CORPORATE GOVERNANCE & ETHICS - REVISION NOTES

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(a) The landscape of corporate governance and ethics is constantly evolving due to the emergence of new governance and ethics models.

Examine FIVE new models of corporate governance. (5 marks — 1 mark each)

1. Stakeholder Governance Model
   This model shifts focus from solely shareholder value to broader stakeholder interests, including employees, customers, suppliers, communities, and the environment. It promotes long-term sustainability over short-term profits.
2. ESG (Environmental, Social, and Governance) Model
   This model integrates environmental responsibility, social equity, and strong governance practices into corporate decision-making. Companies are held accountable not only for financial performance but also for their impact on society and the planet.
3. Integrated Governance Model
   This model combines risk management, compliance, sustainability, and corporate strategy under a unified governance framework, ensuring consistency and resilience in decision-making processes.
4. Technology-Driven Governance (Digital Governance)
   With the rise of AI, blockchain, and big data, this model incorporates digital tools into governance, enhancing transparency, automation, and stakeholder engagement while mitigating cyber risks.
5. Ethical Leadership Model
   This model emphasizes values-based leadership, where ethical conduct, integrity, and corporate social responsibility are central to governance structures, fostering trust and accountability throughout the organization.

(b) Board composition consists of a variety of elements that must be considered to create an effective board.

Evaluate FIVE of these elements. (10 marks — 2 marks each)

1. Board Independence
   Independent directors (non-executive) are critical for unbiased oversight. They help prevent conflicts of interest and ensure management is held accountable, contributing to objectivity in strategic decisions.
2. Diversity (Skills, Gender, Experience, Background)
   A diverse board brings varied perspectives, leading to better decision-making, innovation, and representation of different stakeholders. Diversity enhances the board's ability to understand complex markets and risks.
3. Size of the Board
   An optimal board size balances effectiveness and efficiency. Too small a board may lack necessary expertise, while too large a board can hinder quick decision-making and dilute accountability.
4. Board Expertise and Skills
   Directors must possess relevant industry knowledge, financial acumen, legal awareness, and governance experience to provide strategic guidance and risk oversight effectively.
5. Tenure and Succession Planning
   Effective boards plan for director rotation and leadership succession to ensure continuity and the infusion of fresh ideas. Limiting tenure can help maintain independence and prevent entrenchment.

 

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(a) Organisational integrity is fundamental to sustained success and ethical conduct.

With reference to governance frameworks, explain FIVE key factors that drive integrity within organisations. (5 marks — 1 mark each)

1. Ethical Leadership
   Leaders set the tone at the top; ethical behaviour by executives fosters a culture of integrity throughout the organisation.
2. Robust Code of Conduct
   Clear ethical guidelines help define acceptable behaviour and promote consistency in decision-making.
3. Accountability Mechanisms
   Strong internal controls, audits, and performance evaluations ensure individuals are held responsible for their actions.
4. Transparency and Disclosure
   Open communication about decisions, policies, and performance builds trust with stakeholders and discourages misconduct.
5. Whistleblower Protection Systems
   Safe channels for reporting unethical behaviour encourage integrity by exposing misconduct without fear of retaliation.

(b) The Constitution of Kenya (2010) provides a framework for governance and ethical conduct in public and private institutions.

Examine FIVE areas in which these constitutional provisions impact organisational governance. (5 marks — 1 mark each)

1. Leadership and Integrity (Chapter Six)
   Sets ethical standards for leaders, requiring honesty, accountability, and avoidance of conflicts of interest.
2. Bill of Rights (Chapter Four)
   Upholds human rights such as equality and non-discrimination, which organisations must respect in their operations.
3. Devolution and Public Participation
   Encourages citizen involvement in decision-making, increasing transparency and accountability in public institutions.
4. Separation of Powers and Checks and Balances
   Promotes independent oversight and control mechanisms that influence governance structures and reduce misuse of power.
5. Public Finance Management (Article 201)
   Enforces principles of transparency, accountability, and prudence in financial management, applicable to both public and private entities.

