/agency cost 3.. The Board of Directors Board Committees .Will they get away with it? 2. Uncertainty Do we trust the other party enough? The more certain we are. Uncertainty .how often will they try it? 3.1.How much is to gain? Responsibilities of. Nominations committee . The appropriate number and type of NEDs on the board. especially among the most senior members of the board. Is responsible for recommending the appointments of new directors to the board . The balance between executives and NEDs 2.Roles The nominations committee is usually made up of NEDs. Reduces board workload Use inherent expertise Communicates to shareholders that directors take these issues seriously. It establishes the skills.Board committees Importance of committees Many companies operate a series of board sub-committees responsible for supervising specific aspects of governance. knowledge and experience possessed by current board Notes any gaps that will need to be filled Looks at continuity and succession planning. Nominations committee Advises on: 1. Communicates to stakeholders the importance of remuneration and risk. long-term strategy and market rates for a given job.Roles Determine remunerations policy. It is likely that discussions of this type will take place for each individual director and will take into account issues including market conditions. usually in the corporate governance section of the annual report Be compliant with relevant laws or codes of best practice. Is responsible for advising on executive director remuneration policy Board Of Directors The board of directors .Risk committee -Roles Considered best practice by most corporate governance codes Helps Investor confidence Should be made up of NEDs Requires good information systems to be in place Reviews effectiveness of internal controls regarding risk Is responsible for overseeing risk management Remuneration Committee . acting on behalf of shareholders but benefitting both shareholders and the other board members of the board Ensure that each director is fairly but responsibly rewarded for their individual contribution in terms of levels or pay and the components of each director’s package. Reports to the shareholders on the outcomes of their decisions. retention needs. This is where all directors. Separate MD & chairman 2. including managing directors. Ensure that its obligations to its shareholders and other stakeholders are understood and met 8. Provide entrepreneurial leadership 2. Set the company's strategic aims In the UK listed companies have to state in their accounts that they comply with the following regulations: 1. . chairman and other board members 5. Ensure that the necessary financial and human resources are in place 7. Represent company view and account to the public 3. Determine the company’s mission and purpose 4. Maximum one-year notice period 5. Independent NEDs (three-year contract. Establish appropriate internal controls 6. Select and appoint the CEO.Roles and Responsibilities 1. no share options) Unitary Board This is the single board structure with sub-committees. departmental directors and NEDs all have equal legal and executive status in law. Minimum 50% non executive directors (NEDs) 3. Independent chairperson 4. Responsible for the running of the business.This does not mean that all are equal in terms of the organisational hierarchy. separating the executive from directors. Supervisory board Appoints. Advantages 1. NEDs are empowered. Often larger than a tier of a two-tier board so more viewpoints are expressed and more robustly scrutinised 6. but that all are responsible and can be held accountable for board decisions. 2. Reduced likelihood of abuse of power by a small number of senior directors 5. This two-tier approach can take the form of a: Management or executive board Responsible for managing the enterprise with the CEO to coordinate activity. These are predominantly associated with France and Germany. The presence of NEDs can bring independence. being accorded equal status to executive directors. A NED or independent director can not be expected to both manage and monitor 2. The time requirement on NEDs may be onerous Two-tier boards The board is split into multi-tiers. A separate chairman coordinates the work and members are elected by shareholders at the AGM Has no executive function. experience and expertise 3. . Composed entirely of executive directors. All participants have equal legal responsibility for management of the company and strategic performance Disadvantages 1. Board accountability is enhanced as all directors are held equally accountable under a ‘cabinet government’ arrangement 4. supervises and advises members of the management board. In implementing policies on board diversity. Clear stakeholder involvement 3. gender. Clearly management and owners separation 2. Owners control management by power of appointment Diversity on boards of directors Diversity on boards of directors DEFINITION OF BOARD DIVERSITY means having a range of many people that are different from each other. its business nature as well as its strategies. being the leader of the board. race. factors like age. The nomination committee should give consideration to diversity and establish a formal recruitment policy concerning the diversity of board members with reference to the competencies required for the board. . has to facilitate new members joining the team and to encourage open discussions and exchanges of information during formal and informal meetings.It reviews the company's strategy. both the company’s chairman and the nomination committee play a significant role. educational background and professional qualifications of the directors to make the board less homogenous. The chairman. Separate meetings means freedom of expression 4. Advantages of 2-tier boards 1. They may challenge any aspect of strategy they see fit.They should represent the shareholders’ interests . BENEFITS OF BOARD DIVERSITY 1.The committee members have to carefully analyse what the board lacks in skills and expertise and advertise board positions periodically. The key role is to reduce the conflict of interest between management (executive directors) and shareholders by providing the balance to the board. and offer advice 2. also woman). More effective decision making. Better utilisation of the talent pool (not only male involved. NEDs bring an independent viewpoint as they are not full time employees. 1. NEDs Non Executive Directors (NEDs) NEDs have no executive (managerial) responsibilities. Scrutiny role NEDs should hold executive directors to account for decisions taken. Enhancement of corporate reputation and investor relations. Strategy role NEDs are full members and thus should contribute to strategy. Roles and Responsibilities The Higgs Report (2003) described the function of non-executive directors (NEDs) in terms of four distinct roles. 2. 3. in turn. For example. may play a part in deciding his own salary It is for this reason the cross directorships are explicitly forbidden by many corporate governance codes Advantages of NEDs . The board should ensure any NED is truly independent in character and judgement by: not being an employee of the company within the last 5 years not having a material business relationship with the company in the last 3 years not receiving any remuneration except a director’s fee not having any family ties with the firm not holding cross directorships with other directors Cross directorships When two (or more) directors sit on the boards of the other. 4. In most cases. such as chemicals.3. have other systems in place. People role NEDs should oversee issues on appointments and remuneration. but might also involve contractual or disciplinary issues. This can compromise the independence of the directors involved. each director’s ‘second’ board appointment is likely to be non-executive. Independence The Code states as a principle that the board should include a balance of NEDs and executives. a director deciding the salary of a colleague who. some of which fall under International Organisation for Standardisation (ISO) standards. Risk role NEDs should ensure the company adequate internal controls and risk management systems This is often informed by prescribed codes (such as Turnbull) but some industries. Communication: improvement in communication between shareholders interests and the company. Independent view 6. Perception: Company is perceived more trustworthy 4. and assisting in the appointment of directors to the board 6. Lack of trust can affect board operations 2.The main advantages of bringing NEDs onto a board are as follows: 1. Quality: there may not be many appropriately qualified NEDs around 3. monitor results. customers and .Chief executive officer Role of CEO 1. 2. compliance with corporate governance code Disadvantages of NEDs 1. Monitoring to reduce the excesses of executives. 