Governance and Management
Core concepts
Governance is about direction, oversight and accountability; management is about execution. Candidates should understand agency theory and stakeholder theory, the role of the board and its committees, separation of chair and CEO, independence of non-executive directors, audit and risk committees, disclosure and transparency, and shareholder rights. King IV's 'apply and explain' philosophy, the OECD principles, and the distinction between conformance and performance are examinable. On the management side, expect planning, organising, leading and controlling; span of control and delegation; motivation theories (Maslow, Herzberg, Vroom); leadership styles; and the COSO internal control framework with its five components - control environment, risk assessment, control activities, information and communication, and monitoring.
Traps
- Describing King IV as 'comply or explain'; the correct phrase is 'apply and explain'.
- Confusing governance (board oversight) with management (executive delivery).
- Assuming internal control guarantees objectives; it gives reasonable, not absolute, assurance.
- Placing the CEO on the audit committee, or treating an executive director as independent.
- Ignoring tone at the top - the control environment underpins everything else.
Worked example
A company has one person as both chair and CEO, an audit committee chaired by the finance director, and no independent directors. Diagnosis: breach of the separation of roles, compromised committee independence and inadequate oversight. Remedy: appoint an independent chair, reconstitute the audit committee with independent non-executives and a financially literate chair, and disclose the changes.
Rule of thumb: if a control can be overridden by the same person who benefits from it, it is not a control.