chapter 1 financial management and financial...

Premium Course Notes [Session 1 and 2]

ACCA F9Financial Management

Premium ClassSession 1 and 2

Patrick [email protected]

Prepared by Patrick Lui P. 1 Copyright @ Kaplan Financial 2015

AC

CA

Dec

201

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Dec

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Chapter 1 Financial Management and Financial Objectives

SYLLABUS

1. The nature and purpose of financial management(a) Explain the nature and purpose of financial management.(b) Explain the relationship between financial management and financial and

management accounting.2. Financial objectives and the relationship with corporate strategy

(a) Discuss the relationship between financial objectives, corporate objectives and corporate strategy.

(b) Identify and describe a variety of financial objectives, including:(i) shareholder wealth maximization(ii) profit maximization(iii) EPS growth

3. Stakeholders and impact on corporate objectives(a) Identify the range of stakeholders and their objectives(b) Discuss the possible conflict between stakeholder objectives(c) Discuss the role of management in meeting stakeholder objectives, including the

application of agency theory(d) Explain ways to encourage the achievement of stakeholder objectives, including:

(i) managerial reward schemes such as share options and performance-related pay

(ii) regulatory requirements such as corporate governance codes of best practice and stock exchange listing regulations

4. Financial and other objectives in not-for-profit organizations(a) Discuss the impact of not-for-profit status on financial and other objectives.(b) Discuss the nature and importance of value for money as an objective in not-for-

profit organizations.(c) Discuss ways of measuring the achievement of objectives in not-for-profit

organizations.



1. The Nature and Purpose of Financial Management

1.1 Key concepts

(a) Financial management – can be defined as the management of the finances of an organization in order to achieve the financial objectives of the organization. The usual assumption in financial management for the private sector is that the objective of the company is to maximize shareholders’ wealth.

(b) Financial management decisions cover investment decisions, financing decisions, and dividend decisions and risk management.

(c) Financial control – the control function of the financial manager becomes relevant for funding which has been raised. Are the various activities of the organization meeting its objectives? Are assets being used efficiently? To answer these questions, the financial manager may compare data on actual performance with forecast performance.

1.2 Investment decisions, financing decisions and dividend decisions (Jun 10)

(a) Investment decisions(i) The investment decision considers the benefits of investing cash, either

in projects or in working capital, or even in high yield deposit accounts.

(ii) This is important to shareholders, as it will determine the cash flows which are generated by the company and will ultimately affect the dividends paid and the share price.

(iii) Assessing projects can be difficult as large investments are often required which promise the possibility of returns over many years, making the cash flows hard to estimate.

(iv) Shareholders will also be concerned to compare the risk as well as the return between profits, as a higher risk investment should carry a higher return to compensate.

(b) Financing decisions(i) The financing decision considers the source of the finance required for

the business operations. This will be a mixture of equity and long-term debt finance.

(ii) Companies need to balance the benefits to their shareholders – debt is a cheaper form of finance as the returns required are lower (due to



lower risk) and the debt interest is tax allowable, but excessive gearing can increase the risk to the company, and hence the shareholders, dramatically.

(c) Dividend decisions(i) The dividend decision looks at how much of the surplus cash

generated should be paid out to the shareholders, and how much retained for future investments.

(ii) Shareholders generally prefer a predictable, steadily rising, dividend rather than one, which follows the fluctuations of the profits.

1.3 Examples of different types of investment decision:Decisions internal to the business enterprise

Whether to undertake new projects Whether to invest in new plant and machinery Research and development decisions Investment in a marketing or advertising campaign

Decision involving external parties

Whether to carry out a takeover or a merger involving another business

Whether to engage in a joint venture with another enterprise

Disinvestment decisions Whether to sell off unprofitable segments of the business

Whether to sell old or surplus plant and machinery The sale of subsidiary companies

1.4 The three decisions relationship under Miller and Modigliani (M&M) investigation:(Jun 10)

(a) In perfect capital market, the market value of a company and its weighted average cost of capital (WACC) were independent of its capital structure.

(b) Therefore, the market value depended on the business risk of the company and not on its financial risk.

(c) Investment decision determined the operating income of a company, so it was important in determining the market value.

