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Corporate Governance Notes

Management and Organizational Behavious (Institute of Business Administration)

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Corporate Governance: Principles, Policies, and Practices

Chapter 1: NOTES:

Corporate Governance

1. Corporate governance defined P4


Corporate governance is about the exercise of power over
corporate entities it covers activities of the board and its
relationship with the stakeholders or members and with those
managing the enterprise as well as the external auditors
regulators and other legitimate stakeholders.
2. Attributes of a limited liability P6
company The key concept of a joint stock, limited liability, separate from
the owners, as many of the legal property rights of a real
person – to contract, to sue and be sued, to own property and
to employ. The company has a life of its own, giving continuity
beyond the life of its founders could transfer their shares in the
company. Crucially, the owner’s liability for the company’s debts
is limited to their equity investment.
3. Basis of corporate power P6
Ownership is the basis of power over the joint stock, limited
liability company
4. Berle and means (1932) study P8
Berle and means (1932) draw attention to the growing
separation of power between the executive management of
major public companies in their increasingly diverse and
remote shareholders.
5. UK Bullock committee report P 9-10
(1977) The Bullock report – the report of the committee of enquiry on
industrial democracy (1977) – proposed a continuation of the
unitary board, but with worker representative directors
6. Proposal from Corporate report P 10
(1975) from the UK accounting The corporate report (1975) call for all economic entities to
standards committee report publicly and to accept accountability to all those whose
interests were affected by the director’s decisions.
7. Name some corporate collapses P11
in the 1980s that led to the first In Australia, Alan Bond, Laurie Connell of Rothwells, and the
studies of corporate governance Girvan Corporation.
In Japan, Nomura securities and the recruit Corporation.
In the United States, Ivan Bowesky, Michael Levine, and
Michael Milken of Drexal, Burnham, and Lambert.
In the United Kingdom, the Guinness cases and Robert
Maxwell’s companies
8. What was the first official report on P12
corporate governance and why The first report on corporate governance in 1992 came from Sir
was it commissioned what were Adrian Cadbury in the United Kingdom and was on the financial
the major recommendations of the aspects of corporate governance. The committee he chaired
Caddy report was set up in response to various company collapses. The
report called for:
 wider use of independent outside, non-executive
directors;
 audit committees as a bridge between board and
external auditor;
 separation of the roles of chairman of the board and
Chief Executive.

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Corporate Governance: Principles, Policies, and Practices

Chapter 1: NOTES:

Corporate Governance

9. Name some financial institutions P17


in the United States failed during Bear Stearns, Fannie Mae, and Freddie Mac, AIG (American
the global financial crisis International group), and Lehman brothers
10. What additional dimensions to the P14
Australian helmet report add to The Helmer report argued that governance is about
the conformance and compliance performance as well as con formants: ‘the boards key role is to
concepts of corporate governance ensure that corporate management is continuously and
effectively striving for above-average performance, taking
account of risk….. (Although) this is not to deny the boards
additional role with respect to shareholder protection.’
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 2: Topic 1 NOTES:

Governance and Management

1. Why does a corporate entity P 38


need a constitution Constitutions of a corporate entity define the rights and duties
of members, and to lay down the rules about the way it is to be
governed.
2. What is a principal difference P 40
between a private and a public A private company may not offer its shares for sale to the
company general public; a public cut company can
3. Explain the difference between P 43 -P 44 figure 2.4 and figure 2.5
governance and management management is typically a hierarchy, operates through
hierarchy, we know who reports to whom.

The board is not part of the management structure


boards don’t appear in organizational charts

Unitary board – boards with both executive and non-executive


outside directors – executive directors hold a managerial role in
addition to border director role

as an executive, they are employees subject to ploy McGraw


directors – are not employees are subject to company law
Management runs the business the board ensures that it is
being run well and run in the right direction.
‘governance circle’ - the work of the board of directors or other
governing body

‘management triangle’ - the work of the executive management


team
4. What other two aspects of the P 47
board’s work that can provide Performance – (to formulation and policy-making)
a paradox for the unitary board Conformance - (supervising executive activities and
accountability)
5. Describe the scope of P 33
corporate governance scope of corporate governance not only involves the Board of
Directors. It in involves the shareholders, market
intermediaries, stock markets for listed companies, finance
markets, equity markets, societal influences and other
stakeholders, government and other corporate regulators,
contractual stakeholders such as employees, suppliers,
customers and the media
P 45

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Corporate Governance: Principles, Policies, and Practices

Boards task is to direct the company – involving four basic


elements
-strategy formulation
-policy-making
-supervision of executive management
-accountability to shareholders and others

boards must consider the future of the company as well as the


present position and recent results
6. Where can one inspect Companies house: www.companieshouse.co.uk
company accounts annual
returns and other documents
filed under the UK companies
act
7. What led to the creation of the P 34
US Securities and Exchange The great 1929 financial crash in the United States. The
Commission? When? What is mission of the US Securities and Exchange Commission is to
its mission? protect investors to maintain fair, orderly, and efficient markets,
and to facilitate capital function. Among the key participants in
the securities world that the SEC oversee our securities
exchanges, security brokers and dealers, investment advisers,
and mutual funds.
8. What sort of companies might P 48
have an all executive board all executive director boards – top managers are also the
directors – no outside non-executive directors. These types of
all Executive Director boards are often found in family firms and
start-up businesses.
The company generally hasn’t reached the stage of maturity
where it requires non-executive directors the directors seldom
draw a distinction between their duties as directors and their
role as managers
9. What is a typical structure of P 49
the boards of companies listed Typical board structure of US companies listed in the United
in the United States States has one or two executive directors the Chairman/CEO,
the chief operating officer, and perhaps the chief finance officer
– with three or four times that number of independent outside
directors (non-executive directors).
10. What is a two-tier board? P50
Outline how it works in The two-tiered boards have two layered structures, top layer or
Germany supervisory board comprised entirely of non-executive outside
directors which oversee the work of the executives in the
Management board.
The lower layer – Management board – consists of entirely
executive directors.
Members of management board attend meetings of the

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Corporate Governance: Principles, Policies, and Practices

supervisory board but have no vote. The executive members


present their strategies, management plans and budgets to the
supervisory board for comment and approval. It is the
supervisory board’s role to consider matters referred to them
and either approve or send matters back to the executive for
further consideration. The supervisory board can then review
and assess subsequent managerial performance. The power of
the supervisory board lies in its ability to appoint to and remove
members from the executive board.

