3)1) The UK Corporate Governance Code

Question 1

1.1 What is Corporate Governance?

Answer 1

The system by which companies are directed and controlled
Boards of directors are responsible for governance

Question 2

1.1 What is the shareholders’ role in Corp governance?

Answer 2

Shareholders’ role is to appoint directors and auditors to satisfy corp governance

Question 3

1.1 What is the board’s responsibilities?

Answer 3

Responsibilities include:
- setting the company’s strategic aims
- providing the leadership to put them into effect
- supervising the management of the business
- reporting to shareholders on their stewardship

Question 4

1.1 Who is the UK Corporate Governance Code (the Code) published by?

Answer 4

The Financial Reporting Council (FRC)

Question 5

1.1 What were the FRC’s main conclusions following their review of the Code?

Answer 5

More attention should be paid to following the spirit of the code, as well as the letter
The impact of shareholders in monitoring the Code could and should be enhanced by better interaction between the boards of listed companies and their shareholders

Question 6

1.1 Who does the UK Corporate Governance Code apply to?

Answer 6

All companies with a premium listing of equity shares in the UK, regardless of whether they are incorporated in the UK or overseas

Question 7

1.1 What changes does the latest edition of the Code, published in 2018, make?

Answer 7

Broadens the definition of governance and emphasises the importance of:
- positive relationships between companies, shareholders and stakeholders
- a clear purpose and strategy aligned with healthy corporate culture
- high-quality board composition and a focus on diversity
- remuneration, which is proportionate and supports long-term success

It is designed to:
- set higher standards of corporate governance to promote transparency and integrity in business
- attract investment in the UK for the long-term, benefitting the economy and wider society

Question 8

1.2 Is the Code mandatory?

Answer 8

It is not a set of rules, but rather guidance.

However, the Listing Rules require all companies with a premium listing in the UK to include a corp governance report (the disclosure statement) in their annual report and accounts

Question 9

1.2 What should a company’s corporate governance report include?

Answer 9

Describe how they have complied with the main principles of the Code
Show whether the company has or has not complied with all of the provisions, which, if any, it has not complied with, and for those that are of a continuing nature, the period in which, if any, it did not comply with some or all of these provisions, and the reasons for non-compliance

These descriptions should give shareholders a clear and comprehensive picture of the company’s governance arrangements in relation to the Code as a criterion of good practice

Question 10

1.2 When is it acceptable for a company to not follow specific provisions?

Answer 10

If good governance can be achieved through other means
Reasons for non-compliance should be explained to shareholders whose voting intentions may shift as a result

This approach has been in operation since the Code’s beginnings in 1992, and the flexibility it offers is valued by both company boards and investors

Question 11

1.2 Who is the Code voluntary for?

Answer 11

Standard listed companies or companies quoted on AIM or the Aquis Growth Market

These companies are encouraged to follow the Code, however

Question 12

1.2 Who are the Association of Investment Companies Corporate Governance Code and Guide used for?

Answer 12

Externally managed investment companies with a different board structure

Question 13

1.2 What are the 5 sections of the Code?

Answer 13

1. Board Leadership and Company Purpose
   - Guidance on leadership, strategy and policy from and of the board
2. Division of Responsibilities
   - within the board
3. Composition, Succession and Evaluation
   - within the board
4. Audit, Risk and Internal Control
   - policies of the company and the board
5. Remuneration
   - of the board

Question 14

1.2.1 What are the main principles under section 1. Board Leadership and Company Purpose?

Answer 14

• successful company comes from effective and entrepreneurial board, role is to promote long-term sustainable success, generating value for shareholders and wider society
• board should establish company purpose, values and strategy, and align company culture with these. Directors must act with integrity and lead by example
• board should ensure that necessary resources are in place for company to meet its objectives and measure performance against them.
• board should establish a framework of prudent and effective controls, which enable risk to be assessed and managed
• for company to meet responsibilities to shareholders and stakeholders, the board should ensure effective management with, and encourage participation from, these parties
• workforce policies and practices are consistent with the company’s values and support long-term sustainable success. Workforce should be able to raise any concerns

Question 15

1.2.2 What are the main principles under section 2. Division of Responsibilities?

Note, independence of a director referenced by other current or recent connections to the company or its exec directors, such as employment, shareholdings, commercial arrangements or familial relations

Answer 15

• the chair leads the board and is responsible for overall effectiveness in directing the company. Should demonstrated objective judgement and promote a culture of openness and debate.
• the chair facilitates constructive board relations and effective contribution of all NEDs, and ensures all directors receive accurate, timely and clear info
• the board should include an appropriate combination of exec and non-exec (and, in particular, independent non-exec) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the exec leadership of the company’s business
• NEDs should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account
• The board, supported by the company secretary, should ensure that it has the policies, processes, info, time and resources it needs in order to function effectively and efficiently

Question 16

1.2.2 What are the main provisions in section 2. Division of Responsibilities?

Answer 16

Focus on the independence of the chair and NEDs
Half the board should be independently led by a senior independent director - doesn’t apply for all boards e.g. for UK funds, NED membership requirement is only 25%
NEDs have the prime role in appointing and removing exec directors
written responsibilities of the board and committee are clear
sufficient time for board responsibilities
all directors have access to the company secretary

Question 17

1.2.3 What are the main principles under section 3. Composition, Succession and Evaluation?

Answer 17

• Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management.
  -Appointments and succession plan based on merit and obj criteria
  
  • should promote diversity of gender, social and ethnic backgrounds, and cognitive and personal strengths
• board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to length of service of the board as a whole and membership regularly refreshed
• Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively

