Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

Agency problems can be resolved proper corporate governance. Corporate governance lays emphasis on shareholders rights and enhancement of shareholder value. In many countries including Kenya, the concept of corporate governance has gained increasing prominence in recent times as evidenced the issue of corporate governance guidelines the Capital Markets Authority (CMA).

Required:
a) Explain the reasons motivating the increasing interest in corporate governance.
b) Identify the benefits of good corporate governance to shareholders.
(e) Write short notes on any five corporate governance guidelines issued the Capital Markets Authority (CMA) or similar authority in your country.
ANSWER
a) Driving forces/factors behind keen interest in corporate governance.
Increasing corporate fixtures e.g collapse of sugar factories, financial institutions, manufacturing concerns etc.
Increasing fraudulent and corrupt behaviour e.g money laundering bribery, abuse of corporate power etc. e.g golden berg scandal, bad debt crisis in the banking sector, fraudulent claims in insurance sector.
A growing demand stakeholders for transparency, accountability as the world embraces wider issues of democratisation and good governance. This has increased shareholders activism.
Powerful and dominant BOD that manipulates shareholders and other stakeholders of the firm. The BOD perceive most shareholders as illiterate to understand fully issues in the business sector.
Structures that demand academic and professional gratifications e.g some boards never demand basic qualifications of the board members. Shareholding and influencing are used as a benchmark to get a seat in the board.
The growth of multi-nationals and transnational firms.
The global governance revolution resulting from globalisation of firms and economic liberalisation. Separation of ownership from control.

b) Advantages of good corporate governance
Protection of investors rights.
Enhances corporate performance, capital formation and maximisation of shareholders wealth (promotes corporate growth).
Promotes standards of self regulation.
Greater investor‟s confidence and access to capital
Less risk of costly litigation and substantial compensation payouts. Efficient and responsible use of capital companies
Greater loyalty from customers and employees
Creates mechanism that selects, monitor and replaces the managers in a timely manner. Enhanced corporate image

c) Guidelines/principles of corporate governance as issued CMA
Audit committees – consisting of at least 3 independent non-executive directors who shall report to the board.
The committee has written terms of reference which deal clearly with its authority and duties Directors remuneration – their package should be competitive and comparable to similar firms so as to retain the best directors and to ensure decisions made are not affected inadequate

Supply of information – relevant, accurate and timely information should always be provided. Directors – the BOD should assume a primary role of fostering the long term business of the corporation consistent with their fiduciary responsibility to shareholders.
Board balance – the composition of the BOD should be as such that at least a 3rd of the members are non-executive directors.
Appointment to the board – a formal and transparent system of appointment should be in place. Re- election of directors – this should happen at least every 3 years and no director should be allowed to continue serving if this contribution has declined.
Remuneration committee – the BOD should appoint a remuneration committee consisting of independent non-executive directors with a mandate to recommend to the board the remuneration of the executive directors and structure of their compensation package.

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