Readings
Week 1: Introduction to CG, CG internal mechanisms
Gray et al. (2019). Corporate Governance. In: The Audit Process (see core readings), chapter 5.
Chapter 5: Corporate Governance Summary
Organisations need effective corporate governance to minimise risk. Risks include financial
risk and operating risk. Good corporate governance can help to protect the interests of
stakeholders such as employees, suppliers, customers, society in general, shareholders, and
other providers of finance.
The UK Corporate Governance Code (the Code) provides guidance for effective corporate
governance, particularly for corporate entities controlled by directors acting as agents for
shareholders and providers of capital. The Code outlines 5 principles and provisions for
boards of directors regarding:
o Leadership
o Effectiveness
o Accountability
o Remuneration
o Relations with shareholders
The "comply or explain" principle is central to the UK Corporate Governance Code. It means
that companies are not strictly required to adhere to every provision of the Code. Instead,
they can either:
Comply: Follow the specific guidelines and recommendations laid out in the Code for good
corporate governance.
Explain: If they choose not to comply with certain provisions, they must provide a clear,
transparent explanation as to why they have deviated from the Code’s recommendations in
annual reports.
This approach allows for flexibility, recognizing that not all companies will fit neatly into a
one-size-fits-all governance model. Businesses may have legitimate reasons to depart from
certain provisions, such as their size, complexity, industry, or specific corporate structure.
Audit committees, typically composed of independent non-executive directors, are vital for
corporate governance. They help ensure the effectiveness of internal control, risk
management systems, and the internal and external audit functions.
The UK Stewardship Code encourages institutional investors to actively hold boards
accountable and engage in "purposeful dialogue" with companies. This dialogue aims to
influence strategy, governance, culture, and remuneration policies within the company.
The Financial Reporting Council (FRC) published Internal Control: Guidance for Directors to
assist companies in establishing robust internal control systems.
Recent developments in corporate governance aim to increase transparency and
accountability, particularly regarding executive pay and promoting board diversity.
,Garvey, M. L. (2016) The governance of strategic risk-taking. In: Andersen, The Routledge Companion
to Strategic Risk Management (see core readings), chapter 2.
Garvey focuses on the board's role in governing corporate strategic risk-taking, particularly
emphasizing value creation for the firm and its shareholders.
Corporate governance, in this context, is viewed through a financial economics lens,
concerning itself with the mechanisms ensuring a fair return on investment for debt holders
and shareholders.
While various definitions exist, Garvey emphasizes the perspective that prioritizes value
creation and assesses it through risk-adjusted cash flows.
The chapter acknowledges the lack of a universally accepted definition for both "risk" and
"corporate governance".
It relies on the financial perspective, defining risk as the standard deviation from a variable's
expected value, essentially viewing it as the variability of returns.
Board Responsibilities and Risk Appetite
The chapter emphasizes the board's role in crafting risk appetite statements (articulate the
types and levels of risk a firm is willing to accept), however she notes the limited availability
of exemplary models and the evolving nature of this practice.
It summarizes discussions on risk appetite from various organizations like the Institute of Risk
Management (IRM), Society of Actuaries in Ireland (SAI), Committee of Sponsoring
Organizations of the Treadway Commission (COSO), Casualty Actuarial Society (CAS), and the
Financial Stability Board (FSB) to shed light on developing practices.
The chapter also provides insights into risk committee practices, outlining what constitutes
'good' and 'best' practices in areas such as:
o Committee creation and documentation - formal establishment of the committee,
its mandate, and documentation of its activities.
o Composition and structure - ideal makeup/diversity of the committee,
o Meeting frequency and documentation - importance of maintaining records of
discussions and decisions.
o Reporting and evaluation - how its effectiveness is assessed
o Responsibilities, particularly within the financial services industry.
,McGahan 2020 WHERE DOES AN ORGANIZATION’S RESPONSIBILITY END?
The article uses the case of big tobacco companies to illustrate the difficulties in defining the
boundaries of an organization's responsibility to its stakeholders.
-example of the tobacco industry’s historical failure to disclose the dangers of smoking to highlight
the complexities of defining the boundaries of corporate responsibility to stakeholders.
McGahan argues that existing theoretical frameworks for stakeholder analysis, particularly the
team production theory (suggests that the primary goal of corporate law should be to maximize the
welfare of all stakeholders, not just shareholders), are insufficient in defining these boundaries.
