What governance is and why it matters — study companion

Accounting Ahead | Original study resource | accountingahead.com.au

Governance in one page

MODULE 3 | PART B.1 | STUDENT COMPANION

Corporate governance is the system that directs and controls a company and keeps it accountable. It applies to

any entity that acts for others: companies, charities, government bodies and community associations.

Governance: the board Management: the chief executive and team

Sets the direction and approves the strategy Develops strategy options for the board to approve

Approves key policies and the appetite for risk Puts approved strategy and policies into action

Appoints, guides and, if needed, replaces the chief

executive

Runs day-to-day operations, people and resources

Monitors results and holds management to account Reports to the board on performance and key risks

Reports to shareholders and oversees compliance Deals with customers, suppliers and staff

Managers run the business. The board makes sure it is run well, and for the right reasons.

Good governance

Conformance: the brakes

Laws, regulations, policies and accountability. Reliable

controls and reporting.

Performance: the engine

Strategy, growth and results. For not-for-profits: economy,

efficiency and effectiveness.

All engine, no brakes

Reckless. FTX (2022): a complete

failure of controls.

Both, in balance

Durable success that investors trust

All brakes, no engine

Paralysed. Compliant, but too cautious

to grow.

ETHICS & GOVERNANCE | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Four roles of the board

MODULE 3 | PART B.1 | BOARD ROLES WITH ORIGINAL EXAMPLES

Board role Looks Time focus Example at an imagined

company

Mainly serves

Strategy

formulation

Outward Future Deciding whether to expand into

New Zealand

Performance

Policy making Inward Future Approving a new code of conduct Performance or

conformance, by policy

Monitoring and

supervising

Inward Past and

present

Reviewing results against the

budget

Conformance

Providing

accountability

Outward Past and

present

Approving the annual report; AGM

questions

Conformance

All four roles are held together by the board's relationship with the chief executive, whom it appoints and works

through. Forward-looking roles drive performance; backward-looking roles carry most of the conformance.

Why governance matters

Access to finance: trusted companies find it easier and cheaper to raise money in capital markets.

Investor protection: including ordinary households whose savings are invested in shares.

Sustainability and resilience: of companies and, through them, of the wider economy.

Investor confidence: listed companies compete for capital, and foreign investors weigh governance when

choosing.

The trade-off. Proper governance can slow decisions, such as thorough checks before an acquisition.

Growth built on solid foundations is worth more than growth grabbed in a hurry.

Real case: FTX Trading Ltd, Chapter 11 filing (11 November 2022) and the sworn declaration of its new chief executive (17 November

2022); Sam Bankman-Fried convicted 2 November 2023, sentenced 28 March 2024. Study guide reference: Module 3, Part B, sections

3.5 and 3.6.

ETHICS & GOVERNANCE | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 3 | PART B.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - which board role, and what does it mainly serve?

For each activity, name the board role and say whether it mainly serves performance or conformance.

Board activity Role, and performance or conformance

(a) Approving a plan to open stores overseas

(b) Reviewing quarterly results against the budget

(c) Approving the annual report and financial statements

(d) Adopting a new anti-bribery policy

(e) Assessing whether to sell a struggling division

(f) Answering shareholders' questions at the AGM

(g) Approving a pay policy that links bonuses to three-year

growth

(h) Reading internal audit's report on whether payroll

controls work

Question 2 - governance or management?

Mark each decision G (a board decision) or M (a management decision).

Decision G or M Decision G or M

(a) Choosing a courier for office supplies (e) Approving the annual budget

(b) Setting the company's appetite for risk (f) Running a social media campaign

(c) Approving the chief executive's pay (g) Deciding to replace the chief executive

(d) Preparing next week's staff roster (h) Negotiating prices with a regular

supplier

ETHICS & GOVERNANCE | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | PART B.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1

Activity Board role Mainly serves

(a) Stores overseas Strategy formulation (outward, future) Performance

(b) Results against budget Monitoring and supervising (inward,

past/present)

Conformance

(c) Annual report Providing accountability (outward, past/present) Conformance

(d) Anti-bribery policy Policy making (inward, future) Conformance: it sets rules for

lawful behaviour

(e) Selling a division Strategy formulation Performance

(f) AGM questions Providing accountability Conformance

(g) Long-term bonus policy Policy making Performance: it aligns managers

with long-term growth

(h) Payroll controls report Monitoring and supervising Conformance

Policy making can serve either side. Ask what the policy is for: rules for lawful conduct lean to

conformance; incentives for growth lean to performance. A well-reasoned alternative is acceptable.

Question 2

Governance (G): (b) risk appetite, (c) chief executive's pay, (e) annual budget, (g) replacing the chief executive.

Management (M): (a) courier, (d) staff roster, (f) social media campaign, (h) supplier prices.

Test to apply: is the decision about setting direction, approving the framework or holding management to

account? Then it belongs to the board. Is it about running operations within that framework? Then it belongs to

management.

ETHICS & GOVERNANCE | M3 PART B.1 | WORKED ANSWERS

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