PDF: Hello and welcome to the ACCA-SBL: Strategic Business Leader PDF on Governance

Scope and Approaches! In this chapter, you will learn about the role and influence
of institutional investors in governance systems, compare rules versus principles-
based approaches to governance, and discuss different models of organizational
ownership that influence governance regimes.

Example questions:
1. What are the key differences between rules-based and principles-based approaches
to governance?
2. How do institutional investors influence governance systems and structures?
3. Can you provide examples of different models of organizational ownership and how
they impact governance practices?

Me: What are the key differences between rules-based and principles-based
approaches to governance?

PDF: The key differences between rules-based and principles-based approaches to

governance are as follows:

Rules-Based Approach:
1. Specific Requirements: A rules-based approach involves specific, detailed, and
prescriptive regulations and requirements that must be followed.
2. Clarity and Certainty: It provides clarity and certainty as it leaves little
room for interpretation.
3. Compliance Focus: Emphasizes strict compliance with the established rules and
regulations.
4. Rigidity: Can be rigid and may not easily accommodate unique or evolving
situations.
5. Enforcement: Non-compliance typically leads to penalties or sanctions.

Principles-Based Approach:
1. Broad Principles: A principles-based approach involves broad, overarching
principles and guidelines that provide a framework for decision-making.
2. Flexibility: It allows for flexibility and judgment in applying the principles
to specific situations.
3. Ethical Focus: Emphasizes ethical behavior and the spirit of the principles
rather than just strict adherence to specific rules.
4. Adaptability: Can adapt to changing business environments and circumstances.
5. Interpretation: Requires judgment and interpretation, which can lead to varying
interpretations and potential challenges in enforcement.

It's important to note that both approaches have their advantages and
disadvantages, and the appropriateness of each approach depends on the specific
context and regulatory environment,.

Me: How do institutional investors influence governance systems and structures?

PDF: Institutional investors exert significant influence on governance systems and

structures in several ways:

1. Shareholder Activism: Institutional investors, due to their substantial

shareholdings, can engage in shareholder activism by voting at company meetings,
engaging in one-on-one discussions with management, and submitting resolutions at
shareholders' meetings. They can also escalate their actions, such as holding
additional meetings with management or making public statements, to address
concerns,.

2. Stewardship and Accountability: Institutional investors promote management

accountability and provide stewardship to improve returns to shareholders. They
actively pursue boards of organizations to follow effective corporate governance,
ensuring that the longer-term interests of the organization and shareholder
interests are prioritized over the interests of managers.

3. Monitoring and Expertise: Institutional investors monitor the health of

organizations in which they have interests and provide reliable information to
investors. They leverage their expertise and knowledge acquired from engagements
with other companies to promote good corporate governance and ensure financial and
operational efficiencies,.

4. Compliance and Reporting: Institutional investors play a role in promoting

compliance with corporate governance codes and national policies. They also report
on their stewardship and voting activities, contributing to transparency and
accountability in governance practices,.

5. Influence on Board Decisions: Institutional investors can influence board

decisions related to strategic positioning, performance, executive decisions,
remuneration policy, internal controls, board composition, and corporate social
responsibility. They seek to ensure that boards comply with effective corporate
governance and prioritize the longer-term interests of the organization,.

Overall, institutional investors play a crucial role in promoting good corporate

governance, enhancing transparency, and advocating for the long-term interests of
the organization and its shareholders,,.

Me: Can you provide examples of different models of organizational ownership and
how they impact governance practices?

PDF: Certainly! Different models of organizational ownership can significantly

impact governance practices. Here are some examples:

1. Family-Owned Businesses:
- Little Separation of Ownership and Control: In family-owned businesses, there
may be little separation between ownership and control, leading to potential
governance challenges.
- Informal Governance Structure: Governance practices in family-owned businesses
may be more informal, with decision-making often influenced by family dynamics.
- Succession Issues: Challenges related to succession planning and leadership
transitions are common in family-owned businesses, impacting governance continuity
and stability.

2. Joint Stock Company-Based Models:

- Separation of Ownership and Control: In joint stock companies, there is a
clear separation of ownership and control, leading to a different governance
dynamic compared to family-owned businesses.
- Formal Governance Structures: Governance practices in joint stock companies
are often more formalized, with established board structures, committees, and
governance processes.
- Emphasis on Shareholder Rights: Governance practices in joint stock companies
often prioritize protecting shareholder rights and ensuring transparency in
decision-making.

3. State-Owned Enterprises:
- Government Influence: State-owned enterprises are directly influenced by
government policies and objectives, impacting governance practices.
- Public Accountability: Governance practices in state-owned enterprises often
emphasize public accountability and adherence to government regulations and
priorities.
4. Publicly Traded Corporations:
- Shareholder Activism: Governance practices in publicly traded corporations are
influenced by the presence of diverse shareholders and potential for shareholder
activism.
- Regulatory Compliance: Publicly traded corporations are subject to extensive
regulatory requirements, impacting governance practices related to financial
reporting, disclosure, and compliance.