(c) The triple bottom line (TBL) approach extends organisational accountability beyond profit.

Describe FIVE benefits an organisation could derive from adopting this ESG framework. (5 marks — 1 mark each)

1. Enhanced Corporate Reputation
   Demonstrating commitment to social and environmental values builds public trust and brand loyalty.
2. Access to Sustainable Investment
   Investors increasingly favour ESG-compliant companies, improving access to capital and funding opportunities.
3. Improved Risk Management
   Identifying environmental and social risks early helps the organisation avoid legal, financial, and reputational damage.
4. Increased Employee Engagement and Retention
   Ethical and socially responsible organisations attract and retain talent who value purpose-driven work.
5. Market Competitiveness and Innovation
   Sustainable practices can lead to operational efficiencies, cost savings, and new business opportunities.

 

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(a) Performance evaluation tools are essential for monitoring individual and organisational success.

Outline FIVE benefits that arise from the use of such tools in governance and management. (5 marks — 1 mark each)

1.        Enhanced Accountability
Evaluation tools help hold individuals and departments accountable for performance against set targets.

2.        Informed Decision-Making
Data from performance reviews guides strategic and operational decisions, improving governance outcomes.

3.        Early Identification of Problems
Continuous monitoring helps detect underperformance or risks early, allowing timely interventions.

4.        Improved Resource Allocation
Evaluation results inform better allocation of resources toward high-performing or critical areas.

5.        Employee Motivation and Development
Clear performance metrics and feedback promote professional growth, goal alignment, and morale.

(b) Corporate Social Responsibility (CSR) reflects a company’s commitment to ethical and sustainable practices.

Evaluate FIVE challenges faced by organisations in implementation of CSR. (5 marks — 1 mark each)

1.        High Implementation Costs
CSR initiatives can require significant investment, especially in environmental or community programs.

2.        Lack of Clear CSR Strategy
Without a defined CSR framework, efforts can be fragmented, ineffective, or misaligned with core business goals.

3.        Stakeholder Skepticism
Some stakeholders may view CSR as superficial or as a marketing tactic, reducing its perceived authenticity.

4.        Balancing Profit and Social Goals
Organisations may struggle to align profit-making with social and environmental responsibilities.

5.        Measuring CSR Impact
It can be difficult to quantify the social or environmental outcomes of CSR activities, making assessment challenging.

(c) An effective board is vital for good governance and strategic oversight.

Explain FIVE core functions performed by a well-governed organisational board. (5 marks — 1 mark each)

1.        Strategic Direction and Oversight
The board sets the organisation’s long-term vision, mission, and strategic priorities.

2.        Risk Management and Compliance
It oversees the identification, monitoring, and mitigation of risks, and ensures compliance with laws and regulations.

3.        Performance Monitoring
The board regularly reviews organisational and executive performance against strategic goals.

4.        Policy Formulation
Boards establish governance policies, codes of conduct, and frameworks for ethical operations.

5.        Stakeholder Representation and Communication
The board ensures the organisation remains accountable to stakeholders and maintains transparent communication.

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(a) Assess FIVE potential drawbacks of adopting a fund-raising model of board governance. (5 marks — 1 mark each)

1. Limited Strategic Focus
   Boards may focus more on fundraising targets than on strategic governance or long-term sustainability.
2. Overreliance on Board Members for Funding
   This can place undue pressure on board members, leading to disengagement or resignation if they cannot meet expectations.
3. Lack of Diverse Expertise
   Emphasis on fundraising may result in recruiting board members primarily for their wealth or connections, rather than diverse skills or governance experience.
4. Conflict of Interest
   Board members involved in fundraising might promote donor interests over organisational mission or stakeholder needs.
5. Short-Termism
   A focus on immediate financial contributions can shift attention away from long-term impact, mission alignment, and sustainability.