In Germany, it is enshrined in law that half the members of the


supervisory board represent the interest of the employees and
are appointed through trade union organisations. The
remaining supervisory board members represent the interest of
shareholders and are appointed by them otherwise known as
an informal partnership between labour and capital. The
German supervisory board has more power over the
management and external audit.
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 3: Topic 4 NOTES:

Theories and philosophies of


corporate governance

1. What is a fundamental difference P 61, P65, P66


between agency theory and Agency theory is based on the premise that a director will
stewardship theory maximise his or her own personal utility and cannot be
expected to act in the best interest of the shareholder.

Stewardship theory follows the legal perspective that directors


can be trusted to fulfil their fiduciary duties to shareholders.

2. What is a fundamental difference Stewardship theory follows the legal requirement for directors
between stewardship theory and to act solely in the interests of the shareholders.
stakeholder philosophy
Stakeholder philosophy believes that companies should be
accountable to a wide range of stakeholders affected by its
activities.
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 4: Topic 2 NOTES:

The Governance Partnership:


investors, companies, and directors

1. What determines shareholder P85


rights Shareholder rights are determined by the company’s articles of
association and the company law predominantly the companies
act.
2. Can shareholders get involved in P85
the day-to-day management of the Having elected directors to govern the company, shareholders
company or inspect the company do not have the right to be involved in the day-to-day
financial records management of the business, nor to inspect company records
or management accounts.
3. In public companies in the P85
European Union, can members The company must answer any questions relating to the
raise questions at the AGM? Do business put by a member, unless it can be shown that it is not
shareholders have a right to put in in the interest of the company or the question has already been
an item on the agenda of an AGM answered on the company’s website. Shareholders have the
right to have matters included on the agenda of the annual
general meeting, if they hold 5% of the voting shares or have
the support of 100 members entitled to vote.
4. Under the UK financial reporting P89
Council (FRC) stewardship code, Institutional investors should have a clear policy on voting and
should institutional investors have disclosure of their voting activity. They should seek to vote all
a clear policy on voting and shares held. They should not automatically support the board. If
disclose their voting activity? they have been unable to reach a satisfactory outcome through
Should they vote all of the shares active dialogue, they should register an abstention or vote
they hold? against the resolution.
5. What distinguishes an P93
independent non-executive An independent non-executive director (INED) is a director with
director from an affiliated or no affiliation or other relationship with the company, other than
connected non-executive director? the directorship, that could affect, or be seen to effect, the
exercise of objective, independent judgement. A connected
non-executive director (CNE D) is an outside director who does
have some relationship with the company.
6. What is an outside director? What P93/94
is a shadow director? An outside director is another word for a non-executive director.
Mainly used in the United States, it is often taken to refer to an
independent director. A shadow director is a person who,
although not formally a member of the board, is able to exert
pressure on the decision of that board.

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Corporate Governance: Principles, Policies, and Practices

Chapter 4: Topic 2 NOTES:

The Governance Partnership:


investors, companies, and directors

7. Can people be given the title P95


director without being formally In companies, it is often found that individuals responsible for
members of a board departments may sometimes be referred to as director or
associate directors
8. Is the chairman legally chairman P98
of the company or Chairman of Chairman of the Board of Directors
the Board of Directors
9. Is it a good idea to appoint a P99
retiring CEO as chairman There are different perspectives. Those in favour point out that
the years of experience, knowledge, and connections that the
retiring top executive could bring to the board as its chair –
experience that would otherwise be lost. Questioning the move
point out potential difficulties for the new CEO. It is a rare
person, having been successful CEO, who can pass on the
managerial reins to a new CEO without interfering in the day-
to-day running of the business. Some codes of good practice in
corporate governance oppose the appointment of a retiring
CEO to the chair of the company’s board.
10. Does company law in most P92
jurisdictions distinguish the role of No. In most jurisdictions and consistent with most corporate
executive and non-executive constitutions, the roles and responsibilities of all directors are
directors the same
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 5: Topic 5 NOTES:

The Regulatory Framework

1. What were the key P116


recommendations of the first ever The Cadbury report call for:
code of corporate governance the  the wider use of independent non-executive directors;
Cadbury code (1992)  the introduction of an audit committee of the board with
a minimum of three non-executive directors with a
majority of them independent;
 the division of responsibilities between the chairman of
the board and the Chief Executive but, should the roles
be combined, the board should have a strong
independent element;
 the use of a remuneration committee of the board to
oversee executive rewards;
 the introduction of a nomination committee with
independent directors to propose new board members;
and
 adherence to detailed code of best practice.
2. What are the requirements of the P120
UK corporate governance code A. On professional development.
(2010) on professional  All directors should receive induction training,
development and performance  all directors should have regular updates on
evaluation relevant skills, knowledge, and familiarity with the
company.
B. On board’s performance evaluation
 board should undertake an annual evaluation of
their own performance
 there should also be an annual assessment of the
performance of individual directors and of the main
board committees
3. What is the role of the OECD P129
Principles of Corporate The OECD has produced sets of principles that are intended to
Governance assist governments in their efforts to evaluate and improve the
legal, international and regulatory framework for corporate
governance in their countries, and to provide guidance and
suggestions for stock exchanges, investors, corporations, and
others that have a role in the process of developing good
corporate governance.

