Corporate Governance – Final Revision Pack
Dear Students,
This document combines structured exam guidance and detailed concept explanations. It
includes summary notes prepared by your instructor and clear examples for better
understanding. Please use this to revise both theoretical concepts and real-world
applications in preparation for your final exam.
Cadbury Report (1992)
Focus: Internal governance, board responsibility, financial transparency.
Key Term: 'Comply or explain' approach – companies must follow governance codes or
explain why they don’t.
Study Tip: Know why internal control was emphasized and how the UK approach promotes
flexibility.
Comply or Explain vs. Comply or Else
• 'Comply or Explain' (UK model): flexible, transparent, board explains non-compliance.
• 'Comply or Else' (US model): mandatory compliance, penalties (e.g., SOX).
Study Tip: Understand enforcement differences and policy implications.
Sarbanes-Oxley Act (SOX, 2002)
• US regulation after corporate scandals (Enron, WorldCom).
• CEO/CFO must certify financial reports.
• Audit committees must be independent.
Study Tip: Know key provisions and which corporate failures triggered the Act.
CRAFTED Principles
C – Consistency
R – Responsibility
A – Accountability
F – Fairness
T – Transparency
E – Effectiveness
D – Discipline
Tip: Be ready to match each principle to practical behaviors or violations.
Committees
• Audit Committee: monitors financial reporting.
• Compensation Committee: determines executive pay.
Tip: Learn responsibilities associated with each board structure.
King I (1994) vs. King II (2002)
King I: Focused on ethics and traditional governance.
King II: Introduced sustainability, triple bottom line (People, Planet, Profit).
Tip: Understand the evolution in values and stakeholder inclusion.
Detailed Concept Explanations & Commentary
Lecture Note Explanation (for students):
Notes: Cadbury Report
In the early 1990s, several financial scandals in the UK raised concerns about how
companies were being controlled and directed. In response, the Cadbury Report was
published in 1992 under the leadership of Sir Adrian Cadbury. The report focused on
improving standards of corporate governance, especially how companies are managed
internally, how responsibilities are divided between company boards and executives, and
how financial reporting and accountability should be handled. It emphasized internal
control mechanisms, transparency, and the role of company boards.
Notes: There are two major approaches to enforcing corporate governance rules:
"Comply or explain" is a flexible approach. Companies are expected to follow governance
codes, but if they do not, they must provide a reasonable explanation. This approach trusts
the market and stakeholders to evaluate the explanation. It is commonly used in the UK and
EU.
"Comply or else" is a strict, rules-based approach. Companies must comply, and if they
don’t, they face legal or financial penalties. This method is more common in the US and
focuses on strong regulatory enforcement.
The main difference lies in enforcement: "comply or explain" allows for transparency and
flexibility, while "comply or else" emphasizes mandatory compliance and punishment.
The main difference lies in enforcement. The 'comply or explain' approach gives companies
some freedom: they are encouraged to follow the rules, but if they don’t, they can continue
operating as long as they provide a clear and reasonable explanation. This method
promotes transparency and trusts the market and stakeholders to judge the company’s
behavior.
On the other hand, the 'comply or else' approach is much stricter. Companies must follow
the rules, and if they fail to do so, they face serious consequences—such as legal penalties or
financial sanctions. There is no room for explanations. This method focuses on control and
punishment to ensure compliance.
note3 The board of directors of a company usually includes two types of members: inside
and outside directors.
Inside directors are people who already work for the company in managerial roles. For
example, the CEO or CFO can be inside members of the board. They are involved in the daily
operations of the business.
Outside directors (also called non-executive directors) do not have a managerial role in the
company. They are more independent and provide oversight from an external perspective.
So, inside members are part of the company’s management, while outside members are not.
4. Corporate governance is the framework that defines how companies are directed and
controlled. It involves the responsibilities of the board of directors in supervising
management and ensuring that the company is being run in the best interests of
shareholders and stakeholders.
A proper governance system is designed to enhance transparency, encourage ethical
behavior, and increase stakeholder trust. It ensures that decisions are made openly, that
financial information is clear and accessible, and that all stakeholders (such as
shareholders, employees, and regulators) are properly informed.