(b) A social audit reveals an organisation’s social performance and impact.

Identify FIVE critical areas commonly examined in a social audit. (5 marks — 1 mark each)

1. Labour Practices and Employee Welfare
   Assesses working conditions, fair wages, health and safety, and employee rights.
2. Community Engagement and Development
   Evaluates the organisation’s contributions to local communities and social development initiatives.
3. Environmental Impact
   Reviews how operations affect the environment, including waste management, energy use, and carbon footprint.
4. Human Rights Compliance
   Examines adherence to human rights principles, including non-discrimination and freedom of association.
5. Corporate Governance and Ethics
   Assesses ethical conduct, transparency, accountability, and anti-corruption measures within the organisation.

(c) The Risk Appetite Framework (RAF) guides decision-making and risk tolerance.

Explain FIVE essential components that constitute an effective RAF in governance. (5 marks — 1 mark each)

1. Risk Appetite Statement
   Clearly defines the amount and type of risk the organisation is willing to accept in pursuit of its objectives.
2. Risk Tolerance Levels
   Specifies acceptable risk thresholds for various categories (e.g., financial, operational, reputational).
3. Governance and Oversight Structure
   Outlines the roles and responsibilities of the board, risk committees, and management in enforcing the framework.
4. Integration with Strategy and Decision-Making
   Ensures risk appetite is embedded into strategic planning, capital allocation, and key operational decisions.
5. Monitoring and Reporting Mechanisms
   Provides tools and processes to track adherence to risk appetite and report deviations or emerging risks.

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(a) Explain SIX governance challenges that family companies like company X are likely to face as they move beyond the first or second generation.

(6 marks — 1 mark each)

1. Succession Planning Difficulties
   Family firms often lack clear succession plans, leading to disputes or unprepared successors.
2. Conflict Between Family and Business Interests
   Personal relationships may interfere with objective business decisions, especially as more family members become involved.
3. Lack of Professionalisation
   Resistance to bringing in external expertise may hinder growth, especially beyond the founder's generation.
4. Informal Governance Structures
   Many family businesses operate without formal boards, policies, or governance frameworks, leading to inefficiencies.
5. Nepotism and Meritocracy Issues
   Appointing family members based on relation rather than merit can lower morale and reduce overall competence.
6. Ownership and Control Disputes
   As ownership is passed down, differing visions among family shareholders can lead to governance gridlock or legal disputes.

(b) Discuss FIVE poor governance practices at company X that affected the effectiveness of its Board.

(10 marks — 2 marks each)

1. Lack of Board Independence
   The board was dominated by family members, leading to biased decisions and a lack of objective oversight.
2. No Clear Separation of Roles
   Combining the roles of Chairperson and CEO in one individual limited checks and balances, concentrating too much power.
3. Infrequent Board Meetings
   Irregular board meetings reduced the board’s ability to monitor performance and respond to emerging issues effectively.
4. Poor Documentation and Record-Keeping
   Decisions were not properly minuted, and there was a lack of transparency in how resolutions were reached.
5. Failure to Establish Committees
   The absence of audit, risk, or remuneration committees weakened internal control and risk management functions.

(c) Examine SIX reasons why independent directors were important in the corporate governance of company X, being a family-owned business.

(12 marks — 2 marks each)

1. Objective Oversight
   Independent directors bring impartiality to board decisions, helping counteract potential family biases.
2. Conflict Resolution
   They can mediate internal family disputes by providing neutral perspectives focused on business outcomes.
3. Strategic Expertise
   Independent directors often have diverse industry experience, contributing valuable insights and external perspectives.
4. Strengthening Accountability
   They help hold management (including family executives) accountable, improving transparency and trust among stakeholders.
5. Enhancing Credibility with Investors
   Their presence reassures external investors or lenders that governance standards are being upheld.
6. Promoting Succession Planning
   Independent directors can support the development of fair and objective succession plans, avoiding favoritism.