(d) Financing decision, under M&M’s assumptions, was shown to be irrelevant in determining the market value.

(e) Dividend policy was also irrelevant to value of the share under the assumption of a perfect capital market.

(f) As a result, the investment decision was the most important factor for the



market value of the company and also the primary objective of maximization of shareholders wealth.

(g) In practice, capital markets are not perfect and a number of other factors affect the three decision areas.

(h) For example, pecking order theory suggests that managers do not in practice make financing decisions with the objective of obtaining an optimal capital structure, but on the basis of the convenience and relative cost of different sources of finance.

1.5 The statement of financial position and financial management:

Multiple Choice Questions

1. Which of the following is NOT one of the three main types of decision facing the financing manager in a company?

A Dividend decisionB Investment decisionC Economic decisionD Financing decision

2. Which of the following are the 3 key areas covered by financial management decisions?

1 Investment2 Cash flow3 Finance



4 Dividend

A 1, 2 and 3B 2, 3 and 4C 1, 3 and 4D 1, 2 and 4

3. Which of the following statements concerning financial management are correct?

1 It is concerned with investment decisions, financing decisions and dividend decisions

2 It is concerned with financial planning and financial control3 It considers the management of risk

A 1 and 2 onlyB 1 and 3 onlyC 2 and 3 onlyD 1, 2 and 3

(ACCA F9 Financial Management Pilot Paper 2014)

Question 1Discuss the relationship between investment decisions, dividend decisions and financing decisions in the context of financial management, illustrating your discussion with examples where appropriate. (8 marks)

(ACCA F9 Financial Management June 2010 Q4(c))



2. Financial Management, Management Accounting and Financial Accounting

2.1 Management accountingFinancial management is mainly concerned with making decisions for the long-term future of the company. It involves making forecasts for the future and needs much external information (e.g. knowledge of competitors). The purpose is to make decisions which end up achieving the objectives of the company.

Once the long term decisions have been made, they need to be implemented and controlled. This is management accounting.(a) Management accounting involves making short-term decisions as to how

to implement the long-term strategy and involves the setting up of a control system in order to measure how well objectives are being achieved in order that corrections may be made if necessary.

(b) It tends to be short-term, and involves both past information and forecasts for the future.

2.2 Financial accounting(a) Financial accounting is the reporting to stakeholders – primarily

shareholders – of how the company has performed and therefore effectively how well the financial manager and management accountant are doing their jobs.

(b) The financial accountant is fulfilling a legal requirement to report the profits, and it is not their role to look for ways of performing better – that is the job of the financial manager.

(c) The financial accountant is only looking at past information and information internal to the company.


4. Which of the following statements are correct?

1. Financial management is concerned with the long-term raising of finance and the allocation and control of resources.

2. Management accounting is concerned with providing information for the more day-to-day functions of control and decision making

3. Financial accounting is concerned with providing information about the



historical results of past plans and decisions


5. The following statements relate to various functions within a business.

1. The financial management function makes decisions relating to finance2. Financial accounts are used as a future planning tool.

Are the statements true or false?

A Both statements are trueB Both statements are falseC Statement 1 is true and statement 2 is falseD Statement 2 is true and statement 1 is false.

6. Which of the following statements are true?

1 Cash flow forecasting is primarily the responsibility of Financial Reporting2 Whether to undertake a particular new project is a Financial Management

decision

A Both statements are trueB Both statements are falseC Statement 1 is true and statement 2 is falseD Statement 2 is true and statement 1 is false

7. The following statements relate to various functions within a business.

1 The financial management function makes decisions relating to finance2 Management accounts incorporate non-monetary measures

Are the statements true or false?



A Statement 1 is true and statement 2 is falseB Both statements are trueC Statement 1 is false and statement 2 is trueD Both statements are false

3. Financial Objectives and Organizational Strategy

3.1 Organizational strategy

3.1.1 The financial manager needs to decide on strategies for the raising of finance, for the investment of capital, and for the management of working capital. However, before he can decide on these strategies he needs to identify what the objectives of the company are.

