CH12 QB Corporate governance

Question 1

Jacob has just been appointed as a Non-executive Director of Pulsemania plc, a FTSE 350
company. A consultant told him that under the UK Corporate Governance Code he has the
following responsibilities as a non-executive director.
Responsibility 1 Satisfying himself about the integrity of the company’s financial
information
Responsibility 2 Reporting on the performance of the company
Responsibility 3 Determining appropriate levels of remuneration for executive directors
Responsibility 4 Satisfying himself that financial controls and systems of risk
management are robust and defensible
Which will be Jacob’s responsibilities?
A 1, 2 and 3
B 2, 3 and 4
C 1, 2 and 4
D 1, 3 and 4

Answer 1

D
Satisfying himself about the integrity of the company’s financial
information
-> Responsible
Reporting on the performance of the company -> Not responsible
Determining appropriate levels of remuneration for executive
directors
-> Responsible
Satisfying himself that financial controls and systems of risk
management are robust and defensible
-> Responsible
The role of a non-executive director is to monitor the reporting of performance by the
executive directors, not to do the reporting. These rules are set out in the supporting
principle for the main principle A4 (leadership: non-executive directors) in the Code.

Question 2

The chairman of Raygold plc, a FTSE 350 company, is considering which of the company’s
non-executive directors can be classified as independent. Even if a non-executive director
has worked as an employee for the company in the past, they may still be classified as
independent if the period of employment finished at least:
A two years ago
B three years ago
C four years ago
D five years ago

Answer 2

D This is set out in the provision supporting B1 (effectiveness: the composition of the
board) in the Code.

Question 3

Jumpers plc has just joined the FTSE 350. A consultant has made the following two
statements about the company and the UK Corporate Governance Code.
Statement (1) As Jumpers plc is in the FTSE 350, the Listing Rules mean that the Code
applies so the company must never depart from any of its requirements.
Statement (2) If Jumpers plc had joined the FTSE 100, compliance with the Code would
be a statutory requirement.
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true

Answer 3

B
As Jumpers plc is in the FTSE 350, the
Listing Rules mean that the Code applies
so the company must never depart from
any of its requirements.
-> False
The Code applies to all FTSE 350
companies by virtue of the Listing Rules.
While they are expected to comply with
the main principles, non-compliance with
supporting principles and provisions is
allowed provided it is properly explained
- If Jumpers plc had joined the FTSE 100,
compliance with the Code would be a
statutory requirement.
-> False
Even in the FTSE 100 the Code is applied
via the Listing Rules, not by statute

Question 4

According to the UK Corporate Governance Code, a company should seek to improve
corporate governance by ensuring that:
A the chairman and chief executive are the same individual in order to avoid confusion
over who has responsibility for running the company
B the chairman and chief executive are different individuals in order to prevent one
person having too much power within the company
C the chairman and chief executive are different individuals in case one dies or becomes
incapacitated by ill health
D the company chairman does not take up outside directorships

Answer 4

B A company should seek to improve corporate governance by ensuring that the
chairman and chief executive are different individuals. This prevents one person from
having unfettered powers of decision, in line with main principle A2 (leadership:
division of responsibilities) of the Code.

Question 5

The performance of Petula in her role as an executive director of Jemson plc is due to be
evaluated in line with the requirements of the UK Corporate Governance Code. This means
that her performance will be judged in terms of:
A her effectiveness of contribution and time commitment to the role
B her time commitment to the role only
C her effectiveness of contribution only
D neither of these

Answer 5

A This is set out in principles supporting main principle B6 (effectiveness: evaluation) of
the Code.