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Corporate Governance: Principles, Policies, and Practices

Chapter 5: Topic 5 NOTES:

The Regulatory Framework

4. What do the Hermes Principles P133


have to say about a company’s Company should manage effectively relationships with their
relationship with stakeholders employees, suppliers, and customers, and with others who
have a legitimate interest in the company’s activities.
Companies should behave ethically and have regard for the
environment and society as a whole. (Principle 9)
5. What does section 404 of the US’s P109
Sarbanes – Oxley Act require Section 404 of the act requires management to produce an
internal control report as part of each annual exchange act
report. The report is required to affirm the responsibility of
management for establishing and maintaining an adequate
internal control structure and procedures for financial reporting
6. What do the Hermes Principles P133
have to say about a company’s Principle 7: company should have and continue to develop
strategy formulation? coherent strategies for each business unit. These should ideally
be expressed in terms of market prospects and of the
competitive advantage of the business has in exploiting these
prospects. The company should understand the factors that
drive market growth, and the particular strengths that
underpinned the competitive position.
Principal 8: company should be able to explain why they are
the best parent of the business they run. Where they are not
best parent, they should be developing plans to resolve the
issue.
7. How does the SOX Act define an No director qualifies as independent unless the Board of
INED Directors affirmatively determines that the director has no
material relationship with the listed company (either directly or
as a partner, shareholder, or officer of an organisation that has
a relationship with the company).
8. What is the minimum number of P115
members of an audit committee The audit committee must have a minimum of three members.
under SOX? What qualifications Each member of the audit committee must be financially
should they have literate, as such qualification is interpreted by the company’s
board in its business judgement, all must become financially
literate within a reasonable period of time after his or her
appointment to the audit committee. In addition at least one
member of the audit committee must have an accounting or
related financial management expertise, as a company’s board
interpret such qualification in its business judgement.

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Corporate Governance: Principles, Policies, and Practices

Chapter 5: Topic 5 NOTES:

The Regulatory Framework

9. Is it necessary for companies P115


covered by the SOX act to adopt Listed companies must adopt and disclose a code of business
and disclose a code of business conduct and ethics for directors, officers, and employees, and
conduct and ethics for directors, promptly disclose any waivers of the code for directors or
officers, and employees? executive officers.
10. What are the responsibilities of P129
the board according to the OECD The responsibilities of the board include the strategic guidance
Principles of the company, the effective monitoring of management by the
board, and the boards accountability to the company and the
shareholders.
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 6: NOTES:

Models of Corporate Governance

1. Distinguish the Anglo-American Refer to text


model of corporate governance
from that of the Continental
European
2. Does the United Kingdom or the Counory Individuals insoiouoional
United States have a greater invesoors
proportion of individual, as UK 19% 58%
USA 51% 41%
against institutional, investors
3. Describe the Japanese business Refer to text
network, keiretsu, model
4. Name some characteristics of the Studies suggest that overseas Chinese firms:
overseas Chinese family business  a family centric with close family control; in listed
companies, keep the public in a minority with a
controlling equity stake kept within the family,
sometimes causing problems of family related
transactions;
 our entrepreneurial, often with a dominant
entrepreneur, centralised decision-making, with close
personal links emphasising trust and control;
 have a paternalistic management style, in a social
fabric dependent on relationships and social harmony,
avoiding confrontation and the risk of loss of face;
 see an intuitive strategy formulation in which business
is seen as more of a succession of contracts or
ventures, relying on intuition, superstition, and tough-
minded bargaining rather than quantitative analysis
5. Explain listing through the back Listing through the back door involves the acquisition of a Hong
door Kong listed company and backing a China business into this
shell
6. Describe the development of Refer to text
strategy in a Japanese keiretsu
company

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Corporate Governance: Principles, Policies, and Practices

Chapter 6: NOTES:

Models of Corporate Governance

7. What institutions are necessary for Are reliable legal system


successful corporate governance  stock market liquidity
 financial institutions
 regulatory authorities
 a company’s Registry
 accounting and legal professions
 auditing firms that are professional
 professional organisations
 educational institutions
 consulting organisations
 financial and corporate governance training, continuous
professional development

8. Identify some forces for - Corporate governance codes of good practice


convergence in corporate - securities regulations
governance around the world - International accounting standards
- global concentration of audit practices
- raising capital overseas stock exchanges
- international institution investors
- research publications, international conferences, and
professional journals
9. Identify some forces of - legal differences
differentiation in corporate - standards in the legal process
governance around the world - stock market differences
- ownership structures history, culture, and ethnic
backgrounds
10. What value links the original Trust
Western concept of the corporation
with the contemporary Asian
attitude
Summary/Reflection:

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Corporate Governance: Principles, Policies, and Practices

Chapter 7: Topic 5 NOTES:

Functions of the Board

1. Define strategy formulation P170


Strategy formulation is a process of generating and receiving
alternative long-term directions for the firm that lead towards
the achievement of its purpose
2. What is a mission statement P170
A mission statement is a concrete statement of the company’s
purpose, aims, and direction, which can inspire employees and
inform customers and other stakeholders.
3. Why might long-range planning not P171
be a useful tool for strategy In long-range planning the planner is conceptually, inside the
formulation organisation looking out. The approach fails to take a strategic
perspective, perpetuating the existing business, rather than
reorganising a strategic change in technology, markets, and
competition, and ignoring the economic and social context
4. What are the five forces in the five P173/4
forces model 1. Who is currently competing in our market
2. what strategic powers do our upstream suppliers of goods
and services have
3. what strategic powers to our downstream distributors and
ultimate customers have
4. could our customers’ needs be met in other ways-with
substitute goods or services
5. could other firms enter the market
5. What is resource-based strategic P174
theory Resource-based strategic theory sees a firm as a collection of
resources and capabilities that need to be utilised to create a
winning strategy. The resources could include access to capital,
employee skills, unique products or services, managerial talent
and expertise, equipment and buildings, or goodwill. The
resource-based perspective seeks to find a fit between a firm’s
internal capabilities and its external market situation that will
produce a competitive advantage
6. What are corporate policies P175
Corporate policies can be thought of as the rules, systems, and
procedures that are laid down by the board to guide and
constrain executive management.