5. To lead the company and to protect shareholder interests above all others 2. Communicating effectively with significant stakeholders including the company’s shareholders. suppliers. To oversee the management team. To develop and implement polices and strategies capable of delivering superior shareholder value 3. Liability: Poor remuneration and liability in law might reduce potential NEDs further Role of CEO CEO . co-ordinating the interface between the board and the other employees in the company. To manage the financial and physical resources of the company. External expertise 3. and ensure that effective operational and risk controls are in place 5. To assume full responsibility for all aspects of the company’s operations 4. Removes the risks of ‘unfettered powers’ in one individual 4. Agrees with most best practice codes . by setting the agenda and ensuring meetings occur regularly 2. the chairman’s roles include communication with shareholders. Allows chair to represent shareholders’ interests 3. Finally. Chairman provides a conduit for the concerns of non-executive directors 6. the co-ordinating of NEDs and facilitating good relationships between them and executives 5. Frees up the chief executive to fully concentrate on the management of the organisation 2. Reduces the risk of a conflict of interest in a single person being responsible for company performance whilst also reporting on that performance to markets 5. Ensures the CEO is responsible to someone named directly 7. The chairman represents the company to investors and other outside stakeholders/constituents. Ensuring the board receives accurate and timely information Benefits of separation of roles of Chair & CEO 1. Effective communication with shareholders The ‘public face’ of the organisation So. This occurs in a statutory sense in the annual report and at annual and extraordinary general meetings. 4.state authorities Role of the Chairman Roles of the chairman in corporate governance Roles and Responsibilities 1. Provide leadership to the board The chairman is responsible for ensuring the board’s effectiveness for shareholders. 3. Importance of the chairman’s statement An important and usually voluntary item. Conveys important strategic messages Allows chairman to inform shareholders about issues Legal rights and responsibilities of Directors (Breach of responsibility can leave director open to criminal prosecution) Disclosures Mandatory & Voluntary Disclosures Chairman and CEO statements Voluntary but to not include this would be unimaginable. social and environmental reporting Others . Stakeholders hoped the OFR would be a vehicle for: 1. Operating and Financial Review (OFR) This detailed report is written in non financial language. typically at the very beginning of an annual report. Its narrative is forwardlooking rather than historical. risk disclosure 2. Purpose: 1. Present the year’s results 2. Present the audited accounts and 4. is recommended by the board but only paid after approval by the shareholders at the AGM. It is usual for the board to make a recommendation and then seek approval of that recommendation by shareholders. To have the final dividend and directors’ emoluments approved by shareholders. When events necessitate substantial change or a major threat. The dividend per share. Notice of the AGM to be sent to shareholders at least 20 working days before the meeting Extra-ordinary General Meeting Extraordinary meetings are called when issues need to be discussed and approved that cannot wait until the next AGM. an EGM is called. Shareholder approval is signalled by the passing of resolutions in which shareholders vote in proportion to their holdings. Discuss the outlook for the coming year 3. The chairman should arrange for the chairmen of the audit. Institutional shareholders may employ proxy voting if they are unable to attend in person. for example. . remuneration and nomination committees to be available to answer and for all directors to attend.There are also: The accounts Press releases AGM Annual General Meeting The AGM is a formal part of a company financial year. Management may want: a shareholder mandate for a particular strategic move. number of votes for the resolution 2. Other major issues that might threaten shareholder value may also lead to an EGM such as a ‘whistleblower’ disclosing information that might undermine shareholders’ confidence in the board of directors They also occur for many irregular events for special issues such as takeovers The issue is basically too serious to wait for the next AGM Proxy Voting Ensures that shareholders unable to attend meetings can still vote The Combined Code 2006 requires that: After a vote has been taken the number of proxy votes should be stated in terms of: 1. number of votes withheld Individual Directors Directors Rights and Duties Directors Rights and Duties These are: Rights The first thing to understand is that directors do not have unlimited power. such as for a merger or acquisition. number of votes against the resolution. and 3. They are limited by: . Articles of association These prescribe how directors operate including the need to be re-elected every 3 years 2. 4. Duty of skill and care This is a legal requirement. Shareholder resolution This can stop the directors acting for them 3. Board decisions Boards make decisions in the interests of shareholders not directors Fiduciary Duties 1. Provisions of law Eg health and safety or the duty of care. Act in good faith: as long as directors’ motives are honest 2. The amount of skill expected depends on your expertise and experience Penalties for acting without due skill and care Any contract made by the director may be void Directors may be personally liable for damages if negligent May be forced to restore company property at their own expense Directors Service Contract Director’s service contract .1. This should Include: key dates duties remuneration details termination provisions (notice constraints other ‘ordinary’ employment terms Director’s Induction & CPD Induction Depends on their background It is important. Induction Process Highly tailored to the individual but will include the following 1. Company strategy 4. but also for the director to build relationships with the existing board and employees below board level. not only for the board to get to know the new director. Company structure 2. Markets and key players . Company values 3. for effective participation in board strategy development. To communicate challenges and changes within the business environment 3. Day to day job details 6. the articles may allow if disclosed) Substantial property transactions: These need approval Loans to directors: generally prohibited . Improve board effectiveness 4. Support personal development of directors Conflicts of Interest Conflict and disclosure of interests Key areas Directors contracting with their own company (However. Information about Board operations It can be given as a presentation by other directors or as an induction pack also Objectives of CPD 1.5. Reporting lines 7. Maintain sufficient skills and ability 2. Director's Remuneration Director's Remuneration The purpose of directors' remuneration is: to attract and retain individuals motivate them to achieve performance goals Components of a rewards package .Insider dealing/trading Here a director uses information (not known publicly) which if publicly available would affect the share price Trading in own shares with this knowledge is fraud Directors are often in possession of market-sensitive information ahead of its publication and they would therefore know if the current share price is under or over-valued given what they know about forthcoming events. then it is likely that some decisions would have a short-term effect which would not be of the best long-term value for shareholders. If insider dealing is allowed. for example. they are made aware of a higher than expected performance. This can become particularly important at times of takeovers where inside information could mean big profits for the director and not necessarily in the longer term interests of the shareholder There is also the potential damage that insider trading does to the reputation and integrity of the capital markets in general which could put off investors who would have no such access to privileged information and who would perceive that such market distortions might increase the risk and variability of returns beyond what they should be. If. it would be classed as insider dealing to buy company shares before that information was published. Why is insider trading unethical and often illegal? Directors must act primarily in the interests of shareholders. The main way of doing this is to ensure that executive reward packages are aligned with the interests of principals (shareholders) so that directors are rewarded for meeting targets that further the interests of shareholders. 5. Balanced package This is needed for the following reasons: A reduction of agency costs These are the costs the principals incur in monitoring the actions of agents acting on their behalf.These include: 1. A reward package that only rewards accomplishments in line with shareholder value substantially decreases agency costs and when a shareholder might own shares in many companies. 6. Share schemes which may be linked to other bonus schemes and provide options to the executive to purchase predetermined numbers of shares at a given favourable price. Pension contributions are paid by most responsible employers. Typically. 3. Pension and termination benefits including a pre-agreed pension value after an agreed number of years’ service and any ‘golden parachute’ benefits when leaving. 4. Director's removal . etc. It recognises the basic market value of a director. Basic salary . Short and long-term bonuses and incentive plans which are payable based on pre-agreed performance targets being met. (Not linked to performance in the short run but year-to-year changes in it may be linked to some performance measures) 2. health insurance. Other benefits in kind such as cars. such reward packages involve a bonus element based on specific financial targets in line with enhanced company (and hence shareholder) value. which is paid regardless of performance. such a ‘self-policing’ agency mechanism is clearly of benefit. but separate directors’ schemes may be made available at higher contribution rates than other employees. use of company property. Disciplinary procedures Disqualification The reasons can be: Wrongful trading . Bankruptcy 5. every 3 years Longest serving director retires first Means a nice phased retirement of directors Directors can be replaced in an orderly manner Termination 1. Not seeking re-election (see above) 4.There are 3 main methods Retire by Rotation At AGM. Resignation 3.allowing the company to trade while knowing its insolvent Not keeping proper accounting records Failing to prepare & file accounts. Death 2. 