GOET7312 Governance and Ethics Comprehensive Exam Notes

Comprehensive practice vocabulary flashcards covering the core legal, theoretical, and practical concepts of corporate governance, business ethics, board structures, and compliance frameworks across Learning Units 1 to 6.

Corporate Governance (Narrow Cadbury-Style Definition)

The practice by which companies are managed and controlled, focusing specifically on corporate structures and control mechanisms to check power.

Corporate Governance (King IV Definition)

The exercise of ethical and effective leadership by the governing body towards the achievement of four governance outcomes: ethical culture, good performance, effective control, and legitimacy.

Four Governance Outcomes (King IV)

The core results intended to be achieved by corporate governance: ethical culture, good performance, effective control, and legitimacy.

ICRAFT

The foundational characteristics of ethical leadership under King IV: Integrity, Competence, Responsibility, Accountability, Fairness, and Transparency.

Separation of Ownership and Control

The structural reality in modern corporations where shareholders (the de facto owners) nominate and elect directors, who delegate operational management to professional managers rather than running day-to-day affairs themselves.

Agency Theory

The theoretical model developed by Jensen and Meckling (1976) that describes shareholders as principals and management as agents with divergent interests and information asymmetry.

Agency Costs

The total expenses arising from the divergence between principals and agents, comprising monitoring costs (audits, independent boards, reporting), bonding costs (contracts, performance-linked remuneration), and residual loss.

Directing vs Managing (Garratt's Distinction)

Directing is an intellectual process where the board thinks strategically and independently to show the way ahead and delegate authority; managing involves routine administrative, supervisory tasks and a level of physical presence to execute that direction.

Accountability

The obligation to give an account to a higher authority of how one has discharged a delegated responsibility, implying continuous oversight and ultimate answerability for actions.

Responsibility

The duty to respond or take action by executing a delegated operational task, distinct from the ultimate oversight of the accountable body.

Original Authority (Section 66(1))

The direct statutory grant under Section 66(1) of the Companies Act 71 of 2008 stating that the business and affairs of a company must be managed by or under the direction of its board.

Ubuntu-botho

An African philosophy affirming that 'a person is a person through other people', emphasising communal relationships, mutual respect, human dignity, and collective responsibility that informs corporate decisions and constructive boardroom dialogue (SABC v Mpofu).

Shareholder Primacy Approach

A shareholder-centric perspective asserting that directors must focus primarily on maximising shareholder wealth and profits within legal boundaries, treating other stakeholders only as means to profit.

Stakeholder-Inclusive Approach (King IV Principle 16)

A governance model requiring the governing body to balance the legitimate and reasonable needs, interests, and expectations of all material stakeholders in the best interests of the company over time.

United Nations Global Compact (UNGC)

A voluntary corporate sustainability initiative based on Ten Principles covering human rights, labour, the environment, and anti-corruption, requiring an annual Communication on Progress (CoP).

OECD Principles of Corporate Governance

An international benchmark first issued in 1999 covering shareholder rights, institutional investors, stakeholder roles, disclosure, and board responsibilities to support financial market efficiency and integrity.

ICGN Global Governance Principles

An international standard setting out the respective responsibilities of boards and shareholders to enhance investor dialogue, mitigate bribery and corruption, and promote effective market standards worldwide.

Unitary Board Structure

A single board composed of executive and non-executive directors who sit together and share collective legal responsibility for directing the company, which is the standard model in South Africa.

Two-Tier Board Structure

A corporate governance structure common in continental Europe separating governance into an executive management board chaired by the CEO and a separate supervisory board of non-executives chaired by the board chairman.

Legal Personality (Juristic Person)

A legal concept establishing that a registered company exists as a legal entity separate and distinct from its shareholders and directors, possessing perpetual succession, separate property, and the capacity to sue and be sued.

Piercing the Corporate Veil

An exceptional legal remedy where a court disregards a company's separate juristic personality and holds the shareholders or controllers personally liable for its debts or obligations.

Section 20(9) of the Companies Act 71 of 2008

The statutory provision allowing a court, on application, to declare a company not to be a juristic person regarding a specific right or liability if its use or acts constitute an 'unconscionable abuse of the juristic personality of the company as a separate entity'.

Turquand Rule

A common-law rule codified in Section 20(7) allowing third parties dealing with a company in good faith to assume that its internal management rules and formalities have been complied with, unless they knew or reasonably ought to have known otherwise.

Memorandum of Incorporation (MOI)

The founding constitutional document of a company setting out its powers, rights, and duties, which binds the company to each shareholder, shareholders to one another, and the company to its directors and prescribed officers under Section 15(6).

Independent Non-Executive Director

A director who is detached from day-to-day operations and free from any interest, position, association, or relationship likely to unduly influence or cause bias in fact or in the perception of a reasonably informed outsider.

Nine-Year Rule (King IV)

The practice requiring an annual evaluation of independent non-executive directors who have served more than $9$ years to confirm that their objectivity, judgement, and independence remain intact.

Dysfunctional Board

A governing body that permits extraneous agendas to supersede the company's best interests, typically marked by mistrust, factional camps, open hostility, information withholding, or a 'them and us' relationship between management and NEDs.