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Corporate Governance: Principles, Policies, and Practices

Chapter 7: Topic 5 NOTES:

Functions of the Board

7. Name some management control P177


systems that can be used by Financial accounts-profit and loss account and balance sheet
directors to monitor management - budgetary control with cost centres
performance - profit performance with profit or profitability centres
- multiple performance measures and control systems

8. What is sub- optimization P178


In designing a management control system, in which units of
the organisation are to be held responsible for various
performance criteria, in seeking to meet the required
performance of each unit will tend to take action that is
beneficial to achieving its own objectives, but potentially
detrimental to the organisation as a whole
9. To whom is a board accountable P178
Universally the answer is the members. In the case of joint
stock, limited liability company, the members are those
shareholders with voting rights. In a cooperative Society, the
members are those with voting rights under the Constitution. In
a professional body the members are those who are paid up
and qualified to vote under the rules that association.
10. What is exception reporting P178To reduce the reports presented to directors, some firms
rely on exception reporting in which only significant variations
from planned performance have occurred in board-level action
is required
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Corporate Governance: Principles, Policies, and Practices

Chapter 8: Topic 6 NOTES:

The Governance of Corporate Risk

1. Name three regulatory instruments P195


that call for risk management 1. the UK corporate governance code
responsibility at board level 2. the Sabanes-Oxley Act
3. Basel II agreement
2. Some boards include corporate P198
risk assessment in the mandate of Audit committees tend to be orientated towards the past,
the board audit committee. Why involved with audit outcomes, and approving accountability
might this have limitations? information for publication, while risk assessment needs a
proactive, forward-looking orientation.
3. What alternatives to other P198/199
companies adopt to bring risk From a risk assessment or risk management committee has a
issues to the board? distinct standing committee of the board.
4. Who might be involved in such a P199
risk management subcommittee, Such a risk management committee might have four or five
and how does it operate? members, wholly or mainly INEDs with appropriate business
experience, meeting, perhaps, four times a year, and reporting
to the board as a whole. Members of senior management and
external expert in risk might be invited to attend meetings to
give advice.
5. Where else might responsibility for P199
risk assessment and management In management based risk management committee, which
be placed in a company? might include the CEO, the CFO, profit responsible division or
unit heads, and the CRO, with external experts invited to attend
to give advice.

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Corporate Governance: Principles, Policies, and Practices

Chapter 8: Topic 6 NOTES:

The Governance of Corporate Risk

6. Identify the levels of risk in a P 200


business In every organisation, risk arise at various levels:
- corporate strategic risk-exposure to threats from outside
the organisation;
 competitor activities
 consumer activities
 stock and finance market hazards
 government and regulator activities
 terrorism or political debated actions
- managerial-level risks-exposure to risk arising from the
firm’s activity;
 board level strategic failings
 lack of board level security
 shortage of skilled experienced staff
- operational risk-exposure to hazards within the enterprise
 fire, explosion, flood
 loss of power (example inability to carry out trades)
 Poor cyber security
7. What should an enterprise risk P210
management system provide and An enterprise risk management system (ERMS) should provide
to whom? information routinely and regularly for management to take
executive decisions and for the board to carry out its monitoring
and supervisory function. The ERMS as should also generate
information to enable the company to communicate externally
to auditors, regulators, shareholders, and other legitimate
stakeholders, as well as its insurers and brokers.
8. Name the iterative phases involved P204
in the analysis of risk in an  Risk recognition
organization  risk assessment
 risk evaluation
 risk management policies
 risk monitoring
 risk transfer (buying insurance, creating a derivative, or just
self-insuring)
9. Identify some risk assessment and P206/7/8
risk management tools that are  Simple tabular approach
available  a questionnaire designed to identify risks and hazards
 mind mapping
 risk benchmarking by industry, country, or other company
 software programs and systems

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Chapter 8: Topic 6 NOTES:

The Governance of Corporate Risk

10. What policy options does a board P210/211


have when deciding its approach  Avoid the risk. Do not commit to the planned action.
to enterprise risk management Abandon the project
 mitigate the risk by making capital investment or incurring
ongoing expenditure
 transfer the risk. Enter derivative agreements, insure
against the risk
 risk retention. Except the risk. Self-insure
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Corporate Governance: Principles, Policies, and Practices

Chapter 9: Topic 7 NOTES:

Corporate Social Responsibility and


Sustainability

1. Name six types of stakeholder that P220


a company might have The stakeholders of a company could include:
- customers of the end product or service;
- agents, distributors and others in the downstream Supply
chain;
- original suppliers and others in the upstream Supply chain;
- other creditors;
- bankers and non-equity sources of finance;
- employees, including managers;
- self-employed contractors to the company;
- local and national societal institutions;
- regulators;
- government, local and national;
- Society generally
2. What are the different perspectives P219-221
on CSR Societal; strategy driven; stakeholder; ethical; political;
philanthropic
3. What might a firm’s socially P221
responsible activities include The firm’s socially responsible activities might include:
 the contributions of facilities, staff time to local and other
organisations;
 educational and academic contributions;
- support for local and other academic institutions;
- contributions to research and similar activities;
 aesthetic and arts contributions
- expenditure on building and landscape design;
- sponsorship of arts, crafts, and similar activities;
 sports and leisure contributions
4. What is enlightened shareholder P224
value Boards adopting an enlightened shareholder value (ESV)
approach believe that the satisfaction of the needs of
stakeholders is crucial to corporate success and essential to
creating value for shareholders. The ESV concept of corporate
governance attempts to overcome apparent conflicts between
the shareholder and the stakeholder focused perspectives

Profits can be generated, shareholder value created, and


society’s wealth increased by satisfying stakeholder interest,
rather than through the classical attempts of shareholder theory
to maximise shareholder wealth.