3.1.2 The following diagram is the key to understanding how financial management fits into overall business strategy.

3.1.3 The distinction between 'commercial' and 'financial' objectives is to emphasise that not all objectives can be expressed in financial terms and that some objectives derive from commercial marketplace considerations.



Question 2The following list contains some commercial objectives/targets, some financial objectives/targets and some strategies, all at different levels of the business. Identify which is which.1. Implement a Just-In-Time (JIT) inventory system.2. Increase earnings per share (EPS) by 5% on prior year.3. Acquire a rival in a share-for-share purchase.4. Buy four new cutting machines for $250,000 each.5. Achieve returns of 15% on new manufacturing investment.6. Improve the ratio of current assets to current liabilities from 1.7 to 1.85.



7. Reduce unsold inventory items by 12%.8. Update manufacturing capacity to incorporate new technology.9. Improve brand awareness within the UK.

Commercial objectives

Financial objectives

Strategies

Corporate levelBusiness levelOperational level

3.2 Financial Objectives(Jun 13)

3.2.1 Shareholder Wealth Maximization

(a) Most companies are owned by shareholders and originally set up to make money for those shareholders. The primary objective of most companies is thus to maximise shareholder wealth. This could involve increasing the share price and/or dividend payout.

(b) Shareholder wealth maximisation is a fundamental principle of financial management. You should seek to understand the different aspects of the syllabus (e.g. finance, dividend policy, investment appraisal) within this unifying theme.

(c) Many other objectives are also suggested for companies including:(i) profit maximization(ii) growth(iii) market share(iv) social responsibilities

3.2.2 Maximising and satisficingOne problem for the financial manager is to satisfy the objectives of several stakeholders at the same time. For example, reducing wages might increase profits and might satisfy shareholders, but would be unlikely to satisfy employees. Therefore, in practice a distinction must be made between maximising and satisficing.(a) Maximising – seeking the best possible outcome (b) Satisficing – finding a merely adequate outcome.




8. In relation to the financial management of a company, which of the following provides the best definition of a firm’s primary financial objective?

A To achieve long-term growth in earningsB To maximize the level of annual dividendsC To maximize the wealth of its ordinary shareholdersD To maximize the level of annual profits

9. Financial management focuses on financial objectives. Which of the following are financial objectives?

1 Maximisation of market share2 Improving brand awareness3 Sales revenue growth4 Achieving a target level of customer satisfaction5 Achieving a target level of ROCE

A 1 and 4 onlyB 3 and 5 onlyC 2, 3 and 5 onlyD 1, 2, 3 and 4 only

10. Which of the following is an example of a financial objective that a company might choose to pursue?

A Provision of good wages and salariesB Dealing honestly and fairly with customers on all occasionsC Producing environmentally friendly productsD Restricting the level of gearing to below a specified target level



11. Which of the following actions is LEAST likely to increase shareholder wealth?

A The average cost of capital is decreased by a recent financing decisionB The financial rewards of directors are linked to increasing earnings per shareC The board of directors decides to invest in a project with a positive net present

valueD The annual report declares full compliance with the corporate governance code



1 Maximising market share is an example of a financial objective2 Shareholder wealth maximization is the primary financial objective for a

company listed on a stock exchange3 Financial objectives should be quantitative so that their achievement can be

measured


(ACCA F9 Financial Management December 2014)

13. Which of the following statements is correct?

A One of the problems with maximizing accounting profit as a financial objective is that accounting profit can be manipulated

B A target for a minimum level of dividend cover is a target for a minimum dividend payout ratio

C The welfare of employees is a financial objectiveD One reason shareholders are interested in earnings per share is that accounting

profit takes account of risk(ACCA F9 Financial Management June 2015)



Question 3Identify TWO financial objectives of a listed company such as HDW Co and discuss how each of these financial objectives is supported by the planned investment in new machinery.

(6 marks)(ACCA F9 Financial Management June 2013 Q1(c))

4. Objectives in Not-for-profit Organizations (Dec 11)

4.1 Not-for-profit (NFP) organizations include organizations such as charities, state health service and police force, where they are not run to make profits, but to provide a benefit.

4.2 NFP organisations seek to provide services to the public and this requires cash income. Maximising net cash income is therefore a key financial objective for NFP organisations as well as listed companies. A large charity seeks to raise as much funds as possible in order to achieve its charitable objectives, which are non-financial in nature.