The article identifies five critical areas for future research that need to be addressed to improve our
understanding of corporate responsibility.
These areas include:
1) a deeper understanding of uncertainty and its role in determining responsibility,
2) a re-evaluation of the team production model to account for situations where stakeholders are
not fully informed, coerced, or excluded,
3) an acknowledgement of stakeholder diversity and the implications for their capacity to make
claims on corporations,
4) a more robust exploration of alternative governance models for stakeholder engagement and
collaboration, and
5) a more nuanced understanding of what constitutes cocreated value*. The article concludes by
emphasising the urgency of tackling this question, arguing that failing to do so could lead to more
instances of corporate irresponsibility with disastrous consequences for society.
The research method used in the article is a critical analysis of existing literature on stakeholder
theory, using the case of the tobacco industry as an illustrative example.
One limitation of the paper is that it does not offer concrete solutions or definitive criteria for
determining stakeholder inclusion or exclusion. Instead, it highlights the need for further research
on the complexities of stakeholder relationships and the boundaries of corporate responsibility.
*co-created value: business strategy that involves customers and organizations working together to
create a product or service that has more value
Lego's "Idea" platform: Customers can post their own design ideas for new playsets, and the designs
that get the most votes are considered for production.
, Week 2 - Corporate governance: Regulation
Tricker, B. (2019). "The regulatory framework". In: Corporate Governance. Principles, poilcies, and
practices (core reading), chapter 5
Regulatory Framework for Corporate Governance: A Global Perspective
This chapter focuses on the regulatory environment surrounding corporate governance, comparing
and contrasting different regulatory approaches and highlighting the increasing role of corporate
governance codes worldwide.
UK: The chapter begins by tracing the evolution of corporate governance regulation in the
UK, starting with the Cadbury Report (1992). This landmark report, commissioned in
response to corporate failures, advocated a "comply or explain" approach. This principle-
based model encourages companies to adhere to a code of best practices or provide
explanations for deviations. Subsequent reports, including the Greenbury Report, Hampel
Report, Myners Report, Higgs Report, Tyson Report, and Walker Guidelines, further refined
corporate governance expectations. The chapter also highlights the UK Corporate
Governance Code (2018), emphasizing board engagement with the workforce, corporate
culture, succession planning, diversity, and stakeholder relationships.
USA: In contrast to the UK's principles-based approach, the USA employs a more stringent,
rules-based system rooted in legislation and legal precedents. The chapter examines key
regulations like the Sarbanes-Oxley Act of 2002 (SOX), enacted to prevent accounting fraud
and financial misconduct. It mandates stricter financial reporting, internal controls, and
increased accountability for corporate leaders. The chapter also touches upon the Dodd-
Frank Wall Street Reform and Consumer Protection Act (2010), designed to address systemic
risks in the financial system.
Other Countries/International: The chapter provides a global perspective, noting that most
economically significant countries have implemented corporate governance codes since the
1990s. It briefly examines regulatory frameworks in various countries, including France,
Germany, Japan, and South Africa. These examples underscore the growing international
trend towards formalized corporate governance standards, although specific
implementations vary across jurisdictions.
Beyond national regulations, the chapter acknowledges the role of international organizations in
shaping corporate governance practices. The Organisation for Economic Co-operation and
Development (OECD) published its Principles of Corporate Governance in 1999, promoting
transparency, accountability, and responsible board conduct. The chapter observes that while
inspired by Western models, countries like China have adapted corporate governance to suit their
unique economic and political systems.
The chapter concludes by highlighting the increasing importance of compliance and corporate
governance reports as tools for transparency and accountability. The debate between principles-
based and rules-based approaches remains a key point of discussion, with no clear consensus on
the optimal model. The chapter suggests that the future of corporate governance will likely involve
greater emphasis on stakeholder engagement, integrated reporting, and adapting to a rapidly
evolving business landscape.
Limitations
Limited Depth on Specific Regulations: While it mentions key regulations and codes, it
doesn't offer in-depth analyses of their implementation challenges or unintended
consequences e.g. for SOX in the USA and the UK Corporate Governance Code.
Western Bias: The chapter primarily focuses on corporate governance developments in
Western economies like the UK and the USA. While it acknowledges the growing prevalence
of corporate governance codes globally, it dedicates less attention to alternative models or
Week 1: Introduction to CG, CG internal mechanisms
Gray et al. (2019). Corporate Governance. In: The Audit Process (see core readings), chapter 5.