Question 6

The UK Corporate Governance Code contains principles for the level and make-up of
directors’ remuneration. A consultant has listed the following as being among these
principles.
Principle 1 Design remuneration to promote the long-term success of the company
Principle 2 Establish a formal and transparent procedure for developing policy on
executive remuneration and for fixing the remuneration packages of
individual directors
Principle 3 Obtain the auditor’s approval of the remuneration set
Which of these are contained in the UK Corporate Governance Code?
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1, 2 and 3

Answer 6

A
Design remuneration to promote the
long-term success of the company
-> True
Main principle D1: remuneration: level
and components of remuneration
- Establish a formal and transparent
procedure for developing policy on
executive remuneration and for fixing the
remuneration packages of individual
directors
-> True
Main principle D2: remuneration
procedure
- Obtain the auditor's approval of the
remuneration set
-> False
The auditors are not required to approve
the remuneration though they should
ensure that there is appropriate
disclosure in the financial statements

Question 7

The board of directors of Kempton plc is considering the membership of its remuneration
committee. In this regard, which statement is true?
A The chairman must be one of the members of the remuneration committee.
B The chairman may be both a member and chair of the remuneration committee.
C The chairman may be a member but cannot chair the remuneration committee.
D The chairman cannot be a member of the remuneration committee.

Answer 7

C This is set out in provisions supporting main principle D2 (remuneration: procedure) of
the Code.

Question 8

Which statement about the requirements of the UK Corporate Governance Code is true?
A Non-executive directors of FTSE 350 companies, once appointed, only need to be
submitted for re-election every three years.
B The board’s responsibility to present a fair, balanced and understandable assessment
of company performance extends to interim reports as well as to annual financial
statements.
C Directors’ service contracts should not exceed three years.
D The annual report should state the company’s business model but its strategy for
delivering the objectives of the company may remain confidential

Answer 8

B
Non-executive directors of FTSE 350
companies, once appointed, only need
to be submitted for re-election every
three years.
-> False
In the FTSE 350 they must be submitted
for annual election just like executive
directors (principle supporting main
principle B7 effectiveness; re-election)
- The board's responsibility to present a
fair, balanced and understandable
assessment of company performance
extends not only to annual financial
statements but also to interim reports.
-> True
This is in the principles supporting main
principle C1 (accountability: financial and
business reporting)
- Directors' service contracts should not
exceed three years.
-> False
The Code recommends that contract or
notice periods should not exceed one
year; if a longer period is agreed for a
new director then this should be reduced
to one year or less as soon as possible
(provisions supporting main principle D1:
level and components of remuneration)
- The annual report should state the
company's business model but its
strategy for delivering the objectives of
the company may remain confidential.
-> False
Provisions supporting main principle C1
on accountability (financial and business
reporting) state that both the business
model and the strategy should be in the
annual report

Question 9

Flange plc is planning its forthcoming Annual General Meeting (AGM). Which, if any, of the
following committees should be represented by their chairman at the meeting?
A Audit
B Audit and remuneration
C Audit, remuneration and nomination
D None of these

Answer 9

C This is set out in provisions supporting main principle E2 (relations with shareholders:
constructive use of the AGM) of the Code.

Question 10

Paul has become aware of theft from his employer, Mortice plc, by one of its directors. He
wants to bring this to the attention of the company but does not know how to do so in line
with the UK Corporate Governance Code. Which of the following is responsible for
reviewing arrangements by which staff may, in confidence, bring such matters to the
attention of the company?
A The company chairman
B The board of directors
C The non-executive directors
D The audit committee

Answer 10

D This is set out in provisions supporting C3 (accountability: audit committee and
auditors) of the Code.

Question 11

Merton plc is a small listed company outside the FTSE 350. As a consequence, the company:
A must comply with all the requirements of the UK Corporate Governance Code
B is governed by other corporate governance regulations than the UK Corporate
Governance Code
C can be flexible in how it applies the UK Corporate Governance Code
D is not affected by the requirements of the UK Corporate Governance Code

Answer 11

C The company can be flexible in how it applies the UK Corporate Governance Code (C).
Non-FTSE 350 companies may depart even from the main principles in particular
circumstances provided their non-compliance is explained (A). The company will be
expected to adhere to the requirements of the Code by virtue of being listed (B) and
(D).