3+ defaults in filing documents in 5 years Failing to send tax returns and pay tax . be consistently profitable .Stakeholders Corporate Social Reponsibility CSR Introduction Corporate Social Responsibility (CSR) CSR is a concept whereby organisations consider the interests of society by taking responsibility for the impact of their activities on wider stakeholders. Economic Economic responsibilty towards shareholders. Milton Friedman “Only humans have moral responsibilities…not companies” Enlightened Self Interest By looking after society also. employees etc -eg Maximise EPS. society will respond and look after your company Carroll’s view on CSR 1. g. Defence (Accept responsibility but do the minimum) 3. Reaction (deny all responsibility to society) 2. Ethical Ethical responsibility to act fairly e. sponsor art events etc Social responsiveness of a company 1. Accommodation (Do what is demanded of them) 4. Legal Legal responsibility to operate within the laws of society e. Health and safety Laws codify society's moral views 3. The idea is to establish which stakeholders have the most influence by estimating each stakeholder’s individual power over – and interest in – the organisation’s affairs.g.Do not put profits before ethical norms 4.. Shareholders demand a good return Employees want fair employment Customers seek good quality products 2.Eg. Philanthropic Philanthropic responsibility to give to charities. The stakeholders with the highest combination of power and interest are likely to be those with the most actual influence over .. Proaction (Go beyond the norm) Definition and categories The Mendelow Framework Understanding the Influence of each Stakeholder (MENDELOW) This framework is used to attempt to understand the influence that each stakeholder has over an organisation’s strategy. objectives. changing events can mean that stakeholders can move around the map . The ‘map’ is not static. The Mendelow Framework Power Is the stakeholder’s ability to influence objectives Interest is how much the stakeholders care Influence = Power x Interest However it is very hard to effectively measuring each stakeholder’s power and interest. low Interest .Keep satisfied All these stakeholders need to do to become influential is to re-awaken their interest. C) High power. It is simply the stance to take if strategic positioning is the most important objective 2. 4. B) Low power. If there is only one (eg management) then there is unlikely to be any conflict in a given decision-making situation. and so the management strategy for these stakeholders is to ‘keep satisfied’. low interest .Keep informed Can increase their overall influence by forming coalitions with other stakeholders in order to exert a greater pressure and thereby make themselves more powerful.Minimal effort These can be largely ignored. The management strategy for dealing with these stakeholders is to ‘keep informed’ 3. If there are several and they disagree on the way forward. high interest . although this does not take into account any moral or ethical considerations. there are likely to be difficulties in decision making and strategic direction Stakeholders Definitions and Influence . This will move them across to the right and into the high influence sector.Mendelow Framework .Key players Those with the highest influence. D) High power. high interest .explanation 1. The question here is how many competing stakeholders reside in that quadrant of the map. A) Low power. Stakeholders Definitions and Influence Definition Freeman,1984 defined a stakeholder as: ‘Any group or individual who can affect or [be] affected by the achievement of an organisation’s objectives’. This definition shows important bi-directionality of stakeholders - that they can be affected by - and can affect - an organisation. Small v large companies’ stakeholders Compare, for example, the different complexities of a small organisation, such as a corner shop with a large international organisation as a major university. The stakeholders can be: 1. shareholders 2. management 3. employees 4. trade unions 5. customers 6. suppliers 7. communities Stakeholder Theory Business are now so large and pervasive they are accountable to more than just direct shareholders; they are also accountable to other stakeholders STAKEHOLDER ‘CLAIMS’ A stakeholder makes demands of an organisation. Some shareholders want to influence what the organisation does (those stakeholders who want to affect) and the others are concerned with the way they are affected by the organisation. Some stakeholders may not even know that they have a claim against an organisation, this brings us to the issue of.. Direct stakeholder claims Direct stakeholder claims are made by those with their own ‘voice’. These claims are usually unambiguous, and are made directly between the stakeholder and the organisation. Stakeholders making direct claims will typically include: 1. trade unions 2. shareholders 3. employees 4. customers 5. suppliers 6. in some instances, local communities Indirect stakeholder claims Indirect claims are made by those stakeholders unable to make the claim directly because they are, for some reason, inarticulate or ‘voiceless’. This does not invalidate their claim however. Typical reasons for this include the stakeholder being: (apparently) powerless (eg an individual customer of a very large organisation) not existing yet (eg future generations) having no voice (eg the natural environment), or being remote from the organisation (eg producer groups in distant countries). The claim of an indirect stakeholder must be interpreted by someone else in order to be expressed, and it is this interpretation that makes indirect representation problematic. How do you interpret, for example, the needs of the environment or future generations? The example is an environmental pressure group Categories of Stakeholder HOW TO CATEGORISE STAKEHOLDERS Internal and external stakeholders 1. Internal stakeholders Will typically include employees and management 2. External stakeholders Will include customers, competitors, suppliers, and so on. Some will be more difficult to categorise, such as trade unions that may have elements of both internal and external membership Narrow and wide stakeholders 1. Narrow stakeholders Most affected by the organisation’s policies and will usually include shareholders, management, employees, suppliers, and customers who are dependent upon the organisation’s output. Voluntary stakeholders Voluntary stakeholders are those that engage with an organisation of their own choice and free will. Primary stakeholder Without whom the corporation cannot survive Do influence the organisation 2. . and local communities.2. but so may some parties from outside an organisation. Management and employees obviously fall into this active category. suppliers. Voluntary and involuntary stakeholders 1. Active stakeholders Those who seek to participate in the organisation’s activities. Passive stakeholders Are those who do not normally seek to participate in an organisation’s policy making. most customers. Will normally include most shareholders. such as regulators and environmental pressure groups 2. Secondary stakeholders Those that the organisation does not directly depend upon for its immediate survival Do not influence the organisation Active and passive stakeholders 1. This is not to say that passive stakeholders are any less interested or less powerful. government. Primary and secondary stakeholders 1. and shareholders. but they do not seek to take an active part in the organisation’s strategy. less-dependent customers and the wider (non local) community An organisation may have a higher degree of responsibility and accountability to its narrower stakeholders. They are ultimately (in the long term) able to detach and discontinue their stakeholding if they choose. Wider stakeholders Less affected and may typically include government. They will include employees with transferable skills (who could work elsewhere). For example. Recognised and unrecognised (by the organisation) stakeholders The categorisation by recognition follows on from the debate over legitimacy. Legitimate and illegitimate stakeholders Legitimacy depends on your viewpoint (one person’s ‘terrorist’. Known about and unknown stakeholders It is very difficult to recognise whether the claims of unknown stakeholders (eg nameless sea creatures. future generations. and most competitors. . If an organisation considers a stakeholder’s claim to be illegitimate. Illegitimate Those that make claims without such a link. Do not choose to be stakeholders but are so nevertheless Includes local communities. or that have no mandate to make a claim. 