4.3 Both listed companies and NFP organisations need to control the use of cash within a given financial period, and both types of organisations therefore use budgets. Another key financial objective for both organisations is therefore to keep spending within budget.

4.4 Although good financial management of these organizations is important, it is not possible to have financial objectives of the same form as for companies. The focus therefore for these organizations is on value for money, i.e. attempting to get the maximum benefits for the least cost.

4.5 Value for money can be defined as getting the best possible combination of services from the least resources, which means maximising the benefits for the lowest possible cost.

4.6 This is usually accepted as requiring the application of economy, effectiveness and efficiency.

4.7 Economy is attaining the appropriate quantity and quality of inputs at lowest cost to achieve a certain level of outputs.



For example, the economy with which a school purchases equipment can be measured by comparing actual costs with budgets, with costs in previous years, with government/ local authority guidelines or with amounts spent by other schools.

4.8 Effectiveness is the extent to which declared objectives/goals are met.For example, the effectiveness of a school's objective to produce quality teaching could be measured by the proportion of students going on to higher or further education.

4.9 Efficiency is the relationship between inputs and outputs.For example, the efficiency with which a school's IT laboratory is used might be measured in terms of the proportion of the school week for which it is used.


14. Which of the following is most appropriate as an objective of a not-for-profit organisation?

A To achieve long term growth in earningsB To maximise shareholder wealthC To make efficient use of resourcesD To minimise input costs

15. Value for money is an important objective for not-for-profit organizations

Which of the following actions is consistent with increasing value for money?

A Using a cheaper source of goods and thereby decreasing the quality of non-for-profit organization services

B Searching for easy to diversify the finances of the not-for-profit organizationC Decreasing waste in the provision of a service by the not-for-profit organizationD Focusing on meeting the financial objectives of the not-for-profit organization

16. Value for money is an important objective for not-for-profit organisations.

Which action is LEAST consistent with increasing value for money?



A Using a cheaper source of goods without decreasing the quality of not-for-profit organisation services

B Searching for ways to diversify the finances of the not-for-profit organisationC Decreasing waste in the provision of a service by the not-for-profit organisationD Focusing on meeting the objectives of the not-for-profit organization


17. In the context of managing performance in 'not for profit' organisations, which of the following definitions is incorrect?

A Value for money means providing a service in a way which is economical, efficient and effective

B Economy means doing things cheaply: not spending $2 when the same thing can be bought for $1

C Efficiency means doing things quickly: minimising the amount of time that is spent on a given activity

D Effectiveness means doing the right things: spending funds so as to achieve the organisation's objectives

18. A school decides to have larger classes and examination results suffer as a result. In terms of the ‘value for money’ framework, which one of the following statements is true?

A Economy has increased but efficiency has decreasedB Efficiency has increased but effectiveness has decreasedC Economy has increased but effectiveness has decreasedD Economy has increased, but efficiency and effectiveness have decreased

19. A government body uses measures based upon the ‘three Es’ to the measure value for money generated by a publicly funded hospital. It considers the most important performance measure to be ‘cost per successfully treated patient’.

Which of the three E’s best describes the above measure?

A EconomyB Effectiveness



C EfficiencyD Externality

20. In not-for-profit businesses and state-run entities, a value-for-money audit can be used to measure performance. It covers three key areas: economy, efficiency and effectiveness. Which of the following could be used to describe effectiveness in this context?

A Avoiding waste of inputsB Achieving agreed targetsC Achieving a given level of profitD Obtaining suitable quality inputs at the lowest price

21. Which of the following is an ‘efficiency’ target that a not-for-profit organization might put in place?

A Negotiation of bulk discountsB Pay rates for staff of appropriate levels of qualificationC Staff utilizationD Customer satisfaction ratings

Question 4Compare and contrast the financial objectives of a stock exchange listed company such as Bar Co and the financial objectives of a not-for-profit organisation such as a large charity.