Chapter 5: Corporate Governance Summary
Organisations need effective corporate governance to minimise risk. Risks include financial
risk and operating risk. Good corporate governance can help to protect the interests of
stakeholders such as employees, suppliers, customers, society in general, shareholders, and
other providers of finance.
The UK Corporate Governance Code (the Code) provides guidance for effective corporate
governance, particularly for corporate entities controlled by directors acting as agents for
shareholders and providers of capital. The Code outlines 5 principles and provisions for
boards of directors regarding:
o Leadership
o Effectiveness
o Accountability
o Remuneration
o Relations with shareholders
The "comply or explain" principle is central to the UK Corporate Governance Code. It means
that companies are not strictly required to adhere to every provision of the Code. Instead,
they can either:
Comply: Follow the specific guidelines and recommendations laid out in the Code for good
corporate governance.
Explain: If they choose not to comply with certain provisions, they must provide a clear,
transparent explanation as to why they have deviated from the Code’s recommendations in
annual reports.
This approach allows for flexibility, recognizing that not all companies will fit neatly into a
one-size-fits-all governance model. Businesses may have legitimate reasons to depart from
certain provisions, such as their size, complexity, industry, or specific corporate structure.
Audit committees, typically composed of independent non-executive directors, are vital for
corporate governance. They help ensure the effectiveness of internal control, risk
management systems, and the internal and external audit functions.
The UK Stewardship Code encourages institutional investors to actively hold boards
accountable and engage in "purposeful dialogue" with companies. This dialogue aims to
influence strategy, governance, culture, and remuneration policies within the company.
The Financial Reporting Council (FRC) published Internal Control: Guidance for Directors to
assist companies in establishing robust internal control systems.
Recent developments in corporate governance aim to increase transparency and
accountability, particularly regarding executive pay and promoting board diversity.
,Garvey, M. L. (2016) The governance of strategic risk-taking. In: Andersen, The Routledge Companion
to Strategic Risk Management (see core readings), chapter 2.
Garvey focuses on the board's role in governing corporate strategic risk-taking, particularly
emphasizing value creation for the firm and its shareholders.
Corporate governance, in this context, is viewed through a financial economics lens,
concerning itself with the mechanisms ensuring a fair return on investment for debt holders
and shareholders.
While various definitions exist, Garvey emphasizes the perspective that prioritizes value
creation and assesses it through risk-adjusted cash flows.
The chapter acknowledges the lack of a universally accepted definition for both "risk" and
"corporate governance".
It relies on the financial perspective, defining risk as the standard deviation from a variable's
expected value, essentially viewing it as the variability of returns.
Board Responsibilities and Risk Appetite
The chapter emphasizes the board's role in crafting risk appetite statements (articulate the
types and levels of risk a firm is willing to accept), however she notes the limited availability
of exemplary models and the evolving nature of this practice.
It summarizes discussions on risk appetite from various organizations like the Institute of Risk
Management (IRM), Society of Actuaries in Ireland (SAI), Committee of Sponsoring
Organizations of the Treadway Commission (COSO), Casualty Actuarial Society (CAS), and the
Financial Stability Board (FSB) to shed light on developing practices.
The chapter also provides insights into risk committee practices, outlining what constitutes
'good' and 'best' practices in areas such as:
o Committee creation and documentation - formal establishment of the committee,
its mandate, and documentation of its activities.
o Composition and structure - ideal makeup/diversity of the committee,
o Meeting frequency and documentation - importance of maintaining records of
discussions and decisions.
o Reporting and evaluation - how its effectiveness is assessed
o Responsibilities, particularly within the financial services industry.
,McGahan 2020 WHERE DOES AN ORGANIZATION’S RESPONSIBILITY END?
The article uses the case of big tobacco companies to illustrate the difficulties in defining the
boundaries of an organization's responsibility to its stakeholders.
-example of the tobacco industry’s historical failure to disclose the dangers of smoking to highlight
the complexities of defining the boundaries of corporate responsibility to stakeholders.
McGahan argues that existing theoretical frameworks for stakeholder analysis, particularly the
team production theory (suggests that the primary goal of corporate law should be to maximize the
welfare of all stakeholders, not just shareholders), are insufficient in defining these boundaries.