Question 12

In relation to the fundamental accounting principles directors are expected to report in the
company’s annual financial statements on:
A the going concern status of the company
B the materiality of specific company transactions
C the accruals approach to accounting in the company
D the consistency of treatment of particular items or transactions by the company

Answer 12

A The directors have to state that the financial statements are prepared on the going
concern basis, if this is the case. They must also state whether there are any material
uncertainties about the company’s ability to continue as a going concern for at least
12 months from the date of approval of the financial statements.

Question 13

Slaithwaite plc is listed but is outside the FTSE 350. According to the UK Corporate
Governance Code, this means that the minimum number of independent non-executive
directors who should sit on the company’s board is:
A one
B two
C three
D variable, as it depends on the total number of people on the board

Answer 13

B This is set out in provisions supporting main principle B1 (effectiveness: the
composition of the board) of the Code.

Question 14

Shareholders often believe the external auditor’s opinion means that the financial
statements of a company are ‘correct’. If the published financial statements are
subsequently found to be ‘incorrect’, perhaps due to a fraud, shareholders then blame the
auditor. However, in fact responsibility for preventing and detecting fraud and error lies
with:
A the directors of the company only
B the directors and management of the company
C the management of the company only
D the company’s audit committee

Answer 14

B Both the directors and the management have responsibility as senior management to
protect the company against fraud and error

Question 15

Hilditch plc is currently creating a list of potential members of its audit committee. Under
the UK Corporate Governance Code, the list must comprise only:
A independent non-executive directors with recent and relevant financial experience
B independent non-executive directors with at least one who has recent and relevant
financial experience
C non-executive directors with recent and relevant financial experience
D non-executive directors with at least one who has recent and relevant financial
experience

Answer 15

B Provisions supporting main principle C3 (accountability: audit committee and auditors)
of the Code state that the requirement is for independent non-executive directors, with
at least one member of the committee needing to have recent and relevant financial
experience, but not all of them.

Question 16

Under the requirements of the UK Corporate Governance Code, who is responsible for
maintenance of sound risk management and internal control systems?
A Just the executive directors
B Just the non-executive directors
C The entire board of directors
D The audit committee

Answer 16

C The entire board is responsible: main principle C2 (accountability: risk management
and internal control) of the Code

Question 17

Megan is a full-time Executive Director of Rifkind plc, a FTSE 100 company. The executive
directors of Carnforth plc, another FTSE 100 company, have asked her to become chairman
of Carnforth plc in addition to her existing role with Rifkind plc. The guidance provided by
the UK Corporate Governance Code means that:
A Megan will be allowed to accept the offer
B Megan will not be allowed to accept the offer
C Megan will only be allowed to accept the offer if she can show she has the available
time
D Megan will only be allowed to accept the offer if the non-executive directors of both
companies agree

Answer 17

B As a full-time executive director of a FTSE 100 company, the guidance is that she
should not be permitted to take on the chairmanship of another FTSE 100 company.
This is in provisions supporting main principle B3 (effectiveness: commitment) of the
Code

Question 18

Cheshunt plc is considering the re-appointment of its external (statutory) auditors. The
precise level of remuneration to be paid to the external auditors has been agreed between
the company chairman and the senior partners of the audit firm. However, under the
requirements of the UK Corporate Governance Code, before the re-appointment can be
finalised the chairman of Cheshunt plc must obtain the approval of:
A the nomination committee
B the remuneration committee
C the board of directors
D the audit committee

Answer 18

D This is in provisions supporting main principle C3 (accountability: audit committee and
auditors) of the Code.

Question 19

Sheila is the Chief Executive of Forton plc. The remuneration committee has created a new
long-term incentive scheme for Sheila, the details of which have now been agreed.
However, under the requirements of the UK Corporate Governance Code, before the
scheme can be finalised it must be approved by the company’s:
A board of directors
B shareholders
C chairman
D non-executive directors

Answer 19

B This is in provisions supporting main principle D1 (remuneration: level and
components of remuneration) of the Code.