(11 marks)(ACCA F9 Financial Management December 2011 4(d))



5. Stakeholders

5.1 Although the theoretical objective of a private sector company might be to maximize the wealth of its owners, other individuals and groups have an interest in what a company does and they might be able to influence its corporate objectives. Anyone with an interest in the activities or performance of a company are ‘stakeholders’ because they have a stake or interest in what happens.

5.2 It is usual to group stakeholders into categories, with each category having its own interests and concerns. The main categories of stakeholder group in a company are usually the following.

Stakeholders ObjectivesConnected:1. Shareholders Shareholders are the providers of the risk capital of a

company. Usually their goal will be to maximize the wealth

which they have as a result of the ownership of the shares in the company.

2. Trade payables Trade payables will generally be profit-maximising firms themselves and have the objective of being paid the full amount due by the date agreed.

On the other hand, they usually wish to ensure that they continue their trading relationship with the firm and may sometimes be prepared to accept later payment to avoid jeopardizing that relationship.

3. Lenders Lenders, which will often be banks, have the objective of receiving payments of interest and capital on the loan by the due date for the payments.

4. Customers Satisfaction of customer needs will be achieved through the provision of value-for-money products and services.

Internal:5. Employees Employees will usually want to maximize their rewards

paid to them in salaries and benefits. Most employees will also want continuity of

employment.6. Management Management has, like other employees, the objective of

maximizing its own rewards.



External:7. Government Government has objectives which can be formulated in

political terms. Government policies will often be related to

macroeconomic objectives such as sustained economic growth and high levels of employment.

8. Society as a whole This is a particularly important group for public sector enterprises and will have, particular, environmental expectations from private sector or regulated organizations, such as organic foods, safe trains and cleaner petrol.

5.3 The influence of the various stakeholders results in many firms adopting non-financial objectives in addition to financial ones. For example,(a) Maintaining a contented workforce(b) Showing respect for the environment(c) Providing a top quality service to customers


22. Stakeholders can be classified as internal, connected or external. Which of the following is an external stakeholder?

A ShareholdersB CustomersC BankersD Government

Question 5 – Stakeholders’ interestPrivate sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

Identify five stakeholder groups and briefly discuss their financial and other objectives.(12 marks)



6. Agency Problem(Dec 08, Jun 12)

6.1 Nature of agency problem

(a) The agency problem arises because:(i) the objectives of managers differ from those of shareholders;(ii) there is a divorce or separation of ownership from control in modern

companies; and(iii) there is an asymmetry of information between shareholders and

managers which prevents shareholders being aware of most managerial decisions.

(b) The primary financial management objective of a company is usually taken to be the maximisation of shareholder wealth. In practice, the managers of a company acting as agents for the principals (the shareholders) may act in ways which do not lead to shareholder wealth maximisation. The failure of managers to maximise shareholder wealth is referred to as the agency problem.

6.2 Agency conflicts are differences in the interest of a company’s owners and managers. They arise in several ways.(a) Moral hazard – A manager has an interest in receiving benefits from his or

her position as a manager. These include all the benefits that come from status, such as a company car, use of a company airplane, lunches, and so on.

(b) Effort level – Managers may work less hard than they would if they were the owners of the company. The problem will exist in a large company at middle levels of management as well as senior management level.

(c) Earnings retention – The remuneration of directors and senior managers is often related to the size of the company, rather than its profits. Management are more likely to want to re-invest profits in order to make the company bigger, rather than payout the profits as dividends.

(d) Risk aversion – Executive directors and senior managers usually earn most of their income from the company they work for. They are therefore interested in the stability of the company, because this will protect their job and their future income. This means that management might be risk-averse, and reluctant to invest in higher-risk projects.

(e) Time horizon – Shareholders concern about the long-term financial



prospects of their company, because the value of their shares depends on expectations for the long-term future. In contrast, managers might only be interested in the short-term. This is partly because they might receive annual bonuses based on short-term performance, and partly because they might not expect to be with the company for more than a few years.

6.3 Ways to reduce the agency problem in order to achieve the objective of maximization of shareholder wealth (Dec 08, Dec 13)

(a) Devising a remuneration package – it can be encouraged to increase or maximize shareholder wealth by managerial reward schemes such as performance-related pay and share option schemes. Through these methods, the goals of shareholders and directors may increase in congruence.

