COGO LU1 TH2

What is one of the factors that is now ranked alongside return-on-investment ratios in determining whether a potential investor chooses to invest in a company?

• Social media presence

• Quality of corporate governance

• Company age

• Number of employees

Answer explanation

The inability to access capital at competitive rates remains a major inhibitor to the growth of many companies, both public and private, and indeed of many developing countries, and where once corporate governance may have been regarded as a ‘soft issue’, the quality of a potential investee company’s corporate governance is now ranked alongside its return-on-investment ratios in determining whether a potential investor chooses to invest in that particular company

Which country has one of the best corporate governance frameworks worldwide according to the text?

• United States

• India

• South Africa

• China

Answer explanation

With the release of the 4th King Report on Corporate Governance for South Africa (King IV ™ ), following in the wake of King III (2009) and King II (2002), South Africa has undeniably one of the best corporate governance frameworks worldwide, but this country, and indeed much of Africa, still lags far behind other emerging markets in its ability to attract foreign direct investment (FDI).

What is a major inhibitor to the growth of many companies and developing countries according to the text?

• Technological advancements

• Access to skilled labor

• Access to capital

• Government regulations

Answer explanation

•The inability to access capital at competitive rates remains a major inhibitor to the growth of many companies, both public and private, and indeed of many developing countries, and where once corporate governance may have been regarded as a ‘soft issue’, the quality of a potential investee company’s corporate governance is now ranked alongside its return-on-investment ratios in determining whether a potential investor chooses to invest in that particular company.

What is the impact of globalisation on companies according to the text?

• Companies have to compete on equal terms for investment

• Companies do not need human capital

• Companies are isolated from international resources

• Companies no longer need to compete for investment

Answer explanation

•The impact of globalisation is that companies now have to compete on equal terms for investment, internationally traded resources and human capital wherever in the world they are.

•While any investment involves risks, investors globally are now demanding greater assurances that such risks are identified and appropriately managed, and that the board of directors of an investee company accepts that it is fully accountable to investors for their investment.

What is the consequence of a country not having a reputation for strong corporate governance practices according to the text?

• Capital flowing elsewhere

• Improved economic performance

• Increased foreign direct investment

• Capital flowing into the country

Answer explanation

•A country’s reputation regarding governance issues is a collage of its legal and regulatory approach to corporate governance and the conduct of the individual players in its economy.

•Arthur Levitt, former Chairman of the US SEC, put it consummately when he said, “Markets exist by the grace of investors . . . No market has a divine right to investors’ capital . . . If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere.

•If investors are not confident with the level of disclosure, capital will flow elsewhere.

•If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular company’s practices may be – suffer the consequences.”

What is the relationship between governance and performance according to Sir Adrian Cadbury?

• Governance has no impact on performance

• Governance is the sole determinant of performance

• Governance can be an important competitive advantage

• Governance is irrelevant

Answer explanation

•Sir Adrian Cadbury once wrote that ‘the most difficult question of all in corporate governance was defining the relationship between governance and performance.’

•Whilst the form of governance matters – details such as a prevalence of independent non executive directors and the ability to contain conflicts of interest – what really counts is substance.

•Correctly applied, good corporate governance can be an important competitive advantage used to maximise a company’s performance, increase a company’s potential to encourage capital investment, and positively influence a country’s ability to attract investment.

•It remains an essential ingredient for nurturing trust and business confidence.

What is the main reason for the heightened public interest in corporate governance according to the text?

• Increase in company profits

• Proliferation of high-profile corporate scams

• Decrease in shareholder activism

• Government intervention

Answer explanation

•Public interest in corporate governance has heightened with the proliferation, in the last decade, of high-profile corporate scams resulting in huge losses.

The list of corporate governance failures in the last decade – from AIG and Citigroup to Enron and WorldCom and Xerox – reads like an alphabetical checklis

What is one of the benefits of an enhanced level of corporate governance mentioned in the text?

• Increased shareholder activism

• Decreased company performance

• More long-term investors

• Decreased access to capital

Answer explanation

The are numerous benefits of enhanced level of corporate governance, including:

1. A better managed company.

2. More long-term investors.

3. Improved access to capital.

4. The realization of a company's true underlying value.

What is the main reason for investors becoming increasingly selective about the companies they are associated with according to the text?

• Lack of investment opportunities

• Decrease in shareholder activism

• Increase in government regulations

• Recent governance failures

Answer explanation

In the light of recent governance failures, however, shareholders, banks and investors are all becoming increasingly selective about the companies with which they are associated. The majority of recent corporate failures can clearly be attributed to bad business plans, poor management decisions, fraud, under-capitalisation and the failure to anticipate and deal properly with risk – problems which good corporate governance may have helped avoid.

What is the impact of good corporate governance on a company's performance according to the text?

• Decreased performance

• Decreased access to capital

• Increased potential to encourage capital investment

• No impact on performance

Answer explanation

•Correctly applied, good corporate governance can be an important competitive advantage used to maximise a company’s performance, increase a company’s potential to encourage capital investment, and positively influence a country’s ability to attract investment.