10: Corporate Governance

Question 1

Who does UK Corporate Governance Code apply to? Is it a legal requirement?

Answer 1

Applies to all premium listed companies

Compliance with the code is NOT a legal requirement, but is an expectation

‘comply or explain’ approach

Recommended best practice for smaller companies

Question 2

What are the five sections of the CGC?

Answer 2

Board leadership and company purpose

Division of responsibilities

Composition, succession and evaluation

Audit, risk and internal control

Remuneration

Question 3

5 key responsibilities of the board?

Answer 3

Consideration of what makes a successful company

Engage with stakeholders

Set the purpose, values and strategy

Make sure necessary resources are in place (including RA and controls)

appropriate policies and procedures

Question 4

What are the roles on a board composition?

Answer 4

Chair
Chief executive officer
Non-executive directors
Executive directors
Senior independent director

Question 5

What does a chair do and who can they be?

Answer 5

Responsible for leadership of board

Sets the board’s agenda

Promotes openness and debate

Effective communication with shareholders

Should be independent on appointment

CAN chair more than one FTSE100 company

Cannot be the CEO or a past CEO

Appraised by NEDs, taking into account views of EDs

Question 6

What do NEDs do and who can they be?

Answer 6

Review financial controls and risk management

Appoint, remove and set remuneration of EDs

Chair should make sure they hold meetings with NEDs without EDs

Question 7

How are directors put on the board?

Answer 7

‘appointed’ by board
‘elected’ by shareholders at next AGM

Question 8

What do executive directors do?

Answer 8

Manage the day to day business of the company

Should not be the chair or occupy more than one NED role in another FTSE company

Question 9

How many independent NEDs are needed?

Answer 9

Over 50% of the board (excluding the chair) should compromise independent NEDs

Smaller listed companies should have at least 2 INEDs

Question 10

What makes INEDs INEDS???

Answer 10

They are not INEDs if they:
- been an employee in the last 5 years
- have a material business relationship within the last 3 years
- have served on board more than 9 years
- represent a shareholder or have family ties
- have cross directorships with other directors
- receive additional remuneration

Question 11

Who should be on the nominations committee?

Answer 11

Over 50% should be INEDs

NEDs serving longer than 6 years should have rigorous review

Chair or NED can chair (unless to do with chair nomination)

Question 12

Who is senior independent director?

Answer 12

Top INED!

Question 13

How regularly does a board performance need to be evaluated?

Answer 13

Annually

Each director should be evaluated based on effectiveness of contribution and time commitment

Question 14

5 things board need to say in annual report

Answer 14

Confirm their responsibility

True and fair view

Going concern

Any material uncertainties

Assessment of principle risks

RA and internal controls

Question 15

Who sits on the audit committee?

Answer 15

3 NEDs for premium listed companies

2 NEDs for smaller companies

At least one NED must have recent and relevant financial experience

Chaired by a NED

The chair can be a member in smaller companies

Question 16

4 responsibilities of audit committee?

Answer 16

Financial statements review

Financial controls/internal audit

External auditor

Whistleblowing

Question 17

What is the guidance for ED renumeration?

Answer 17

Determined by remuneration committee

Promote long term success of company

Performance related elements acceptable, if transparent and rigorous

Shareholders can approve new long term schemes

Question 18

What is the guidance for NED renumeration?

Answer 18

Determined by the board

Should reflect time commitment and responsibilities (NOT performance)

Cannot include share options

Question 19

Who sits on the remuneration committee?

Answer 19

Decides the remuneration for:
- EDs
- chair
- senior management

3 INEDS for premium listed companies

2 INEDs for smaller companies

Chair may be a member, but the committee must be chaired by a NED

Question 20

How does election and reelection work?

Answer 20

For premium listed companies:
- all directors subject to annual election

For smaller companies:
- directors subject to election at first AGM post appointment
- subsequent election every three years
- NEDs serving more than 9 years should face annual reelection

Question 21

What other groups assist the board?

Answer 21

Institutional investors
- engage with companies to improve governance

External auditors
- report on compliance

Internal auditors
- review internal controls

Question 22

Can companies with a premium listing depart from the code?

Answer 22

Yes, as long as they apply ‘comply or explain’.

Question 23

When do the board of directors identify that the INEDs are independent?

Answer 23

In the annual report

Not in any meeting

Question 24

What are provisions of the code for directors remuneration?

Answer 24

Only basic salary should be pensionable

Directors should not be rewarded for poor performance

Question 25

How does re-election work?

Answer 25

Directors notice of service contracts should not exceed one years

NEDs should submit for annual re-election just like EDs