Question 18

1.2.3 What are the main provisions in section 3. Composition, Succession and Evaluation?

Answer 18

Use of effective board committees for nominations and remuneration
All directors are subject to annual re-election
The tenure of the chair is not to remain beyond nine years
The use of open advertising and an external search for the appointment of the chair and NEDs
Rigorous assessment of performance and suitability of the board, committees, the chair and individual directors
Full disclosure of the nomination committee work

Question 19

1.2.4 What are the main principles under section 4. Audit, Risk and Internal Control?

Answer 19

• Board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements
• Board to present a fair, balance and understandable assessment of the company’s position and prospects
• Board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives

Question 20

1.2.4 What are the main provisions in section 4. Audit, Risk and Internal Control?

Answer 20

• The establishment and effectiveness of the audit committee in performing its various roles and responsibilities
  inc - its advice to whether the annual report and accounts are fair, balanced and understandable
  - Any disclosures on significant issues
  - the directors’ responsibility statement for annual report and accounts
  - robust assessment of emerging and principal risks
  - monitoring of risk management and internal control systems
  - the going concern and viability statement

Question 21

1.2.5 What are the main principles under section 5. Remuneration?

Answer 21

• Policies and practices should be designed to support strategy and promote long-term sustainable success
• Exec remuneration aligned with company purpose and values, clearly linked to the successful delivery of the company’s long-term strategy
• Formal and transparent procedure for developing policy on exec remuneration and determining director and senior management remuneration should be established.
• Directors not involved in deciding own remuneration
• Directors exercise judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances

Question 22

1.2.5 What are the main provisions in section 5. Remuneration?

Answer 22

• establishment of the remuneration committee and its role in setting remuneration
  
  • should address key issues such as clarity, simplicity, risk, predictability, proportionality and alignment to culture
• reporting on any use of remuneration consultants
• the independence of the remuneration committee
• pensions are based on basic salary
• notice or contract periods should be kept to less than one year where possible
• the work of remuneration committee is described in the annual report

Question 23

1.2.6 What have been the notable changes on “Diversity” in the Code?

Answer 23

2010-11
- The govt commissioned a review of gender diversity on the boards of listed companies (the Davies Review). The aim was to identify the barriers preventing more women from reaching the boardroom, and to make recommendations on how govt business could increase the proportion of women on boards
- report recommended FRC to change the Code so premium listed companies had to establish policies on boardroom diversity with measurable objectives

2012
- Companies are required to report on boardroom diversities

2017
- Employers in the UK with more than 250 staff required to publish four figures annually on their own and a govt website:
- gender pay gap
- gender bonus gap
- proportion of men and women receiving bonuses
- proportion of men and women in each quartile of the organisation’s pay structure
- Quoted companies with employees > 250 to also publish the ratio of pay between that of their CEO and UK FTE employees at the 25th, Median and 75th percentiles

Question 24

1.2.7 According to the Quote Companies Alliance (QCA), how many AIM companies follow the QCA corp governance code?

Answer 24

89% (as at 22 Aug 2023)

Question 25

1.2.7 What are the 10 principles the QCA Corporate Governance code are based on?

Answer 25

1. Establish a strategy and business model which promotes long-term value for shareholders
2. Seek to understand and meet shareholder needs and expectations
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success
4. Embed effective risk management, considering both opportunities and threats, throughout the organisation
5. Maintain the board as a well-functioning, balanced team led by the chair
6. Ensure that between them, the directors have the necessary up-to-date experience, skills and capabilities
7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
8. Promote a corporate culture that is based on ethical values and behaviours
9. Maintain governance structures and processes that are fit for purpose and support good decision making by the board
10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

Question 26

1.2.8 What were the proposed changes the FRC published in May 2023 to strengthen UK Governance Code?

Answer 26

• revised framework of prudent and effective controls for stronger basis for reporting on, and evidencing their effectiveness
• improving the functioning of comply or explain, taking account of recently published FRC research and reports
• Making necessary revisions reflecting responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company’s audit and assurance policy
• ensure the Code aligns with changes to legal and reg requirements as set out in the govt’s response to the White Paper, inc strengthening reporting on malus and clawback arrangements

Question 27

1.2.10 What are the Wates Principles?

Answer 27

Provide framework for large private companies to raise their standards of corporate governance by offering a structure for reporting to fulfil their legal requirements and demonstrate good practice

Question 28

1.2.10 Under the Companies (Miscellaneous reporting) Regulations 2018, what size must private companies be to be required to disclose their corp governance arrangements in their directors’ report and on their website?

Answer 28

Satisfying either or both
- more than 2000 employees
- turnover more and £200mill and a balance sheet more than £2 bill

Question 29

1.2.10 What are the 6 principles of the Wates Principles?

Answer 29

• Purpose and leadership
• Board Composition
• Director Responsibilities
• Opportunity and Risk
• Remuneration
• Stakeholder Relationships and Engagement

Stakeholder engagement is a key theme. Companies must be able to show how they engage with stakeholders

Question 30

1.3 Who is the UK Stewardship code aimed at?

Answer 30

Institutional investors such as asset owners, asset managers and service providers, operating alongside the UK Corp Governance Code for listed companies

This is voluntary

Question 31

1.3 What does the UK Stewardship code 2020 define ‘stewardship’ as?

Answer 31

‘The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society’

Question 32

1.3. What is the purpose of the UK Stewardship code?

Answer 32

Improve the quality of corporate governance by promoting better dialogue between shareholders and company boards, and increase transparency about the way in which investors oversee the companies they own