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Corporate Governance: Principles, Policies, and Practices

Chapter 9: Topic 7 NOTES:

Corporate Social Responsibility and


Sustainability

5. Who should lead a company’s P225


CSR efforts? To be effective a company’s CSR efforts need to be led by the
directors. A primary duty of the board is to identify the aims of
the company, establish its mission, and set its values. A
company’s attitude to CSR should be embedded in its
corporate strategy
6. What is a CSR policy? P225
A CSR policy is a summary of the firm’s attitudes to
relationships with its business stakeholders and the
communities in which it operates, and the impact it was to have
on them. To be effective, CSR policies need to be understood,
accepted, and applied throughout the organisation
7. When might a clear CSR policy P225
influence potential investors? A clear CSR policy can influence potential investors looking for
socially responsible, ethical, or environmentally friendly
enterprises in which to invest.
8. How does the Brundtland Report P231232
define sustainable development? The United Nations Brundland report defines sustainable
development as development that meets the needs of the
present without compromising the ability of future generations
to meet their own needs.
9. What is the Global Reporting P235
Initiative and who is involved The global reporting initiative (GRI) is a worldwide, multi-
stakeholder network to create and develop sustainability
reporting framework, in which business, civil society, labour,
investors, accountants, and others collaborate.
10. What is the basic belief behind the P235
Global Reporting Initiative The GRI is based on the underlying belief that reporting on
economic, environmental, and social performance by all
organisations should be as routine and comparable as financial
reporting. The principles and guidelines section of the GRI
framework provides guidance and principles for defining port
content, which helps determine what should be covered by the
sustainability report and where its boundary should be drawn.
Summary and reflection

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Chapter 10: NOTES:

Governance of Listed Companies

1. Distinguish a holding company, a  A holding company is a company that holes all of the
wholly owned, a partly owned dominant shares of the voting rights in another company.
subsidiary company, and an  A subsidiary company is a company in which and other
associated company. company (its holding company) holes all of its voting
shares (a wholly owned subsidiary) or a majority of its
voting shares (partially owned subsidiary).
 An associate company is a company over which another
company exercises dominant power even though it does
not hold a majority of the voting rights in that company, for
example where the other shareholders are widely spread.
2. Why might a company incorporate The primary reason is, typical, low taxation with some
in an offshore jurisdiction? businesses exempt from profit tax, and no capital gains or
wealth taxes. Additionally, an offshore jurisdiction might have
good community relations, political and economic stability, no
exchange controls, and offer companies registered their
flexibility, corporate privacy and confidentiality. A pool of
professional service providers, sound company draw, and
regulation that is reasonably but not bureaucratic.
3. Can shareholders attend internal Not unless they are managers of the company as well as
meetings of the company or shareholders
access management accounts and
other corporate information?
4. Why do groups adopt a chain Principally to leveraged financial power gain from the gearing.
structure? By investing in a chain, the head of the chain is able to exercise
more influence over the companies in the chain then would be
available by investing in individual companies in the chain.
5. What are dual – class shares? The creation of two or more classes of voting shares in which
one class enjoys greater voting rights in the other class
6. What is a nomad? A nominated adviser authorised by the UK AIM market, which
all AIM companies are required to appoint. The nomads
experience provides a quality control mechanism by checking
the company’s plans and certifying to the exchange that the
company is suitable and ready for listing
7. What is a dual – listed company? A dualistic company is a group structure in which to listed
companies merge that both companies continue to exist and
share ownership of a single, operational business. The group
then has to stock exchange listings, with different bodies of
shareholders, usually in different countries.
8. Why might companies consider Many companies use joint ventures with another company to
entering into joint venture enter markets, transfer technology, procure supplies, obtain
agreement? finance, share management skills, manufacturer products
around the world, or share risk in on an international scale

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Chapter 10: NOTES:

Governance of Listed Companies

9. What activities might shareholder Shareholder activism can include communication and
activism include? negotiation direct with management, but also media campaigns
or blogging to change corporate practices, proxy battles
advancing shareholder resolutions to force change, calling
shareholder meetings, all litigation against companies or their
directors. Some shareholder activists use their shareholding to
advance their own social, environmental, or other agenda, and
influence corporate behaviour.
10. Can companies hold shares in Only in some company law jurisdictions. In other jurisdictions,
themselves? Give examples? companies are prohibited from investing in themselves through
group networks.
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Chapter 11: NOTES:

The Governance of Private


Companies and other Corporate
Entities

1. Should the managing Dir/CEO of a If disagreements arise that were not envisaged in the initial
joint venture company, who is also joint-venture (JV) agreement, directors of the JV company can
employed by one of the joint- face conflicts between their responsibilities to the JV company
venture partners, be a member of and to the JV partner company that employs them. Although
the joint venture company bought? many JV companies do appoint the managing director or CEO
of the JV to the board, others now appoint only representative
directors from the partner companies and have the JV
managing director attend meetings in a non-voting non-partisan
way.
2. How are partnerships governed? Basically in a partnership, the partners are responsible for
governing the firm. In a firm with few partners, governance is by
a meeting of all the partners. In larger firms the partnership may
decide to appoint a managing partner and a governing body,
perhaps called an executive or management committee, which
meets regularly to manage partnership affairs, with a periodic
perhaps annual, reading of the entire partnership to accept the
accounts, to transact business reserved to the meeting and
appoint members to the governing body.
3. What is a limited – liability Some countries have a form of limited liability partnerships
partnership? (LLP). This governance vehicle gives the benefits of limited
liability to the members, but allows the flexibility of organising
as a traditional partnership. The governance of an LLP is
similar to that of a partnership: members provide the capital,
contribute personally, and share profits and losses, to give
some protection to those dealing with a limited partnership.
However, the disclosure requirements tend to be more stringent
than those for a traditional partnership, and similar to those of
the company.
4. Explain the difference between a  A holding company is a company at the head of the group
holding, a subsidiary, and an pyramid. Its Board of Directors is often called the main
associated company board.
 Subsidiary company is one in which the holding or parent
company holds all or a majority of the voting shares in the
company.
 An associated company is one in which the holding
company, although not holding a majority of the shares,
has sufficient interest to control it and determine its actions.