1. customers 2. etc) are considered legitimate or not. it might still be logical to assume that low emissions can normally be better for such creatures than high emissions. for example. communities in close proximity to overseas suppliers.2. will be considered illegitimate by some. It may be a moral duty for organisations to seek out all possible stakeholders before a decision is taken and this can sometimes result in the adoption of minimum impact policies. Legitimate Those with an active economic relationship with an organisation will almost always be considered legitimate. For example suppliers. the natural environment. This means that there is no possible case for taking their views into account when making decisions. This means the stakeholder’s claim will not be taken into account when the organisation makes decisions. undiscovered species. is another’s ‘freedom fighter’). Involuntary stakeholders Involuntary stakeholders have their stakeholding imposed and are unable to detach or withdraw of their own volition. it is likely that its claim will not be recognised. even though the exact identity of a nameless sea creature is not known. deriving from the philosophy of the German ethical thinker Immanuel Kant (1724– 1804). 2. The instrumental view of stakeholders That organisations take stakeholder opinions into account only insofar as they are consistent with profit maximisation So. We each have a moral duty to . it is likely that the organisation will recognise the group’s claim It is therefore said that stakeholders are used instrumentally in the pursuit of other objectives. The normative view of stakeholders Describes not what is. enjoying its protection. Why is this so? 1. A business is a citizen of society.Theory Stakeholder Theory Stakeholder Theory Proponents of shareholder theory The agents (directors) have a moral and legal duty to only take account of principals’ claims when setting objectives and making decisions. but what should be. If the loyalty of an important primary stakeholder group is threatened. Kant’s argued civil duties were important in maintaining and increasing overall good in society. support and benefits so it has a duty to recognise a plurality of claims INSTRUMENTAL AND NORMATIVE MOTIVATIONS OF STAKEHOLDER THEORY Some people are concerned about others’ opinions. a business acknowledges stakeholders only because to do so is the best way of achieving other business objectives. while other people seem to have little regard for others’ concerns. The normative view argues that organisations should accommodate stakeholder concerns because by doing so the organisation observes its moral duty to each stakeholder. at the operational level. To safeguard the assets of the business. Internal Control and Review Internal Control Objectives of Internal Control General objectives of internal control To ensure the orderly and efficient conduct of business in respect of systems being in place and fully implemented. To ensure the t imely preparation of financial information Internal controls can be at the strategic or operational level. At the strategic level. controls are aimed at ensuring that the organisation ‘does the right things’.each other in respect of taking account of each others’ concerns and opinions. controls are aimed at ensuring that the organisation ‘does things right’. The normative view sees stakeholders as ends in themselves and not just instrumental to the achievement of other ends. . Assets include tangibles and intangibles To prevent and detect fraud To ensure the c ompleteness and a ccuracy of accounting records. Management overriding controls 5. Underpins investor confidence 2. Poor judgement in decision-making 2. Control processes being deliberately circumvented 4. Human error 3. Risks would not be known about and managed without adequate internal control 3. The occurrence of unforeseeable circumstances Internal Controls Importance Internal Controls Importance Importance of internal control 1.Internal Control Failure Internal Control Failure Typical causes of internal control failure are: 1. Helps expose and improve underperforming internal operations 6. Helps to manage quality 4. Provides management with information on internal operations and compliance 5. Provides information for internal and external reporting . Though they should set the tone All employees have some responsibility for monitoring and maintaining internal controls Effective Systems of Internal Control Effective systems of Internal Control These are: Principles of internal control embedded within the organisation’s structures. No system is infallible Responsibility for internal control is not simply an executive management role. Any change in the risk profile or environment of the organisation will necessitate a change in the system Include procedures for reporting failures immediately to appropriate levels of management Internal Control and Reporting Internal control and reporting . internal control systems are only as good as the people using them.However. procedures and culture. Capable of responding quickly to evolving risks. but may also specify the other members of the board involved in the internal controls over financial reporting.What and When Internal Audit What is Internal audit? Internal audit is a management control. costs. This may involve reporting on rates of compliance.The United States Securities and Exchange Commission (SEC) guidelines are to disclose in the annual report as follows: A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company. The purpose is for shareholders to be clear about who is accountable for the controls. This will always include the nature and extent of involvement by the chairman and chief executive. where all other controls are reviewed Sometimes it is a statutory requirement Codes of corporate governance strongly suggest it The department is normally under the control of a chief internal auditor who reports to the audit committee. resources committed and outputs (if measurable) achieved. A statement identifying the framework used by management to evaluate the effectiveness of this internal control. Management’s assessment of the effectiveness of this internal control as at the end of the company’s most recent fiscal year. failures. When is internal audit needed? . Internal Audit Internal Audit .What and When Internal Audit . This will involve ensuring that the control (i. mitigation measure) is capable of controlling the risk should it materialise. Problems with existing internal control 7. A key part of this role is to review the design and effectiveness of internal controls. Follow up Visits . 2. Increased number of unexplained events IA and Effective Internal Controls IA and Effective Internal Controls Role of internal audit in ensuring effective internal controls Internal audit underpins the effectiveness of internal controls by performing several key tasks: 1. Changes in key risks 6. diverse and complex organisation 2. Reviews and reports on controls The controls put in place for the key risks that the company faces in its operations are reviewed. Large number of employees 3. Changes in organisational structure 5.1.e. Cost benefit analysis required 4. This is the traditional view of internal audit. Large. many industries have upper and lower limits on key indicators and it is the role of internal audit to measure against these and report as necessary. Audit Committee Audit Committee & Internal Control Audit Committee & Internal Control . Internal compliance is essential in all internal control systems. In the production of internal management reports. legal compliance targets are often placed on companies and compliance data is required periodically by governments. In financial services. etc. banking. cost performance or the measurement of a key environmental emission against a target amount (which would then be used as part of a key internal environmental control). Examples might include safety performance. for example. timeliness and adequacy. This ensures that staff take the visit seriously and must implement the findings. Internal audit needs to be aware of the implications of providing incomplete or partial information for decision-making. Often assumed to be of more importance in rules-based jurisdictions such as the United States. 4.Many organisations also require internal audit staff to conduct follow-up visits to ensure that any weaknesses or failures have been addressed since their report was first submitted. oil and gas. Compliance to standards checks (Internal variance analysis) It will typically undertake reviews of operations for compliance against standards. internal audit may be involved in ensuring that the information in the report is correctly measured and accurate. 5. 3. Compliance with regulations Internal audit is used to review internal systems and controls for compliance with relevant regulations and externallyimposed targets. Examine Information Internal audit may also involve an examination of financial and operating information to ensure its accuracy. Standard performance measures will have an allowed variance or tolerance and internal audit will measure actual performance against this standard. of whom at least one has had recent and relevant financial experience What is its Key roles? 