Fiduciary Duty

The legal obligation of a director to act with utmost good faith, loyalty, and fidelity exclusively in the best interests of the company as a separate legal entity, without subordinating that duty to personal or factional interests.

Duty of Care, Skill and Diligence (Section 76(3)(c))

The standard of conduct requiring a director to exercise the degree of care, skill, and diligence reasonably expected of a diligent person carrying out the same functions while also applying their actual personal knowledge and experience.

Business Judgement Rule (Section 76(4))

A statutory protection ensuring directors are not liable for poor business outcomes if they took reasonably diligent steps to be informed, had no material personal financial conflicts under Section 75, and reasonably believed the decision was in the company's best interests.

Personal Financial Interest (Section 75)

A direct conflict where a director or a related person has a financial stake in a matter before the board, requiring the director to disclose the interest, provide material information, recuse themselves, and exit the meeting during deliberation.

Prescribed Officer (Regulation 38)

An executive who, despite not being a director, exercises or regularly participates to a material degree in general executive control and management over all or a significant portion of the company's business, subjecting them to directors' duties and liabilities under Sections 75 to 77.

Company Secretary (Section 88)

The principal administrative officer mandated for public and state-owned companies to guide directors on statutory powers and duties, report non-compliance, record meeting minutes, and certify annual financial statements.

Audit Committee (Section 94)

A statutory committee elected by shareholders at each AGM in public and state-owned companies, comprising at least $3$ independent directors to oversee internal controls, nominate the auditor, and approve non-audit services.

Social and Ethics Committee (Regulation 43)

A statutory board committee mandated for SOCs, listed companies, and companies with a public interest score of $500$ or more points in $2$ of the previous $5$ years to monitor sustainable development, corporate citizenship, labour, and environmental performance.

Derivative Action (Section 165)

The statutory remedy enabling shareholders, directors, registered trade unions, or persons granted leave by a court to demand that a company institute or continue legal proceedings to protect its legal interests, replacing the common-law rule.

Appraisal Rights (Section 164)

A minority shareholder protection mechanism allowing dissenting shareholders to exit and receive cash payment for the fair value of their shares if a special resolution approves an adverse MOI amendment or a fundamental transaction (Sections 112 to 114).

Ordinary Resolution vs Special Resolution

An ordinary resolution requires more than $50\%$ of voting rights exercised, whereas a special resolution requires at least $75\%$ of voting rights exercised (maintaining a minimum $10\%$ statutory margin if changed by the MOI).

Shareholder Activism

The practice of shareholders taking an active ownership stance to influence company policy, board composition, and management behavior through dialogue, voting against resolutions, requisitioning meetings, or public campaigns.

Integrated Reporting

A holistic corporate reporting practice combining financial performance with environmental, social, and governance issues to communicate how an organisation creates value over the short, medium, and long term.

Integrated Thinking

The active internal management process of considering the relationships between operating units and the capitals that the organisation uses or affects, leading to balanced decision-making.

The Six Capitals

The forms of capital utilised and affected by an organisation to create value: financial, manufactured, intellectual, human, social and relationship, and natural capital.

Combined Assurance (King IV Principle 15)

A model overseen by the audit committee integrating five lines of assurance—management, risk/compliance, internal audit, external assurance providers, and governing body oversight—to provide an effective internal control environment.

Risk Governance

The strategic system and processes by which the governing body exercises oversight to steer, set risk appetite and tolerance, and monitor how management identifies and navigates threats and opportunities.

Risk Appetite vs Risk Tolerance

Risk appetite is the aggregate amount and type of risk an organisation is willing to pursue or retain to achieve strategic objectives; risk tolerance refers to the acceptable operational variation or limits around those objectives.

TART Framework

The four core strategic risk responses evaluated by a governing body: Terminate (cease the activity), Accept (tolerate the risk), Reduce (treat the risk with internal controls), or Transfer (shift risk via insurance or contracts).

Technology and Information Governance (King IV Principle 12)

The board's strategic oversight of digital and data assets to ensure they support organizational goals, deliver return on investment, maintain cyber resilience, and comply with data protection laws.

Irregular Expenditure (PFMA)

Expenditure incurred without complying with an applicable legal requirement, including the Public Finance Management Act, Treasury Regulations, or statutory procurement procedures.

Fruitless and Wasteful Expenditure (PFMA)

Expenditure made in vain that would have been avoided had reasonable care been exercised, such as late payment penalties or payment for unutilised services.

Unauthorised Expenditure (PFMA)

Expenditure not budgeted for or spending that does not align with the allocated purpose of the relevant vote, representing unapproved state expenditure.

Accounting Authority (PFMA Section 49)

The governing body or board of a state-owned entity that carries statutory fiduciary duties under Section 50 to prevent irregular and wasteful expenditure and protect public funds.

Corporate Social Responsibility (CSR) vs Corporate Social Investment (CSI)

CSR is an integrated operational commitment managing an organisation's entire economic, social, and environmental impact; CSI consists of external discretionary donations and community projects funded from profits.

Triple Bottom Line (TBL)

A corporate performance framework introduced in King II assessing organizational success across three dimensions: People (social), Planet (environmental), and Profit (economic).

Delinquent Director (Section 162)

A director disqualified by court order for seven years or for life due to gross abuse of position, taking personal advantage of corporate information, gross negligence, wilful misconduct, or breach of trust.