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Chapter 11: NOTES:

The Governance of Private


Companies and other Corporate
Entities

5. Explain the two distinct options in 1. Subsidiary company self-governance, allowing each
governing and managing a group company in the group to govern itself and manage its own
of companies affairs, subject to overall group wide policies and resource
allocation.
2. Groupwide governance, treating the group companies as
divisions or departments of the holding company.
6. What are the benefits of drawing The opportunity for cross group coordination, the sharing of
subsidiary company directors from expertise, training and development of future mainboard
other companies in the group directors, management development, and the building of group
norms and culture.
7. Explain what a family council is A family council, consisting of the family members who own
and does in a family company shares (management and nonmanagement), meets prior to
meetings of the shareholders and the directors to identify
issues that affect family members and to resolve them in the
best interests of the family.
8. Explain what a sovereign wealth An investment fund that invests a country’s financial surpluses
fund is and which countries have in the shares of companies in other countries. Arab and Asian
been particularly involved countries stayed own funds have been used to invest in the
United States and Europe
9. What are some of the sectors in Sovereign wealth funds have invested in telecoms technology,
which sovereign funds have real estate, ports, and to transport operations, in the financial
invested sectors.

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Chapter 11: NOTES:

The Governance of Private


Companies and other Corporate
Entities

10. List some of the distinguishing The distinguished features include:


characteristics of a not-for-profit  they are working for the public good;
corporate entity  there aims reflect community objectives;
 the legal status is rooted in the law of trusts, charities,
cooperatives, or other legal acts;
 their form can take various legal structures;
 there under pinning constitution determines their form and
purpose;
 governance is provided by a governing body, which can be
known variously as a council, Board of Trustees,
management committee, et cetera;
 their performance is measured by the achievement of
multiple goals and is often difficult to measure;
 there governing body is often large and drawn entirely from
outside, non-executive members;
 their objective is can conflict;
 nomination to the governing body may come from the
members, funding bodies, representative bodies (staff,
beneficiaries, funding bodies, the local community, et
cetera), subject to the Constitution;
 the top executive and the top management team are typical
invited to attend meetings of the governing body, make
reports, and answer questions, but are seldom voting
members of it;
 membership of the governing body is usually voluntary and
unpaid, with no fees, remuneration, or capital gains, subject
perhaps to reasonable expenses;
 Trustees are the guardian angels of a voluntary
organisation, watching over its activities, and need to be
competent, informed, but personally disinterested.
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Chapter 12: NOTES:

Corporate Governance around the


World

1. In the market for Chinese listed A shares - listed in China and available only to Chinese
companies, what are the residents
differences between A shares, B B shares – listed in China, but available only to foreign
shares, and shares, L shares, and investors
H shares N shares – China-based companies listed in New York
L shares – China-based companies listed in London
H shares – China-based companies listed in Hong Kong and
Singapore
2. Distinguish the roles in China of SASAC, the state-owned assets supervision and administration
the SASAC and the CSRC Council of the State Council, holes the China government
shareholding in all China’s listed companies (other than those
in the finance sector).
CSRC, the China securities regulatory commission of the State
Council, is the Chinese government’s corporate regulator.
3. What are five types of corporate  State-owned enterprises (SOEs), which may be large,
enterprises medium, or small, with state ownership at the national,
provincial, or local level
 collectively owned enterprises, including urban collectives
and rule townships and village enterprises (TVEs)
 privately owned organisations, defined as firms with more
than seven employees
 small, individually owned enterprises with no more than
seven employees
 foreign-invested firms
4. What is a major problem facing Companies in India, both in the public and private sectors
boards in many Indian companies? including multinationals, are dominated by majority
How does the Asian corporate shareholders, with pre-emption rights for minority shareholders
governance Association rate Indian frequently ignored. A corporate governance rating by the Asian
corporate governance? corporate governance Association in 2007 assessed India’s
corporate governance as fair to poor
5. In Russia, what have been the The role of the state has expanded and government influence
significant changes in corporate over some companies has increased. Some ownership has
governance under the presidency been transferred back to the state by next expropriation or by
of Vladmir Putin? acquisition in the market, as in the case of Yukos.
6. What are the unusual governance Brazilian company law and the code have three unusual
features in Brazilian company law corporate governance features-the fiscal council, the family
and corporate governance codes? council, and the advisory board

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Chapter 12: NOTES:

Corporate Governance around the


World

7. Hong Kong is a special No. Hong Kong has its own corporate governance code,
administrator of region (SAR) of enshrined in the Hong Kong stock exchange listing rules.
China. Do Hong Kong listed
companies have to follow the
Chinese corporate governance
rules laid down by the CSRC?
8. Who often controls listed chaebol Listed chaebol companies are often still controlled by the
companies in South Korea? How is dominant owner-family interests. Even though companies
that control maintain? attract outside capital, family domination is maintained through
insider boards and cross ownership with subsidiary companies.
9. What typifies the governance of  Concentrated ownership, with strong family ownership of
businesses in the MENA region? both private and listed companies or state ownership
 dominant family oversight and control, with leadership from
the head of the family, and manorial decision-making,
opaque communications and relationship based trading
 debt financing in which bank financing is often more than
shareholders’ equity
 banking sector equity investment, with banks holding
significant shares in companies
10. What is the most significant legal Is La make Cherie a law introducing religious rules and
influence on corporate governance interpretations
in the MENA region?
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Chapter 13: Topic 8 NOTES:

Board Membership: Directors


appointment, roles, and
remuneration

1. What is a remuneration committee P331332


The remuneration committee is a subcommittee of the
mainboard, consisting wholly or mainly of independent outside
directors, which is set up with responsibility for overseeing the
remuneration packages of board members, particularly the
executive directors and possibly, members of senior
management
2. What does integrity mean P320
Integrity means being able to distinguish right from wrong and
judge corporate behaviour accordingly. That means being able
to recognise and declare a conflict of interest. It means acting
in the company interests, not self-interest and resisting the
temptation to make an unacceptable personal gain. Essentially
integrity means acting honestly.
3. Name some of the corporate P321
values declared by Microsoft Integrity and honesty, passion for customers, for our partners,
and for technology, openness and respectfulness, taking on big
challenges and seemed them through, constructive self-
criticism, self-improvement, and personal excellence and
accountability to customers, shareholders, partners, and
employees for commitments, results, and quality.
4. In addition to integrity, what other P320
personal qualities are found in They can be summarised as intellect, character, and
high-calibre directors personality
5. Name some essential Director- P322
level skills The essential director-level skills include:
- strategic reasoning, perception, and vision;
- a critical faculty capable of quantitative and quality of
analysis and financial interpretation;
- planning and decision-making capabilities;
- communication and interpersonal skills;
- networking and political abilities.
6. Character traits are desirable in a P320
director Character traits, what some call strength of character, include
being independently minded, objective, and impartial. A director
needs to be capable of moving towards consensus. Yet, from
time to time, a director needs to be tough-minded, gracious,
and resilient, with the courage to make a stand. Further, a
director needs to have a balanced approach to risk, the results-
orientated - neither risk-averse nor rash.

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Chapter 13: Topic 8 NOTES:

Board Membership: Directors


appointment, roles, and
remuneration

7. What are the essential legal duties P326


of a director - A duty of trust-to exercise a fiduciary responsibility to the
shareholders
- a duty of care-to exercise reasonable care, diligence and
skill
8. How does a related-party P330
transaction affected director Related-party transactions provide a good example of the
requirement to disclose personal interest. The listing rules of
most dock exchanges and security regulators require related-
party transactions to be disclosed and, often, approved by
other shareholders.
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Chapter 14: Topic 9 NOTES:

Board Leadership: The reality of the


boardroom

1. What is the fundamental basis of P351


board power? The fundamental power of the board is derived from the
shareholders who have delegated the running of the company
to the directors. This power is reinforced by authority derived
from the company’s constitution backed up by the company
law.
2. Name some other ways in which a P321/352
board can find itself influenced  By majority or dominant shareholder putting pressure on
the board
 from the threat of potential takeover
 by the prospect of litigation
 through the influence of auditors
 from the effects of legislation and regulation
 from media pressure and other external exhortation
 by a dominant or charismatic leader
 and, obviously, through the changing business
circumstances
3. What is the knowledge power that
a director might have Knowledge power is power derived from access to information,
skills, or experiences not available to the other directors (e.g.
the influence on board decisions about international currency
rates by the INED who is also a director of an international
bank).
4. Name five other sources of director  Personal power
power  knowledge power
 sanction power
 interpersonal power
 networking power
 ownership power
 representative power
5. Name for different board styles Professional, representative, rubberstamp, and country-club.
6. What criteria affect board style See the text
7. What is a chairman’s primary duty To manage the board
8. Name six functions of a chairman - Management of the board
- Management of meetings
- strategic leadership
- linking the board with management
- arbitration
- figurehead or public face of the company
9. Explain the chairman’s role in See text
strategic leadership

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Chapter 14: Topic 9 NOTES:

Board Leadership: The reality of the


boardroom

10. In what ways might a chairman be See text


the public face of the company
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Chapter 15: Topic 10 NOTES:

Board Activities: Corporate


governance in practice

1. What is a principal role of the The remuneration committee is responsible for recommending
remuneration committee of the to the board the remuneration packages of executive directors,
board and sometimes other top management, including their salary,
fees, pension arrangements, options to acquire shares in the
company and other benefits.
2. What is the principal role of the The role of the nomination committee is to suggest names for
nomination committee of the board board membership, in an attempt to introduce different
experience, personalities, and diversity to the board, and to
avoid domination of the nomination process by the Chairman,
CEO, or any other dominant directors.
3. What is the primary role of the The primary role of the audit committee is to liaise between the
audit committee board and the independent external auditors
4. What might that primary role Liaising between the board and the independent external
include auditors might include:
 making recommendations to the board on their
appointment, reappointment, or removal and replacement;
 reviewing and approving their terms of engagement;
 ensuring their objectivity and independence from the
company, confirming that no conflicts of interest exists that
could affect the auditor’s ability to issue an unbiased
opinion on the company’s financial statements;
 developing and implementing a policy for their engagement
on non-audit work;
 working with them on audit procedures and plans, receiving
the auditor’s report and management letter about issues
that have arisen during the audit, and reviewing and acting
on these issues.
5. What other duties might a modern See 17 items listed in the main text
audit committee undertake
6. What might boards, and in See 10 items listed in the main text
particular their audit committees,
look to the internal audit function to
provide?
7. Who is responsible for the financial The directors are responsible for the preparation of the financial
accounts of a listed company – the statements, and for being satisfied that they give a true and fair
auditors or the directors view. The auditors responsibility is to audit and express an
opinion on the financial statements in accordance with
applicable law and international auditing standards.