1. for example reviewing major expenses and transactions for reasonableness Checking for fraud Audit Committee and External Audit Audit Committee & External Audit Audit committee must oversee the relationship between external auditors and the company . Oversight 2. Review of other functions and systems in the company. What is the Most important areas for attention regarding IC? Monitoring the adequacy of internal controls involves analysing the controls already in place to establish whether they are capable of mitigating risks To check for compliance with relevant regulation and codes Playing a more supervisory role if necessary. Assessment 3.Who is in the Audit Committee? Entirely NEDs (at least three in larger companies). Visualise the committee as windscreen wipers .Key roles So the role is to OVERSEE the external audit relationship. To make that distinction clear for your memory .understand that the internal audit department work for the same company as . I want you to therefore visualise windscreen wipers when you think of audit committee and external audit.helping the external auditors to see things more clearly. This will help you understand their key role in this respect: W ork plan of auditors is reviewed I independence is maintained P rep are for the audit E engagement terms approved R ecommend and review audits and their work S election process involvement Audit Committee and Internal Audit Audit Committee & Internal Audit As part of the overseeing internal controls the audit committee must also oversee the internal audit function This time I want you to appreciate the difference between how an audit committee would deal with an external auditor compared to an internal one. They share the same goals therefore. In fact they often say “We are Him!”.the committee.. Key roles W ork plan reviewed E ffectiveness assessed A ccountable for the Internal Controls R ecommendations are actioned E fficiency of IA ensured H ead of IA appointed I ndependence preserved M onitor IA Risk Process and Indentifaction Identifying Risk Identifying Risks . Remember though that he works for the same company as the audit committee. So they like him. In fact picture the internal auditor as one man only. After all the head of IA is in fact appointed by the audit committee. This will help you memorise those key roles. such as where the business gets its inputs. Typically affect the whole of an organisation and so are managed at board level 2. Strategic risks Refers to the positioning of the company in its environment. Market risk Those arising from any of the markets that a company operates in. Categories of risk 1. it probably faces significant business risk. Reputation risk Any kind of deterioration in the way in which the organisation is perceived When the disappointed stakeholder has contractual power over the organisation. 3.Management must be aware of potential risks They change as the business changes So this stage is particularly important for those in turbulent environments Uncertainty can come from any of the political. interest rate risk. the cost of the reputation risk may be material. Are managed at risk management level and can be managed and mitigated by internal controls. natural. Business risks The risk that the business won't meet its objectives. liquidity 4. currency risk. Entrepreneurial risk . 6. socio-demographic or technological contexts in which the organisation operates. economic. 5. The most common financial risks are those arising from financial structure (gearing). and other price risks 7. Financial risks = are those arising from a range of financial measures. where it sells its products and where it gets its finance/capital Market risk reflects interest rate risk. If the company operates in a rapidly changing industry. Operational risks Refers to potential losses arising from the normal business operations. Entrepreneurial risk is necessary because it is from taking these risks that business opportunities arise. 9. 8. Technology risk arises from the possibility that technological change will occur 11. 13. Fiscal risks risk that the new taxes and limits on expenses allowable for taxation purposes will change.g. global warming. it is expressed the unknowns of the market reception It also refers to the skills of the entrepreneurs themselves. Legal. or litigation risk arises from the possibility of legal action being taken against an organisation 10. Business probity risk related to the governance and ethics of the organisation. e. Environmental risk arises from changes to the environment over which an organisation has no direct control.The risk associated with any new business venture In Ansoff terms.g. e. oil spillages and other pollution. Credit risk Credit risk is the possibility of losses due to non-payment by creditors. Risk Management Process Risk and the risk management process 4 step process: 1. or occurrences for which the organisation might be responsible. 12. Identify Risk Make list of potential risks continually . Derivatives risk due to the use of underperforming financial instruments 14. . Plan for Risk Avoid or make contingency plans (TARA) 4. This means they do not exist independently and they are likely to rise and fall in importance along with the related one.2. Risk correlation is a particular example of related risk. Monitor Risk Assess risks continually Why do all this? To ensure best use is made of opportunities Risks are opportunities to be siezed Can help enhance shareholder value Related risks Related and correlated Related risks These are risks that vary because of the presence of another risk. Analyse Risk Prioritise according to threat/liklihood 3. Positively Correlated Risks are positively correlated if one will fall with the reduction of the other and increase with the rise of the other.the more attention spent on how the business interacts with the environment means their environmental risk is lower and also their reputation risk Risk Analysis . Negatively correlated They would be negatively correlated if one rose as the other fell. Example Often environmental and reputation risks are positively correlated . management attention obviously on the higher probability risks 4.and the loss of return/ extra costs associated with reduced risks 3. and the potential threat they carry Board Evaluation of risk Depends on: Risk appetite of company Maximum risk a business can take (capacity) Risk that can’t be managed (residual risk) Risk Exposure Assessment Risk assessment can be broken down into 5 steps: 1. Assess the likelihood of the risk occurring .and weighed against the benefits .through consultation with stakeholders 2. Identify risks facing the company .through consultation with affected parties 5. Understand the costs involved in the internal controls set up to manage these risks . Look at how impact of these risks can be minimised . Decide on acceptable risk .Risk Analysis Risk Analysis Use a Risk map like the one below This helps management analyse risks according to their probability / likelihood of happening. Risks cannot be completely eliminated. younger companies often need to be risk seekers and more established companies risk averse 2. risk appetite and risk capacity. Risk Appetite This determines how risks will be managed.Risk Attitudes Risk Attitudes Risk Attitudes / Appetite The overall risk strategy determines the overall approach to risk. Risk Capacity Risk capacity indicates how much risk the organisation can accept. . Some will be risk averse and some will be risk seekers. Risk is a good thing because… Makes a business more competitive Prevents just “following the leader” Comes with rewards ALARP (As low as reasonable practicable) A risk is more acceptable when it is low (and less acceptable when it is high). The overall strategy of an organisation will therefore be affected by risk strategy. so each risk is managed so as to be as low as is reasonably practicable because we can never say that a risk has a zero value. 1. Risk Planning and Control Risk Control Risk Planning and Control strategies TARA There are four strategies for managing risk and these can be undertaken in sequence. If it is decided that the risk cannot be transferred nor avoided. This involves finding a party that is willing to enter into a partnership so that the risks of a venture might be spread 4. Avoid This means asking whether or not the organisation needs to engage in the activity where the risk is. it might be asked whether or not something can be done to reduce the risk. It can also include Risk sharing. Retain This means believing there to be no other feasible option. in practice means an insurer or a business partner such as a supplier or a customer 2. It is sometimes called the TARA framework. so we maintain a number of controls that should reduce the probability of the risks materialising. Transfer This means passing the risk on to another party which. It would be financially and operationally impracticable to completely eliminate health and safety risks This does not mean becoming complacent. Such retention should be accepted when the risk and return characteristics are clearly known . Reduce This means diversifying the risk or re-engineering a process to bring about the reduction.For example. 1. 3. defined in Handy’s terms as ‘the way we do things round here’ underpins all risk management activity as it defines attitudes. Risk management becomes unquestioned. built into the corporate mission and culture and may be used as part of the reward system. actions and beliefs.Embedded Risk Embedded risk It is important to embed awareness at all levels to reduce the costs of risk In practical terms. How? Introduce risk controls into the process of work and the environment in which it takes place. Risk Monitoring Risk Manager Risk management committee . embedding means introducing a taken-for-grantedness of risk awareness into the culture of an organisation Culture. taken for granted. So that people assume such measures to be non-negotiable components of their work experience. Risk management committee Role 1. 