Question 20

With regard to the board of directors of a listed company (excluding the chairman), the
UK Corporate Governance Code requires that the proportion who are independent nonexecutive directors should be:
A between 10% and 24%
B between 25% and 39%
C between 40% and 49%
D 50% or over

Answer 20

D One of the provisions supporting main principle B1 (effectiveness: the composition of
the board) is that at least 50% of the board, excluding the chairman, should be
independent non-executive directors. SAMPLE PAPER

Question 21

Fox plc has engaged its external (statutory) auditors to provide the company with
consultancy services. Which entity would usually be expected to examine the implications
of this engagement?
A The board of directors
B The remuneration committee
C The audit committee
D The non-executive directors

Answer 21

C One of the specific roles and responsibilities given to the audit committee by the Code
is the development and implementation of policy on engaging the external auditor to
supply non-audit services. This is in provisions supporting main principle C3
(accountability: audit committee and auditors).

Question 22

The appointment of suitably qualified, independent external (statutory) auditors is the
decision of a listed company's:
A shareholders
B audit committee
C board of directors
D finance director

Answer 22

A It is the shareholders who actually vote to appoint the external auditors (A), although
this is usually on the recommendation of the audit committee (B) and the board (C).
The finance director (D) may be heavily involved in the conduct of the audit but should
not be actively involved in appointment except as a member of the board.

Question 23

Sumatra plc operates its own internal audit function. It chooses not to make use of an
external supplier for these services. It is therefore vital that the company has arrangements
to ensure that there is no compromise of the:
A independence of the internal auditors
B integrity of information security systems
C stewardship of directors
D rigour of financial reporting processes

Answer 23

A An effective internal audit function has, as a fundamental requirement, to maintain its
independence at all times. SAMPLE PAPER

Question 24

Vidal is the Chief Executive of Plainton plc, a FTSE 350 company. His fellow directors want
him to become the company’s existing chairman, who is due to retire shortly. They also
want him to stay as chief executive for the first year of his chairmanship, while a new chief
executive is sought.
The guidance in the UK Corporate Governance Code means that:
A Vidal can assume both roles concurrently subject to consultation with major
shareholders
B Vidal should not assume both roles concurrently
C Vidal can assume both roles concurrently subject to the board setting out their reasons
at the time of appointment and in the next annual report
D Vidal can only assume both roles concurrently if the non-executive directors of the
company agree

Answer 24

B The roles of the chairman and chief executive should not be exercised by the same
individual (provision supporting main principle A2 leadership: division of
responsibilities).

Question 25

The audit committee of Lancaster plc is considering its recommendation to the board about
re-appointing Kirk & Co as the company’s external (statutory) auditors. Under the
requirements of the UK Corporate Governance Code, the committee is concerned with the
past effectiveness of the audit process. It will also be concerned with which of the following
pairs of characteristics of the audit firm?
A Its integrity and independence
B Its value-for-money and integrity
C Its objectivity and value-for-money
D Its independence and objectivity

Answer 25

D Provision supporting main principle C3 accountability: audit committee and auditors

Question 26

Shona has just been appointed as a Director of Impala plc, an unlisted company. Following
her appointment, she will be subject to election by shareholders:
A at the first AGM after her appointment and then at intervals of no more than three years
after that
B at the first AGM after her appointment and then at intervals of no more than two years
after that
C only at the first AGM after her appointment
D at every AGM LO 5c, 5

Answer 26

A Directors are appointed by the board and then elected by shareholders at the next
AGM. They also face re-election every three years after that.

Question 27

Zyntec plc is a listed company that has recently had an external audit. As well as whether
the financial statements give a ‘true and fair view’ of the company’s performance and
financial position, which of the following will the external auditors have reported on?
A The experience and ability of the chief finance officer
B Whether the staff in the finance function are compliant with CPD requirements
C The company’s compliance with the UK Corporate Governance Code
D The standard of the work performed by the internal audit function

Answer 27

C In addition to the ‘true and fair view’ of the financial statements, an external auditor of a
listed company also reports on the company’s compliance with the UK Corporate
Governance Code and the directors’ remuneration report.