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Chapter 15: Topic 10 NOTES:

Board Activities: Corporate


governance in practice

8. In the United States, what do the PCAOB standards require auditors to:
PCAOB standards require auditors  obtain reasonable assurance that effective internal control
to do? over financial reporting has been maintained;
 assess the risk that a material weakness exists, testing and
evaluating the design, and operating effectiveness of
internal control based on the assessed risk;
 perform such other procedures as are considered
necessary in the circumstances.
9. In the United States, what is the In the United States, the company secretary is typically known
company secretary typical known as the corporate secretary, and the role is frequently carried out
as, and who carries out that role? by the corporate lawyer.
10. What might the duties of a See the nine items in the main text
company secretary typically
include?
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Chapter 16: NOTES:

Board Effectiveness: Building better


boards

1. What are the six C’s for an Commitment, character, collaboration, confidence, creativity,
effective board? contribution
2. Name eight matters that new See case study 16.1 in the text
directors should know about if they
have followed a properly planned
orientation program
3. Name some issues that need to be Confidentiality, security, integrity, availability, assurance, cost
considered before adopting an effectiveness, flexibility, simplicity, and ease of use
electronic paperless system for
board reports
4. What are the key questions that Why, what, when, where, and who
should be posted before calling a
meeting
5. If a director lacks appropriate A director cannot opt out of certain items because he or she
knowledge on a subject matter lacks appropriate knowledge, although he or she may rely on
before the board, can he or she, information received in the opinions of fellow directors, given in
legitimately, opt out of discussions good faith, unless he or she has any reason to doubt-in which
on that item? case he or she must pursue the issue to its root.
6. Are there any Pacific rules Although, subject to the articles, there are no Pacific rules
governing the content or format of governing the content or format minutes of a board or board
units of board or board subcommittee meetings; they should provide a competent and
subcommittee meetings? complete record of what transpired, what was decided, and
what actions are to be taken by whom and when.
7. Name five qualifiers of a good A good report with high quality information is;
report with high quality information  understandable;
 reliable;
 relevant;
 comprehensive;
 concise;
 timely;
 cost-effective.
8. Why should companies have a A newly appointed director needs a proper introduction
director induction program? program to reduce the learning time taken before beginning to
make significant contribution to board deliberations.
9. What is D&O? Directors and officers insurance
10. In a limited liability company, are No. Actions can be brought against the company the board,
the liabilities of the directors and/or individual directors. Claims for unlimited amounts can
limited? put directors personal assets at risk
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Chapter 17: Topic 11 NOTES:

Board Evaluation: Reviewing


directors and boards

1. How does one go about assessing See text


a director’s performance?
2. How are many director appraisals In many cases at the moment, director appraisals are being
are done at the moment? conducted in an informal way, with the chairman personally
assessing the performance and commenting privately to the
director involved.
3. Is the pressure on foot director Yes, the pressure is on for director appraisals to be more
appraisal to be more formalised? formalised. To set up such a process needs a board policy
What is needed to set up such a decision, with the full support of all the directors.
process?
4. What is the usual output of an Typically, the output of an individual director performance
individual director performance assessment will be a confidential report to the chairman and,
assessment? How is it used? possibly, the chairman of the board’s nomination committee, if
involved in the review process. Given the personal nature of
the report, most chairmen will not table it at a board meeting,
but discuss the relevant portion with the director.
5. How is the performance of a The UK corporate governance code calls on the non-executive
chairman assessed? directors, led by the senior independent director, to be
responsible for performance evaluation of the chairman, taking
into account the views of executive directors. But in most
cases, the Chairman’s performance is reflected in the
performance of the company as a whole. Continued poor
performance will bring calls for a change of chairmen from
major investors, the media, or occasionally from fellow directors
who are dissatisfied.
6. Do many corporate governance Yes and yes
codes and stock exchange listing
rules now call for an annual
assessment of the performance of
individual directors, and of the
performance of the board and
board committees?
7. Who might be asked to undertake The chairman often assumes the role of:
a board review? - an experienced INED, perhaps the senior INED;
- an Executive Director, such as the CEO or the CFO;
- the internal auditor;
- the audit committee;
- a past chairman;
- a respected chairman or INED from the board of another
company not in competition;
- an independent organisational firm of consultants

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Chapter 17: Topic 11 NOTES:

Board Evaluation: Reviewing


directors and boards

8. Describe the stages in a board Refer to text


review project
9. What are the principal elements in - Ownership structure and external influence
the Standard and Poor’s GAMMA - shareholder rights and relations
corporate governance ratings? - transparency, disclosure, and audit
- board structure and effectiveness
10. Name some of the systems for - The World Bank and International monetary fund reports on
evaluating corporate governance the observation of standards and codes (ROSC) program
at the country level - the European bank for Reconstruction and development
(2003) (EBRD) corporate assessment project
- the FTSE ISS CGI company ratings
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Chapter 18: Topic 12 NOTES:

Corporate Governance: the next 30


years

1. Explain the paradox of the unitary Refer to text


board developed
2. What did the NYSE – sponsored The commission supports the NYSE’s listing requirements
commission on corporate generally providing for a majority of independent directors, but
governance have to say about the also believes that companies can have additional non-
NYSE requirements on independent directors so that there is an appropriate range and
independent directors? mix of expertise, diversity, and knowledge on the board.
3. What is the schism that has American concepts of corporate governance rely on rules, and
appeared between American and the British on principles.
British concepts of corporate
governance
4. What is the key question in The question is which is preferable a dominant leader, who can
deciding whether the Chief provide single-minded leadership and enhance performance, or
Executive should also be shared responsibility, it reduces risk?
chairman?
5. What is the first step to better Recognise that good corporate governance is about the
corporate governance according to effectiveness of the governing body not about compliance with
CSIA? codes.
6. What evidence suggests that See the text
society is no longer satisfied with
corporate behaviour?
7. What might be some of the - The development of new organisational forms
interesting and more important - the reinforcement of the right of owners to nominate
developments in the future that directors
could affect corporate governance? - institutional investors exercising more power over their
investments
- the drive for gender diversity boards
- the demand for genuine independence of external auditors
- new theories of corporate governance
8. What might board – level Board level Information Systems that enable directors to search
Information Systems offer directors for the information they feel they want, perhaps applying other
in the future? tools and simulators to explore possible outcomes, while
communicating their ideas to other board colleagues online.
Summary and reflection

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