3. Developing and promoting RM competences Arguments against Risk management 1. Seeking opportunities for improvement of systems. Providing overall leadership. Review risk reports from affected department Provide board guidance on emerging risks Work with the audit committee on designing and monitoring internal controls 3. Disruption to normal organisational practices 3. To agree the risk management 2. ‘STOP ’ errors . involving the establishment of risk management (RM) policies 2. Slowing the seizing of new business opportunities Risk Audits Risk Audit Internal and external risk audit . Monitor overall exposure and specific risks. Assess the effectiveness of risk management systems Roles of a risk manager 1. vision and direction. Cost 2.where a practice has been stopped when it should have been allowed to proceed 4. Strategic risk monitoring could occur frequently 4. socio-demographic or technological contexts in which the organisation operates. economic.Risk audit and assessment is a systematic way of understanding risks Features 1. Identify risk Management must be aware of potential risks They change as the business changes So this stage is particularly important for those in turbulent environments Uncertainty can come from any of the political. the controls used are reviewed For example. Voluntary Risk audit is not a mandatory requirement for all organisations but. importantly. Assess risks The probability and the impact of the risk needs assessing ( sometimes not possible to gain enough information about a risk to gain an accurate picture of its impact and/or probability) This strategy is often. Report on inadequate controls . clean-up and so on. insurance cover or diversification of the portfolio In the case of accepted risks. the auditor now reviews the organisation’s responses to each identified and assessed risk. a form of ongoing risk assessment and audit is compulsory Process 1. a review is made of things such as evacuation. 2. 3. Some organisations employ teams of people to monitor and report on risks. 4. 2. Complicated It can be a complicated and involved process. Businesses then come up with strategies to deal with the risks (TARA) but thats for a different part of the syllabus In a risk audit. from share portfolio management to terrorism prevention. in some highly regulated industries (such as banking and financial services). natural. Review controls over risk Here. Finally, a report is produced and submitted, in most cases, to the Board Management will want to know about the key risks; the quality of existing assessment and the effectiveness of controls currently in place. Any ineffective controls would be the subject of urgent management attention. Internal Risk Audit Advantages Those conducting the audit will be familiar with the systems, environment and culture. So an internal auditor should be able to carry out a highly context-specific risk audit. The audit assessments will therefore use appropriate technical language and in a management specified form Disadvantages Impaired independence and overfamiliarity External Risk Audit Advantages Reduces the independence and familiarity threats. Higher degree of confidence for investors and regulators. A fresh pair of eyes to the task Best practice and current developments often used Ethics Professional Professions and the Public Interest Professions and the public interest Profession Has two essential and defining characteristics: 1. A body of theory 2. Knowledge which guides its practice and commitment to the public interest Professionalism Professionalism may be interpreted more as a state of mind while the profession provides the rules that members of that profession must follow. Over time, the profession appears to be taking more of a proactive than a reactive approach. This means seeking out the public interest and positively contributing towards it The Public Interest Providing information that society as a whole should be aware of in many cases ‘public interest’ disclosure is used to establish that disclosure is needed although there is no law to confirm this action A professional accountant Society accords professional status to those that both possess a high level of technical knowledge in a given area of expertise (accounting, engineering, law, dentistry, medicine) on the understanding that the expertise is used in the public interest. The body of knowledge is gained through passing examinations and gaining practical expertise over time. Acting in the public interest means that the professional always seeks to uphold the interests of society and the best interests of clients (subject to legal and ethical compliance). Fundamental principles (responsibilities) as a professional Society has reasonable expectations of all professionals. The major professional responsibilities of any professional are as follows: 1. Integrity The highest levels of probity in all personal and professional dealings. Professionals should be straightforward and honest in all relationships. 2. Objectivity Professionals should not allow bias, conflicts of interest or undue influence to cloud their judgements or professional decisions. 3. Professional competence and due care Professionals have a duty to ensure that their skills and competences are continually being updated and developed to enable them to serve clients and the public interest. 4. Confidentiality Professionals should, within normal legal constraints, respect the confidentiality of any information gained as a result of professional activity or entrusted to them by a client. 5. Professional behaviour Professionals should comply fully with all relevant laws and regulations whilst at the same time avoiding anything that might discredit the profession or bring it into disrepute. Responsibilities to employer Acting with diligence, probity and care in all situations. Absolute discretion of all sensitive matters both during and after the period of employment. To act in shareholdersinterests as far as possible and that he or she will show loyalty within the bounds of legal and ethical good practice. Responsibilities as a professional To observe the letter and spirit of the law in detail and of professional ethical codes where applicable If no codes, apply principles-basedethical standards (such as integrity and probity) such that they would be happy to account for their behaviour if so required. To act in the public interest Accounting has a large potential impact on the public - the working of capital markets and hence the value of tax revenues, pensions and investment rests upon accountantsbehaviour. The stability of business organisations and hence the security of jobs and the supply of important products also depends discipline and reward systems 3.-) A dvocacy S elf-interest S elf-review I ntimidation F amiliarity Safeguards against these threats: 1. ethics codes.on the professional behaviour of accountants. reviews. Be professional CPD. Ethical threats Ethical threats You are an ASS IF you get caught doing any of these . Create the right environment Internal controls. Individual ethics comply with profession standards. contact ACCA if in doubt. professional monitoring and discipline 2. whistle-blowing Bribery and corruption Bribery and corruption . mentoring. Corporate governance regulations. . How the business can avoid conviction Must demonstrate that it had adequate procedures (see later) in place designed to prevent bribery. . Practical steps to take Small and medium-sized enterprises will inevitably have fewer resources to counter bribery than larger companies." Bribing another person You are guilty of this if you: 1.Bribery = "the offering. Director-level and senior management support. to someone who you want to act improperly. Being bribed The recipient is also guilty. giving. Give an advantage . receiving or soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty..the business is guilty then too. If a person in your business bribes another personal to give your business an advantage . Promise or 3. Offer 2. It is important that senior management lead the anti-bribery culture of the business. 4. . licences or permits). energy. Think about the types of transactions that the business engages in. the business could be liable. 2. oil and gas. certain industry sectors (such as construction.Make sure that all senior managers and directors understand that they could be personally liable. High. involvement with regulatory relationships (for example. If the business operates in foreign jurisdictions. always check local laws. especially if it wants to take advantage of the “adequate procedures” defence to the offence of failing to prevent bribery. Make sure the risks that the business may be exposed to. defence and aerospace.risk transactions include: procurement and supply chain management. who the transactions are with and how they are undertaken. are understood. Dealing with third parties Review all relationships with any partners. For example. if an agent or distributor uses a bribe to win a contract for the business. but have clear guidelines in place that everybody understands. Routine or inexpensive corporate hospitality is unlikely to be a problem. For example. 