Performance-related pay links part of the remuneration of directors to some aspect of corporate performance, such as levels of profit or EPS. However, it may have the shortcoming of focus on short-term performance while neglecting the longer term.

Share option schemes bring the goals of shareholders and directors closer together to the extent that directors become shareholders themselves. Share options encourage directors to make decisions which exert an upward pressure on share prices.

Unfortunately, a general increase in share prices can lead to directors being rewarded for poor performance, while a general decrease in share prices can lead to managers not being rewarded for good performance. However, share option schemes can lead to a culture of performance improvement and so can bring continuing benefit to stakeholders.

(b) Regulatory requirements can be imposed through corporate governance codes of best practice and stock market listing regulations.

Corporate governance codes of best practice, such as UK Corporate Governance Code, seek to reduce corporate risk and increase corporate accountability. Responsibility is placed on directors to identify, assess and manage risk within an organization. An independent perspective is brought to directors’ decisions by appointing non-executive directors to



create a balanced board of directors, and by appointing non-executive directors to remuneration committees and audit committees.

Stock exchange listing regulations can place obligations on directors to manage companies in ways which support the achievement of objectives such as the maximization of shareholder wealth. For example, listing regulations may require companies to publish financial reports, to provide detailed information on directorial rewards and to publish detailed reports on corporate governance and corporate social responsibility.

6.4 Why small and medium-sized entities (SMEs) might experience less conflict between the objectives of shareholders and directors than large listed companies.

(Jun 12)(a) In many cases shareholders are not different from directors, for example in

a family-owned company. Where that is the case, there is no separation between ownership and control, there is no difference between the objectives of shareholders and directors, and there is no asymmetry of information. Conflict between the objectives of shareholders and directors will therefore not arise.

(b) The shares of SMEs are often owned by a small number of shareholders, who may be in regular contact with the company and its directors. In these circumstances, the possibility of conflict is very much reduced.


23. The agency problem is a driving force behind the growing importance attached to sound corporate governance.

In this context, the ‘agents’ are the:

A CustomersB ShareholdersC ManagersD Auditors



24. Which of the following is a problem associated with managerial reward schemes?

A By rewarding performance, an effective scheme creates an organisation focused on continuous improvement

B Schemes based on shares can motivate employees/managers to act in the long-term interests of the company

C Self-interested performance may be encouraged at the expense of team workD Effective schemes attract and keep the employees valuable to an organisation

25. Which of the following are typical criticisms of executive share option schemes (ESOPs)?

1. When directors exercise their options, they tend to sell the shares almost immediately to cash in on their profits.

2. If the share price falls when options have been awarded, and the options have no value, they cannot act as an incentive.

3. Directors may distort reported profits to protect the share price and the value of their share options.

A 1 onlyB 1 and 3 onlyC 2 and 3 onlyD 1, 2 and 3


(1) Share option schemes always reward good performance by managers(2) Performance-related pay can encourage dysfunctional behavior(3) Value for money as an objective in not-for-profit organizations requires the

pursuit of economy, efficiency and effectiveness

A 1 and 2 onlyB 1 and 3 onlyC 2 and 3 only



D 1, 2 and 3(ACCA F9 Financial Management June 2015)

Question 6At a recent board meeting of Dartig Co, a non-executive director suggested that the company’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non-executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline.

Required:

Explain the nature of the agency problem and discuss the use of share option schemes as a way of reducing the agency problem in a stock-market listed company such as Dartig Co.

(8 marks)(ACCA F9 Financial Management December 2008 Q1(e))

Question 7Discuss the reasons why small and medium-sized entities (SMEs) might experience less conflict between the objectives of shareholders and directors than large listed companies.

(4 marks)(ACCA F9 Financial Management June 2012 Q3(a))

Question 8Explain ways in which the directors of Darn Co can be encouraged to achieve the objective of maximization of shareholder wealth. (6 marks)

(ACCA F9 Financial Management December 2013 Q1(c))

7. Regulatory Requirements

7.1 Corporate governance

7.1.1 Corporate governance is the set of processes, customs, policies, laws, and institutions concerning the way a corporation (or company) is directed, administered or controlled. Corporate governance deals with the relationships



among the stakeholders involved and the goals for which the corporation is governed.7.1.2 There are a number of key elements in corporate governance:

(a) The management and reduction of risk is a fundamental issue in all definitions of good governance; whether explicitly stated or merely implied.