(d) Analyse SIX good board governance practices that company X could adopt to improve corporate governance.

(12 marks — 2 marks each)

1. Board Composition and Independence
   Introduce a balanced board structure with at least one-third independent non-executive directors to improve objectivity.
2. Separation of CEO and Chair Roles
   Distinct roles enhance accountability and prevent concentration of power in one individual.
3. Establish Key Committees
   Set up audit, risk, nomination, and remuneration committees with clear mandates to enhance oversight and control.
4. Regular Board Evaluations
   Conduct periodic evaluations of board and director performance to identify weaknesses and areas for improvement.
5. Board Training and Development
   Provide continuous governance training for board members to ensure they remain competent and informed.
6. Formalised Policies and Procedures
   Implement governance policies (e.g. code of conduct, conflict of interest, whistleblower policy) to guide ethical and transparent operations.

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(a) Explain FIVE benefits of self-regulation in corporate governance.

(5 marks – 1 mark each)

1. Promotes Organisational Accountability
   Self-regulation encourages companies to take responsibility for their own actions, fostering internal discipline and ethical behaviour.
2. Enhances Flexibility and Innovation
   Organisations can design governance practices suited to their size, industry, and complexity without being constrained by rigid external rules.
3. Builds Stakeholder Trust
   Voluntary adherence to high standards signals integrity and transparency, strengthening relationships with investors, customers, and regulators.
4. Reduces Regulatory Burden
   Effective self-regulation may reduce the need for external interventions or audits, lowering compliance costs and bureaucratic delays.
5. Encourages a Culture of Ethics
   When governance is internally driven rather than externally imposed, it cultivates a values-based culture rather than mere rule-following.

(b) Analyse FIVE guidelines for remuneration of board members according to the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015.

(10 marks – 2 marks each)

1. Fairness and Competitiveness
   Remuneration should be sufficient to attract and retain competent board members, while remaining reasonable and in line with industry benchmarks.
2. Transparency
   The remuneration policy must be disclosed in the annual report, including details of fees, allowances, bonuses, and any other benefits received by directors.
3. Link to Performance
   Compensation for executive directors should be tied to performance targets that align with the company's strategic goals and shareholder interests.
4. Non-Executive Directors Not to Receive Performance Bonuses
   Non-executive directors should not be awarded bonuses or stock options, ensuring their independence and objectivity in board decisions.
5. Approval by Shareholders
   Remuneration policies should be subject to shareholder approval at the Annual General Meeting (AGM), enhancing accountability and stakeholder engagement.

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(a) Five Functions of an External Audit to an Organisation (5 marks)

1. Independent Assurance:
   Provides objective assurance that the financial statements are free from material misstatements, increasing stakeholder confidence.
2. Compliance Check:
   Ensures the organisation adheres to relevant laws, regulations, and accounting standards.
3. Fraud Detection and Prevention:
   Helps identify potential fraud, errors, or irregularities, and recommends controls to prevent future occurrences.
4. Improvement of Internal Controls:
   Reviews and assesses the effectiveness of internal control systems, suggesting improvements to enhance operational efficiency.
5. Credibility with Stakeholders:
   Enhances the organisation’s reputation by providing reliable financial information, useful to investors, lenders, and regulators.

(b) Five Ways to Make a Whistleblower Policy More Effective (10 marks)

1. Clear and Accessible Policy:
   The policy should be written in simple language, clearly outlining what constitutes whistleblowing, who to report to, and how to report concerns.
2. Confidentiality Assurance:
   Whistleblowers must be assured that their identity will be protected to the fullest extent possible to encourage reporting without fear of retaliation.
3. Anti-Retaliation Measures:
   Include strict provisions and enforcement against retaliation, ensuring that whistleblowers do not face dismissal, demotion, or harassment.
4. Multiple Reporting Channels:
   Provide various secure and anonymous channels (e.g. hotlines, third-party platforms, emails) for employees to report concerns safely and conveniently.
5. Training and Awareness:
   Regularly train staff on the policy’s existence, its importance, and how to use it, creating a culture of openness and ethical responsibility.