The article identifies five critical areas for future research that need to be addressed to improve our
understanding of corporate responsibility.
These areas include:
1) a deeper understanding of uncertainty and its role in determining responsibility,
2) a re-evaluation of the team production model to account for situations where stakeholders are
not fully informed, coerced, or excluded,
3) an acknowledgement of stakeholder diversity and the implications for their capacity to make
claims on corporations,
4) a more robust exploration of alternative governance models for stakeholder engagement and
collaboration, and
5) a more nuanced understanding of what constitutes cocreated value*. The article concludes by
emphasising the urgency of tackling this question, arguing that failing to do so could lead to more
instances of corporate irresponsibility with disastrous consequences for society.
The research method used in the article is a critical analysis of existing literature on stakeholder
theory, using the case of the tobacco industry as an illustrative example.
One limitation of the paper is that it does not offer concrete solutions or definitive criteria for
determining stakeholder inclusion or exclusion. Instead, it highlights the need for further research
on the complexities of stakeholder relationships and the boundaries of corporate responsibility.
*co-created value: business strategy that involves customers and organizations working together to
create a product or service that has more value
Lego's "Idea" platform: Customers can post their own design ideas for new playsets, and the designs
that get the most votes are considered for production.
, Week 2 - Corporate governance: Regulation
Tricker, B. (2019). "The regulatory framework". In: Corporate Governance. Principles, poilcies, and
practices (core reading), chapter 5
Regulatory Framework for Corporate Governance: A Global Perspective
This chapter focuses on the regulatory environment surrounding corporate governance, comparing
and contrasting different regulatory approaches and highlighting the increasing role of corporate
governance codes worldwide.
UK: The chapter begins by tracing the evolution of corporate governance regulation in the
UK, starting with the Cadbury Report (1992). This landmark report, commissioned in
response to corporate failures, advocated a "comply or explain" approach. This principle-
based model encourages companies to adhere to a code of best practices or provide
explanations for deviations. Subsequent reports, including the Greenbury Report, Hampel
Report, Myners Report, Higgs Report, Tyson Report, and Walker Guidelines, further refined
corporate governance expectations. The chapter also highlights the UK Corporate
Governance Code (2018), emphasizing board engagement with the workforce, corporate
culture, succession planning, diversity, and stakeholder relationships.
USA: In contrast to the UK's principles-based approach, the USA employs a more stringent,
rules-based system rooted in legislation and legal precedents. The chapter examines key
regulations like the Sarbanes-Oxley Act of 2002 (SOX), enacted to prevent accounting fraud
and financial misconduct. It mandates stricter financial reporting, internal controls, and
increased accountability for corporate leaders. The chapter also touches upon the Dodd-
Frank Wall Street Reform and Consumer Protection Act (2010), designed to address systemic
risks in the financial system.
Other Countries/International: The chapter provides a global perspective, noting that most
economically significant countries have implemented corporate governance codes since the
1990s. It briefly examines regulatory frameworks in various countries, including France,
Germany, Japan, and South Africa. These examples underscore the growing international
trend towards formalized corporate governance standards, although specific
implementations vary across jurisdictions.
Beyond national regulations, the chapter acknowledges the role of international organizations in
shaping corporate governance practices. The Organisation for Economic Co-operation and
Development (OECD) published its Principles of Corporate Governance in 1999, promoting
transparency, accountability, and responsible board conduct. The chapter observes that while
inspired by Western models, countries like China have adapted corporate governance to suit their
unique economic and political systems.
The chapter concludes by highlighting the increasing importance of compliance and corporate
governance reports as tools for transparency and accountability. The debate between principles-
based and rules-based approaches remains a key point of discussion, with no clear consensus on
the optimal model. The chapter suggests that the future of corporate governance will likely involve
greater emphasis on stakeholder engagement, integrated reporting, and adapting to a rapidly
evolving business landscape.
Limitations
Limited Depth on Specific Regulations: While it mentions key regulations and codes, it
doesn't offer in-depth analyses of their implementation challenges or unintended
consequences e.g. for SOX in the USA and the UK Corporate Governance Code.
Western Bias: The chapter primarily focuses on corporate governance developments in
Western economies like the UK and the USA. While it acknowledges the growing prevalence
of corporate governance codes globally, it dedicates less attention to alternative models or
