5.1. Governing Corporations Flashcards
Corporate governance…
Process of controlling and managing organisations at the highest level.
Helps avoid corporate failures and scandals.
Failure to prevent this can cause share price falls, economic concern and financial failure for the company.
This can damage shareholders as their investments lose value.
Shareholder perspective of corporate governance…
Corporate governance aims to mitigate the agency problem.
Shareholders should appoint the board of directors and auditors to be satisfied that appropriate controls are in place.
Stakeholder perspective…
Corporations should be well-governed for the benefit of society, focuses on societies’ wider interests, such as tax revenues, employment and economic impact.
Corporate governance ensures that corporations are held accountable to all their stakeholders.
The board of directors…
Elected by shareholders at the AGM.
Responsible for policy making, supervising and supporting management, external relations, accountability and board maintenance.
Directors must act in the best interest of shareholders (fiduciary duty).
Four duties of the board of directors…
Fiduciary duty: must act in the best interest of the shareholders.
Duty of loyalty and fair dealing: directors must put shareholder interests before their own.
Duty of care: being informed to make rational decisions with the aim of protecting and advancing the interests of the shareholders.
Duty of supervision: review corporate performance, management and operations.
Organising the board…
The board comprises: Chairman, group Chief Executive, Chief Financial Officer, Senior Independent Director and several independent non-executive directors.
Board committees: audit, remuneration, nominations and governance and corporate and social responsibility.
Executive committee: supports the CEO in conducting his role and manages the day-to-day operations of the group’s business.
Audit committee…
Responsible for the assessment and oversight of financial reporting.
This includes internal controls, risk management and compliance.
Responsible for appointing external auditors.
Remuneration committee…
Ensures remuneration policies are designed to support corporate strategy and promote long-term sustainable success.
Ensures that executive remuneration is aligned to the successful delivery of the company’s long-term strategy.
If there is a good bonus on the line, the directors will work hard to achieve it.
Nominations and governance committee…
Reviews the size and composition of the board of directors.
Lead the process for appointment to the board.
Monitors the board and senior management succession planning.
UK Corporate Governance Code 2018…
2018 Corporate Governance code says that corporations should be:
- Successful and sustainable.
- Promote integrity and openness.
- Value diversity.
- Be responsive to the views of shareholders and wider stakeholders.
Applicable to all premium listed companies after January 2019.
Five new principles of the UK Corporate Governance Code 2018…
Board leadership and company purpose:
- Promote long-term sustainability.
- Ensure the company’s actions align with its culture.
Division of responsibility:
- Appropriate combination of executive and non directors who can execute responsibilities.
Composition, succession and evaluation:
- Rigorous and transparent procedure for board appointment.
- Annual evaluation of the board.
Audit, risk and internal control:
- Formal and transparent policies and procedures to ensure independent and effective internal and external audit.
- Present a balanced and understandable assessment of the corporation’s position.
- Procedures to manage risk.
Remuneration:
- Formal and transparent policy.
- Directors shouldn’t decide their own remuneration.
- Independent judgement and discretion when authorising outcomes.
UK Stewardship Code 2020…
Aims to make institutional investors be active and engage in corporate governance in the interests of their beneficiaries.
This is voluntary and applies standards beyond the minimum regulatory requirements.
