10: Corporate Governance Flashcards
Who does UK Corporate Governance Code apply to? Is it a legal requirement?
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
What are the five sections of the CGC?
Board leadership and company purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Remuneration
5 key responsibilities of the board?
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
What are the roles on a board composition?
Chair
Chief executive officer
Non-executive directors
Executive directors
Senior independent director
What does a chair do and who can they be?
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
What do NEDs do and who can they be?
Review financial controls and risk management
Appoint, remove and set remuneration of EDs
Chair should make sure they hold meetings with NEDs without EDs
How are directors put on the board?
‘appointed’ by board
‘elected’ by shareholders at next AGM
What do executive directors do?
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
How many independent NEDs are needed?
Over 50% of the board (excluding the chair) should compromise independent NEDs
Smaller listed companies should have at least 2 INEDs
What makes INEDs INEDS???
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
Who should be on the nominations committee?
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)
Who is senior independent director?
Top INED!
How regularly does a board performance need to be evaluated?
Annually
Each director should be evaluated based on effectiveness of contribution and time commitment
5 things board need to say in annual report
Confirm their responsibility
True and fair view
Going concern
Any material uncertainties
Assessment of principle risks
RA and internal controls
Who sits on the audit committee?
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
4 responsibilities of audit committee?
Financial statements review
Financial controls/internal audit
External auditor
Whistleblowing
What is the guidance for ED renumeration?
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
What is the guidance for NED renumeration?
Determined by the board
Should reflect time commitment and responsibilities (NOT performance)
Cannot include share options
Who sits on the remuneration committee?
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
How does election and reelection work?
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
What other groups assist the board?
Institutional investors
- engage with companies to improve governance
External auditors
- report on compliance
Internal auditors
- review internal controls
Can companies with a premium listing depart from the code?
Yes, as long as they apply ‘comply or explain’.
When do the board of directors identify that the INEDs are independent?
In the annual report
Not in any meeting
What are provisions of the code for directors remuneration?
Only basic salary should be pensionable
Directors should not be rewarded for poor performance
How does re-election work?
Directors notice of service contracts should not exceed one years
NEDs should submit for annual re-election just like EDs