Key principles include accountability, transparency, fairness, and responsibility.
In short, it’s about how decisions are made at the top level and who answers for them.
Transparency is one of the key pillars of good governance.
→ This means that organizations must act openly and honestly. They should share accurate
information about decisions, finances, and risks.
It helps prevent corruption, fraud, and abuse of power.
→ When companies are transparent, it is harder for managers to hide unethical actions.
People inside and outside the company (like shareholders and regulators) can see what is
happening.
So, transparency protects the organization from dishonesty and builds trust with all
stakeholders.
Remember:
Good governance = Openness + Honesty + Accountability
To understand what makes governance truly effective and ethical, we can look at the
CRAFTED principles — a modern framework that summarizes the essential values every
organization should follow.
What does CRAFTED stand for?
Let’s break it down:
C – Consistency:
Actions and decisions should be stable and aligned over time — not random or
opportunistic.
R – Responsibility:
Every person in a leadership position should be aware of their duties and act accordingly.
A – Accountability:
Leaders must be answerable for the results of their decisions — to the board, to
shareholders, and to society.
F – Fairness:
Decisions must be just, inclusive, and respectful of all stakeholders — not just the powerful
ones.
T – Transparency:
Information should be clear and open — no hiding behind technicalities or selective
disclosure.
E – Effectiveness:
Governance isn’t just about rules — it’s about getting real, positive results and protecting
the company’s long-term interests.
D – Discipline:
Strong governance means following procedures and sticking to ethical standards — even
when no one is watching.
CRAFTED promotes a governance culture, not just a structure.
It’s about building trust, stability, and integrity inside the organization.
In the CRAFTED framework of corporate governance, each principle corresponds to a vital
ethical and managerial value. Transparency (T) requires that information—especially
related to financial risks—is shared clearly and completely with stakeholders. Because all
stakeholders must be given equal access to information (Fairness), and selective disclosure
violates the principle of transparency (Transparency)."
Fairness (F) emphasizes merit-based decisions in processes such as promotions, ensuring
equal opportunity and just treatment. Accountability (A) is reflected in stakeholder
engagement and the ability of stakeholders to question decisions, which enhances
managerial responsibility. Consistency (C) involves the regular review of board decisions to
maintain alignment with long-term goals and strategic coherence. Effectiveness (E) focuses
on achieving real, measurable outcomes from governance policies, beyond just formal
compliance. Discipline (D) requires strict adherence to ethical standards and procedures by
all, including top executives—no one is above the rules. Finally, Responsibility (R)
highlights the obligation of leaders to act consciously in accordance with the organization’s
values and ethical expectations. These principles are not isolated rules, but interrelated
foundations for building trust, stability, and integrity within any organization.
Comparison Table: King I vs. King II Reports
This table compares the key differences between the King I and King II reports on corporate
governance, focusing on their evolution in principles, scope, and values.
Dear students,
As we approach the final exam, it's important to understand how corporate governance
thinking has evolved over time. One of the best examples of this shift is the difference
between the King I and King II reports. This table provides a side-by-side comparison to
help you clearly see how the principles expanded from a narrow focus on profit to a broader
view that includes social and environmental responsibility.
Please study each row carefully and think about how these changes reflect the core values
of good governance today—especially the idea that businesses should not only create
wealth, but also contribute to society and sustainability.
In summary, King I focused mainly on traditional governance and profitability, while King II
introduced the idea of the 'triple bottom line'—that is, measuring success not just by profit,
but also by a company's impact on people and the planet. This shift laid the foundation for
modern corporate governance models that emphasize ethics, transparency, and
sustainability. Make sure you're familiar with these distinctions, as they reflect broader
global trends and will help you understand more advanced governance frameworks.
Key Aspects of Corporate Governance:
Board oversight of executive actions
Accountability of managers to shareholders
Transparency in financial reporting
Fairness to all stakeholders (employees, investors, customers, etc.)
Responsibility in strategic and ethical decisions
Why Is Corporate Governance Important for a Company?