3. and charitable and political contributions. Ensure background checks are carried out on any agents or distributors before engaging them. especially those from government agencies or state-owned enterprises or charitable organisations. Risk assessment 1. Review how potential customers are entertained. mining and financial services) and countries present a greater risk as employees are more likely to engage in bribery in these areas. suppliers and customers. Contents of a corporate code of ethics Remember this by the useful acronym ETHICS. To control unethical practice by limiting and prescribing behaviour in given situations To stimulate improved ethical behaviour by insisting on full compliance with the code. consider introducing a compulsory training programme for all staff. training etc T ransparent & Truthful Treatment of shareholders H ow customers are treated (complaint procedures etc) I nclude everyone affected (e. E mployees policies eg equal opportunities policies. Corruption = "the abuse of entrusted power for private gain".. customers. If the business operates in a high-risk industry sector or country. communities and shareholders. Community and wider society) .Policies and procedures Review any existing policies and procedures that the business has on preventing bribery and corruption and decide whether they need to be updated.g. Ethical Codes Ethical Codes Purposes of codes of ethics To convey the ethical values of the company to employees. Fundamental Principles (Summary) 3. Ethical codes do not and cannot capture all ethical dilemmas that an accountant will encounter. . Detailed Application (Specific circumstances) Principles 1. Objectivity 3. Confidentiality 5. Conceptual Framework (How principles are applied) 4. Professional BehaviourLimitations of Codes Limitations They can convey the (false) impression that professional ethics can be reduced to a set of rules contained in a code. Personal integrity is needed also emphasised. Integrity 2.C ompany Values S ourcing of products/ materials done ethically Professional Codes of Ethics Content 1. Introduction (Background and disciplinary measures) 2. Professional Competence 4. Recognise the moral issue 2. Moral Judgement It is immoral to do so as the money is not mine 3. Professional codes of ethics are not technically enforceable in any legal manner Ethical decision making Ethical decision making Ethical decision making and Kohlbergs 4 steps 1. Moral issue Could spend it on getting myself (employee) a coffee 2. Engage in moral behaviour Lets take the example of petty cash lying around: 1.Regional variations mean that such codes cannot capture important differences in emphasis in some parts of the world. Establish intent 4. Intent I should put the petty cash where it belongs 4. Be Moral! Ensure I do put it back and not buy myself a coffee! What influences economic behaviour? . Make moral judgement 3. The moral ‘right’ cannot be prescribed in every situation. not because the product of the action (consequence) is good Teleological ethics ("Consequentialist") . e. an obligation to tell the truth. meaning "duty or obligation" (logos. the more likely the decision will be ethical Intensity is affected by: Affects few The affected are nearby The affect is soon The effect is huge Most people agree on this The affect of the decision will probably happen Context Related Certain behaviours are always rewarded or punished It is the norm for this action to happen Depends on culture and religion Theories and Models Deontological vs Teleological ethics Deontological ethics It originates from the Greek word deon.g. "science").Issue related factors How important it is to the decision maker eg. not to harm others An action is considered morally good because of some characteristic of the action itself. It is based on the concept of duty. The more intense it is. be of net benefit to society. Utilitarianism The quality of outcome in terms of the greatest happiness of the greatest number (“what is best for the majority?”). Consequentialist ethics are therefore situational and contingent. Lying. 2. then the action can be considered as morally right. 1. by its general adoption. since the end result of the action is the sole determining factor of its morality. This is where the ‘means’ are judged more important than the ‘ends’. for example. Egoism The quality of the outcome refers to the individual (“what is best for me?”). would lead to the deterioration of society. Morality is seen as absolute and not situational. The teleological theory comprises two approaches: The consequentialist or teleological perspective is based on utilitarian or egoist ethics meaning that the rightness of an action is judged by the quality of the outcome. An action is right if it would. As long as the consequences of the action taken are more favourable than unfavourable. The rightness of an action is judged by its intrinsic virtue 3. . A decision is right or wrong depends on its consequences or outcome. if adopted in all situations. Deontological vs Teleological ethics Deontological ethics 1. 2.This derives from the Greek word teos. and not absolute. is deemed to be ethically wrong because lying. meaning "end". . culture or environment Believes that there are ‘eternal’ rules that guide all decision making in all situations. in the particular situation.Teleological ethics 1. This involves a decision on what outcome is the most favourable and that is a matter of personal judgment. There is one right course of action regardless of the outcome. Absolutism vs Relativism Absolutism and relativism Absolutism Right and wrong are objective qualities that can be rationally determined and do not change regardless of the person. This is where the ‘ends’ are judged more important than the ‘means’. what is the best outcome. 2. This action should be chosen regardless of the consequences A Dogmatic approach means accepting without discussion or debate and is an example of absolutism Relativism A relativist will adopt a pragmatic approach and decide. ethics is situational and not absolute. In the teleological perspective. An act is right or wrong depending on the favourableness of the outcome (consequences) 3. morality is conceived of in terms of rewards. He stated 3 separate levels: 1.g. Stage/Plane 1 : Punishment-obedience orientation Children do not yet speak as members of society. e. punishments and instrumental motivations. if I am caught?" "Will I be rewarded. Kohlberg argued that the moral development of the individual determines how one will react. each person is free to pursue his individual interests.Three Kohlberg levels Three Kohlberg levels This is a framework for classifying a range of responses to ethical situations. "you scratch my back and I will scratch yours" . Punishment "proves" that disobedience is wrong so to obey is to avoid punishment. if I obey?" Stage/Plane 2 : Instrumental relativist orientation This stage recognises different sides to any issue. Think children. "Will I be punished. Rules and norms are discarded as the individual opts for more self serving attitudes. It often is seen in terms of reward and punishment. Pre-Conventional At the preconventional level of moral reasoning. Because everything is relative. Morality is seen as something imposed by grown-ups. showing respect for authority and maintaining the given social order. Conventional At the conventional level. Stage/Plane 5 : Social contract orientation "Right" is defined in terms of protecting individual rights according to standards which have been agreed on "in the public interest". "What will people think of me?"). morality is understood in terms of conformance with perceived ‘higher’ or ‘universal’ ethical principles. Stage/Plane 4 : Law and order orientation "Right" behaviour is about doing one's duty. Assumptions often challenge existing regulatory regimes and social norms and so is often costly in personal terms. Morality is conformance with ‘higher’ or ‘universal’ ethical principles. impresses or helps others and is approved by them (i. the moral you see yourself as being. American Accounting Association Model (AAA) THE AMERICAN ACCOUNTING ASSOCIATION (AAA) MODEL .e. laws and guidelines. Views the moral ‘right’ as being compliant with legal and regulatory frameworks / norms of society Stage/Plane 3 : Good boy-nice girl orientation "Good" behaviour is that which pleases. universality and consistency. Postconventional assumptions often challenge existing regulatory regimes and social norms and so postconventional behaviour can often be costly in personal terms. Stage/Plane 6 : Universal ethical principle orientation Right" is defined by conscience according to self-chosen ethical principles appealing to logical comprehensiveness. Post-Conventional At the postconventional level. The more compliant you are with norms. regardless of peer pressure. morality is understood in terms of compliance with either or both of peer pressure/social expectations or regulations. 3.2. in order to ensure that each outcome is considered. ethical. which takes ethical issues into account. by asking what ethical issues are at stake. Consider consequences of the outcomes. Identify alternative courses of action by stating each one. The decision is taken The American Accounting Association model invites the decision maker to explicitly outline their norms. 7.Suggests a logical. and values. Identify the ethical issues in the case. Tucker's Model Tucker’s 5-question model Is the decision: profitable? legal? fair? right? sustainable or environmentally sound? . and professional behaviour context. principles. 1. seven-step process for decision making. however inappropriate it might be. 5. What is the best course of action that is consistent with the norms. The purpose of the model is to make the implications of each outcome unambiguous so that the final decision is made in full knowledge and recognition of each one. principles. Identify the norms by placing the decision in its social. 4. while Tucker’s model (next) allows for discussion and debate over conflicting claims. 3. Establish the facts of the case. and values. 6. To ensure there is no ambiguity about what is under consideration. 2. without consideration of the norms. Professional codes of ethics are taken to be the norms. Then it should be possible to see which options accord with the norms and which do not. The reference to profitability means that this model is often more useful for examining corporate rather than professional or individual situations. the arguments for and against a given question in the model and also showing this in the final decision. Pristine Capitalists The value underpinning this position is shareholder wealth maximisation. It might be the case that not all of Tucker’s criteria are relevant to every ethical decision. ‘is it profitable?’