(b) The notion that overall performance enhanced by good organisational structures and management practice within set best practice guidelines underpins most definitions.

(c) Good governance provides a framework for an organisation to pursue its strategy in an ethical and effective way from the perspective of all stakeholder groups affected, and offers safeguards against misuse of resources, physical or intellectual.

(d) Good governance is not just about externally established codes, it also requires a willingness to apply the spirit as well as the letter of the law.

(e) Accountability is generally a major theme in all governance frameworks.7.1.3 Corporate governance codes of good practice generally cover the following areas:

(a) The board should be responsible for taking major policy and strategic decisions.

(b) Directors should have a mix of skills and their performance should be assessed regularly.

(c) Appointments should be conducted by formal procedures administered by a nomination committee (or selection committee).

(d) Division of responsibilities at the head of an organisation is most simply achieved by separating the roles of chairman and chief executive.

(e) Independent non-executive directors have a key role in governance. Their number and status should mean that their views carry significant weight.

(f) Directors' remuneration should be set by a remuneration committee consisting of independent non-executive directors.

(g) Remuneration should be dependent upon organisation and individual performance.

(h) Accounts should disclose remuneration policy and (in detail) the packages of individual directors.

(i) Boards should regularly review risk management and internal control, and carry out a wider review annually, the results of which should be disclosed in the accounts.

(j) Audit committees of independent non-executive directors should liaise with external auditors, supervise internal audit, and review the annual accounts and internal controls.

(k) The board should maintain a regular dialogue with shareholders,



particularly institutional shareholders. The annual general meeting is a significant forum for communication.

(l) Annual reports must convey a fair and balanced view of the organisation. This might include whether the organisation has complied with governance regulations and codes, and give specific disclosures about the board, internal control reviews, going concern status and relations with stakeholders.

7.2 Stock exchange listing regulations

7.2.1 A stock exchange employs rules and regulations to ensure that the stock market operates fairly and efficiently for all parties involved.


27. The director/shareholder conflict has been addressed by the requirements of a number of corporate governance codes.

Which of the following is NOT true?

A At least 60% of the members of the board, excluding the chairman, should be independent non-executive directors

B All directors should submit themselves for re-election at least every three yearsC There should be clear disclosure of director’s emolumentsD Non-executive directors should not hold share option in their company

28. The main purpose of corporate governance is:

A To separate ownership and management control of organizationsB To maximize shareholder valueC To facilitate effective management of organizations and to make organizations

more visibly accountable to a wider range of stakeholdersD To ensure that regulatory frameworks are adhered to

29. Which of the following does NOT form part of the objectives of a corporate governance best practice framework?

A Separation of chairperson and CEO roles



B Establishment of audit, nomination and remuneration committeesC Minimisation of riskD Employment of non-executive directors

30. The combined code states that all directors should be required to submit themselves for re-selection:

A AnnuallyB At least every two yearsC At least every three yearsD At least every four years

31. The Combined Code states that each listed company should provide, within its annual report and accounts, a corporate governance report that includes:

1. A brief report of the remuneration committee and its composition.2. A statement on relations and dialogue with investors.

Which of the following combinations is correct with regard to the above statements?

Statement 1 Statement 2A True TrueB True FalseC False TrueD False False

32. A variety of Corporate Governance rules have been introduced in different countries but the principles, common to all, typically include

1 The chairman and chief executive officer should not be the same individual2 Non-executive directors on the board should prevent the board from being

dominated by the executive directors3 The audit committee should consist solely of executive directors4 A remuneration committee should be established to decide on the remuneration

of executive directors



A 1 and 2 onlyB 1, 2 and 3 onlyC 1, 2 and 4 onlyD 1, 2, 3 and 4

33. Which of the following is LEAST likely to fall within financial management?

A The dividend payment to shareholders is increasedB Funds are raised to finance an investment projectC Surplus assets are sold offD Non-executive directors are appointed to the remuneration committee

(ACCA F9 Financial Management December 2014)


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