Builds Trust: It strengthens investor and public confidence.
Reduces Risk: Good governance prevents fraud, corruption, and mismanagement.
Improves Performance: Companies with strong governance often make better strategic
decisions.
Ensures Accountability: Managers and directors are held responsible for their actions.
Attracts Investment: Investors are more likely to fund companies with transparent and
responsible management.
Please make sure you know the names, duties, and responsibilities of each committee for
the final exam. Avoid mixing them up.
Compensation Committee
The Compensation Committee is a specialized subcommittee of a company’s board of
directors. It plays a crucial role in shaping how top executives are rewarded.
Main Responsibilities of the Compensation Committee:
Determining Executive Pay:
The committee decides the base salaries, performance bonuses, stock options, and other
benefits (such as car allowances or housing support) for the CEO and other senior
executives.
Performance-Based Compensation:
They link pay to performance by setting measurable targets. For example, if the CEO
increases company profits or shareholder value, they may receive a performance bonus.
Approval of Executive Contracts:
They review and approve employment agreements, severance packages, and retirement
plans for top management.
Ensuring Fairness and Competitiveness:
The committee ensures that executive pay is competitive in the market, fair within the
company, and aligned with shareholder interests.
Compliance and Transparency:
The committee must ensure that all compensation decisions follow legal regulations and are
properly disclosed in financial statements and annual reports.
Why It Matters:
Executive compensation directly affects motivation, accountability, and public trust. A well-
functioning compensation committee prevents excessive pay or misaligned incentives that
could harm the company in the long run.
Audit Committee – Roles and Responsibilities
The Audit Committee is a key subcommittee of the board of directors. Its main role is to
monitor and oversee the company’s financial reporting and internal control systems.
Main Responsibilities:
Overseeing Financial Reporting:
Ensures that financial statements are accurate, complete, and comply with legal and
regulatory standards.
Reviews quarterly and annual reports before they are published.
Monitoring Internal Controls:
Evaluates the effectiveness of internal control systems that prevent errors, fraud, or
misreporting.
Liaising with External Auditors:
Selects and communicates with external audit firms.
Reviews and discusses the audit findings with auditors.
Ensuring Compliance:
Checks whether the company follows accounting standards and financial laws.
Helps detect and prevent unethical or illegal behavior.
Risk Management Support (sometimes):
In some companies, the audit committee also oversees risk-related financial matters.
Comparison of "Comply or Else" vs. "Comply or Explain" Approaches in Corporate
Governance
In corporate governance, there are two main regulatory approaches: “Comply or Else” and
“Comply or Explain.” These two differ significantly in philosophy, enforcement, and
flexibility.
Comply or Else
Mandatory enforcement: Companies must follow the rules set by regulatory authorities.
No flexibility: Firms do not have the option to justify non-compliance.
Sanctions: Failure to comply results in legal or financial penalties, such as fines or lawsuits.
Typical in the U.S.: This approach is commonly associated with strict U.S. regulations, such
as the Sarbanes-Oxley Act (2002), which enforces ethical and financial transparency
standards with severe consequences for violations.
Comply or Explain
Principle-based: Companies are expected to follow governance codes, but they may choose
not to, as long as they publicly explain why in their annual reports.
Greater flexibility: Allows for different business models or contexts. The assumption is that
stakeholders (e.g., investors) will evaluate whether the explanation is reasonable.
Soft enforcement: No direct legal penalties for non-compliance, but reputational risks may
occur.
Common in the UK and EU: This model underpins codes like the UK Corporate Governance
Code, where transparency and accountability are prioritized over punishment.
Summary Table
Important:
There’s one very important governance principle you need to understand for the exam:
In good governance, the roles of the CEO and the Chairperson of the Board should not be
held by the same person.”
Why?
“Because the board is responsible for overseeing the CEO.
If the same person is both the boss and the overseer, then who is checking the boss?
That’s a clear conflict of interest.
It weakens board independence, and that’s dangerous for accountability.”
“Merging the CEO and Chairperson roles compromises (undermines) the independence of
the board.
You’ll need to remember that logic.”