Each model of organizational ownership brings its own set of governance challenges
and opportunities, and governance practices must be tailored to the specific
ownership structure and context to ensure effective oversight and decision-making.

Me: Explain sarbanes oxley act

PDF: The Sarbanes-Oxley Act (SOX) is a US federal law passed in 2002 in response to
corporate accounting scandals, such as Enron and WorldCom, that shook investor
confidence in financial reporting. The law was named after its sponsors, Senator
Paul Sarbanes and Representative Michael Oxley.

The Sarbanes-Oxley Act aims to improve corporate governance and financial reporting
by public companies. It introduced new or enhanced requirements for public
companies and accounting firms, including:

1. Internal Controls: Public companies must establish and maintain internal

controls over financial reporting to ensure the accuracy and completeness of
financial statements.

2. Audit Committees: Public companies must have an independent audit committee

composed of outside directors to oversee the financial reporting process and the
work of auditors.

3. Auditor Independence: Auditors are prohibited from providing certain non-audit

services to their audit clients to ensure their independence.

4. CEO and CFO Certification: The CEO and CFO of public companies must certify the
accuracy of financial statements and disclosures.

5. Whistleblower Protection: The law provides protection for whistleblowers who

report accounting fraud or other violations of securities laws.

6. Increased Disclosures: Public companies must disclose more information about

their financial condition, including off-balance sheet transactions and related
party transactions.

The Sarbanes-Oxley Act has been criticized for its onerous documentation and
internal control costs, reduced flexibility and adaptability by companies, and
limited impact on stopping corporate abuse. However, it has also been credited with
improving the accuracy and reliability of financial reporting and restoring
investor confidence in the US capital markets.

Me: Explain icgn governance principles

PDF: The International Corporate Governance Network (ICGN) Global Governance

Principles provide a framework for effective corporate governance practices. The
principles are designed to be applicable to companies of all sizes and sectors, and
they are intended to promote long-term value creation, accountability,
transparency, and ethical behavior.

The ICGN Global Governance Principles consist of seven principles:

1. Board Role and Responsibilities: The board of directors should act in the best
long-term interests of the company with good faith, care, and diligence, for the
benefit of shareholders, while having regard to relevant stakeholders, including
creditors.

2. Leadership and Independence: Board leadership should be clear and balanced, with
an integrity of process to protect the interests of minority investors and promote
the success of the company as a whole.

3. Composition and Appointment: The board should have a sufficient mix of directors
with relevant knowledge, independence, competence, industry experience, and
diversity of perspectives to generate effective challenge, discussion, and
objective decision-making.

4. Corporate Culture: The board should adopt high standards of business ethics,
ensuring that its vision, mission, and objectives are sound and demonstrative of
its values. Codes of ethical conduct should be effectively communicated and
integrated into the company’s strategy and operations, including risk management
systems and remuneration structures.

5. Risk Oversight: The board should proactively oversee, review, and approve the
approach to risk management regularly or with any significant business change and
satisfy itself that the approach is functioning effectively.

6. Remuneration: Remuneration should be designed to effectively align the interests

of the CEO and executive officers with those of the company and its shareholders to
help ensure long-term performance and sustainable value creation. The board should
also ensure that aggregate remuneration is appropriately balanced with the needs to
pay dividends to shareholders and retain capital for future investment.

7. Reporting and Audit: Boards should oversee timely and high-quality company
disclosures for investors and other stakeholders relating to financial statements,
strategic and operational performance, corporate governance, and material
environmental and social factors. A robust audit practice is critical for necessary
quality standards.

The ICGN Global Governance Principles provide a comprehensive framework for

effective corporate governance practices, emphasizing the importance of long-term
value creation, accountability, transparency, and ethical behavior.

Me: Core principles of corporate governance

PDF: The core principles of corporate governance are a set of fundamental concepts
that guide effective governance practices. These principles are designed to promote
transparency, accountability, fairness, and responsibility in corporate decision-
making. Here are the core principles of corporate governance:

1. Accountability: Corporate governance requires clear lines of accountability and

responsibility for decision-making, performance, and outcomes.

2. Transparency: Corporate governance requires transparency in decision-making,

disclosure of information, and communication with stakeholders.

3. Fairness: Corporate governance requires fairness in the treatment of all

stakeholders, including shareholders, employees, customers, suppliers, and the
community.

4. Responsibility: Corporate governance requires responsible decision-making that

takes into account the long-term interests of the company and its stakeholders,
including environmental and social considerations.

5. Independence: Corporate governance requires independent oversight and decision-

making, particularly in relation to the board of directors and audit committees.

6. Leadership: Corporate governance requires effective leadership that sets the

tone for ethical behavior, promotes a culture of integrity, and ensures that the
company's values and objectives are aligned with the interests of its stakeholders.

7. Performance: Corporate governance requires a focus on performance, including the

establishment of clear goals and objectives, the measurement of performance against
those goals, and the implementation of strategies to improve performance.

These core principles of corporate governance provide a framework for effective

governance practices that promote transparency, accountability, fairness, and
responsibility in corporate decision-making.