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(a) Five Differences Between the American and Japanese Models of Corporate Governance (5 marks)

Aspect	American Model	Japanese Model
1. Board Structure	One-tier board system with majority of independent directors.	Two-tier or hybrid board structure, with more insider representation.
2. Shareholder Orientation	Focuses on shareholder primacy — maximizing shareholder value.	Emphasizes stakeholder interests, including employees, suppliers, and communities.
3. Ownership Structure	Dispersed ownership — many shareholders with small stakes.	Concentrated ownership — often includes cross-shareholding among companies (keiretsu).
4. Role of Institutional Investors	Active institutional investors influence management decisions.	Institutional investor influence is limited; banks often play a central governance role.
5. Employment Practices	Flexible labor markets with frequent executive turnover.	Long-term employment and promotion from within (lifetime employment culture).

(b) Five Salient Features of a Consensus Board Model (10 marks)

1. Collective Decision-Making:
   Decisions are made through discussion and agreement among all board members, rather than majority voting. This encourages inclusive and balanced governance.
2. Equality Among Board Members:
   All directors, including executives and non-executives, are treated as equals in discussions, promoting mutual respect and cooperation.
3. Stakeholder-Oriented:
   The board considers the interests of a broad group of stakeholders (e.g. employees, suppliers, customers), not just shareholders.
4. Emphasis on Dialogue and Trust:
   Open communication and trust-building are key features, with a focus on reaching decisions that all members can support.
5. Long-Term Orientation:
   Strategies and decisions are typically geared toward long-term sustainability and growth, rather than short-term financial performance.

 

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(a) Five Contents of the Articles of Association of a Company (5 marks)

1.        Company’s Internal Rules and Procedures:
Defines how the company will be governed, including procedures for meetings, voting, and passing resolutions.

2.        Powers and Duties of Directors:
Outlines the roles, responsibilities, and authority of the board of directors in managing the company.

3.        Share Capital and Rights:
Details the types and classes of shares issued, rights attached to each class, and procedures for share transfers.

4.        Appointment and Removal of Directors:
Specifies how directors are appointed, removed, and replaced, including their tenure and qualifications.

5.        Dividend Distribution:
Provides guidelines for declaring and paying dividends to shareholders.

(b) Five Factors to Ensure Effectiveness of Codes of Ethics (5 marks)

1.        Top Management Commitment:
Senior leaders must lead by example and consistently uphold ethical standards to set the tone at the top.

2.        Clear and Practical Guidelines:
The code should be specific, easy to understand, and relevant to the organisation’s operations and challenges.

3.        Training and Communication:
Regular training and awareness programs ensure all employees understand and apply the code in their roles.

4.        Enforcement Mechanisms:
Establish disciplinary procedures for violations and a system for reporting unethical conduct, such as whistleblower channels.

5.        Regular Review and Updates:
The code should be periodically reviewed to reflect changes in laws, industry standards, and organisational values.

(c) Five Reasons Why Organisations Should Protect the Environment (5 marks)

1.        Legal Compliance:
Helps the organisation avoid penalties by adhering to environmental laws and regulations.

2.        Corporate Social Responsibility (CSR):
Demonstrates commitment to ethical and sustainable practices, improving reputation and public trust.

3.        Long-Term Sustainability:
Conserving natural resources ensures continued access to raw materials and energy for future operations.

4.        Competitive Advantage:
Environmentally responsible companies can attract eco-conscious customers and investors.

5.        Risk Management:
Reducing environmental impact lowers the risk of environmental disasters, legal liabilities, and reputational damage.

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