. Gray. for example. If the situation is relatively complex. the models can be used as a basis for identifying the factors that need to be addressed. showing. or when the case provides a minimum of information. In most situations. will the decision be straightforward. ‘compared to what?’ ‘Similarly. it is reasonable to ask. Whether an option is ‘right’ depends on the ethical position adopted. and implicit within it is the view that anything that reduces potential shareholder wealth is effectively theft from shareholders 2. Although some marks will be available for remembering the questions in the model used. This might involve a consideration of the stakeholders involved in the decision and the effects on them. OWEN AND ADAMS These are 1. the majority of marks will be assigned for its application. When the model asks. In only the most clear-cut cases.This model can require more thought than when using the AAA model in some situations. Expedients . whether an option is ‘fair’ depends on whose perspective is being adopted. USING THESE MODELS In the exam you may be asked to assess a situation using one of these models. Owens and Adams SEVEN POSITIONS ALONG THE CONTINUUM: GRAY. exam answers should reflect that complexity. businesses need to be aware of the norms in society so that they can adapt to them. and competitiveness. dialogue. So. 4. and environmental responsibility is very large – much more so than merely adopting token policies Business should recognise and redresses the imbalances in society and provides benefits to stakeholders well beyond the owners of capital. and mercy (traditionally seen as feminine characteristics). equality. 7. assertiveness.Also believe in maximising shareholder wealth. fairness. power. Business is a concentrator of wealth in society and so the task of business. and even oppressing other classes of people. compassion. Socialists Those that see the actions of business as manipulating. domination. it will create a favourable image that will help in its overall strategic positioning 3. 5. a company might adopt an environmental policy or give money to charity if it believes that by so doing. social. hierarchy. Radical feminists Also seek a significant re‑adjustment in the ownership and structure of society. Deep ecologists The most extreme position. strongly believing that humans have no more intrinsic right to exist than any other species The world’s ecosystems of flora and fauna are so valuable and fragile that it is immoral for these to be damaged simply for the purpose of human economic growth. as was the case with Arthur Andersen after the collapse of Enron. If an organisation acts in a way that society finds unacceptable. Social ecologists Recognise that business has a social and environmental footprint and therefore bears some responsibility in minimising the footprint it creates. Proponents of social contract Businesses enjoy a licence to operate and that this licence is granted by society as long as the business acts deserving of that licence. the licence can be withdrawn by society. It would be better if society and business were based instead on connectedness. but recognise that some social responsibility may be necessary So. Social and Environment Issues . They argue that society and business are based on values that are usually considered masculine in nature such as aggression. An organisation might adopt socially responsible policies because it feels it has a responsibility to do so. 6. economic sustainability calls for using resources so that the business continues to function over a number of years. and to enable and protect social and environmental initiatives. and to the community where the business is located. which tend to be the product of more mature businesses. and likely to provide long-tem benefits. Environmental and Social Audits . Economic sustainability forces a company to look on the internal and external implications of sustainability management. This means that managing economic sustainability must consider: the financial performance of a company. its influence on the wider economy. how the company manages intangible assets. the employees. and how it influences and manages social and environmental impacts There is some consensus that sustainability is desirable for individual businesses to prevent the devastating and inefficient impacts of corporate premature death. In the case of a business operation. Economic sustainability can be seen as a tool to make sure the business does have a future and continues to contribute to the financial welfare of the owners. while consistently returning a profit. The idea is to promote usage of those resources that is both efficient and responsible.Economic Sustanability BENEFITS TO A RANGE OF STAKEHOLDERS Economic sustainability is the term used to identify various strategies that make it possible to utilise available resources to best advantage. and environmental benefits and limitations. to account for their impact on social and natural environments. though for example. or similar. economic. How. when it was argued that there was a moral case for businesses. Provides the process for environmental auditing Environmental audit This allows an organisation to produce an environmental report dealing with the concerns above This is generally voluntary It means organisations must start collecting appropriate data: agreed metrics (what should be measured and how) performance measured against those metrics and reporting on the levels of variance. in addition to reporting on their use of shareholders’ funds.Environmental and Social Audits The social and environmental accounting ‘movement’ began in the mid-1980s. could you attribute a cost to the loss of species habitat when building a new factory? The full cost. then. The same can be said with employees Social Audit A process that enables an organisation to assess and demonstrate its social. should include the cost to the environment. Also measures the extent to which an organisation achieves the shared values and objectives set out in its mission statement. Some consumers will not buy from companies with poor ethical reputations. . What has all this got to do with audit? Many investors now want to know about the organisation’s environmental footprint and represents risk in terms of reputational damage. quantitative or replacement terms. Entirely voluntary? Not always as stakeholder pressure may demand it Most large organisations collect a great deal of data. water. etc.The problem is though what to measure and how to measure it. A target may be set to reduce the footprint and a variance shown. Sustainability can be measured empirically or subjectively Environmental Footprint Measures a company’s resource consumption of inputs such as energy. Social and Environmental Issues Social and Environmental Issues Social and environmental issues in the conduct of business and of ethical behaviour Economic activity is only sustainable where its impact on society and the environment is also sustainable. Together. many have environmental and produce an annual environmental report. feedstock. AA1000. Measures resource consumption and pollution emissions in either qualitative. such as the data-gathering tools for the Global Reporting Initiative (GRI). but essentially there is no underpinning compulsion to any of it. these comprise the organisation’s environmental footprint. land use. Measures any harm to the environment brought about by pollution emissions. An organisation can use whatever it chooses Frameworks do exist. and the ISO 14000 collection of standards. Not all do this and so this makes voluntary adoption controversial . as long as the benefits that accrue from producing such a report exceeds the costs of producing it. from the local neighborhood to the entire planet.Sustainable development The development that meets the needs of the present without compromising the ability of future generations to meet their own needs. including environmental. Full cost accounting This means calculating the total cost of company activities. It is the long term maintenance of systems according to environmental. natural resources and waste emissions etc should be consumed at the same rate they can be renewed Sustainability affects every level of organisation. Learn more list Lauren Laverne on Ethical trade Nice article . The concept is also explained using the triple ‘P’ headings of ‘People. The contention is that a corporation that accommodates the pressures of all the three factors in its strategic investment decisions will enhance shareholder value. environmental (planet) and social (people) factors. Energy. economic and social considerations. with no one factor growing at the expense of the others. land use. Planet and Profit’ The principle of TBL reporting is that true performance should be measured in terms of a balance between economic (profits). economic and social costs TBL (Triple bottom line) accounting TBL accounting means expanding the normal financial reporting framework of a company to include environmental and social performance. Environmental Accounting Systems Environmental Accounting Systems EMAS EMAS compliance is based on ISO 14000 recognition – although many organisations comply with both standards EMAS focuses on the standard of reporting and auditing of that reported information. Many companies refer to the standards in their CSR reports ISO 14000 ISO 14000 focuses on internal systems although it also provides assurance to stakeholders of good environmental management. .