Chapter 10 - Corporate Governance

Question 2

What is the UK Corporate Governance Code?

Answer 2

The UK Corporate Governance Code is a code of practice that follows a corporate perspective on corporate governance. It includes requirements for shareholders as well as for companies themselves.

Question 3

Is compliance with the UK Corporate Governance Code a legal requirement?

Answer 3

No, compliance with the UK Corporate Governance Code is not a legal requirement. However, the London Stock Exchange Listing Rules require all premium listed companies to apply the Code’s main principles and to include in their annual reports a statement of compliance with the Code’s supporting principles and provisions or an explanation of non-compliance.

Question 4

What must companies with a premium listing on the London Stock Exchange do regarding the UK Corporate Governance Code?

Answer 4

Companies with a premium listing on the London Stock Exchange must comply with the UK Corporate Governance Code. They must review all provisions carefully and make a disclosure statement if they depart from any of them.

Question 5

Can companies justify departure from certain supporting principles and provisions of the UK Corporate Governance Code?

Answer 5

Yes, departure from compliance with certain supporting principles and provisions of the UK Corporate Governance Code may be justified in particular circumstances.

Question 6

What are the five main sections of the UK Corporate Governance Code?

Answer 6

The five main sections of the UK Corporate Governance Code are:
1 Board leadership and company purpose
2 Division of responsibilities
3 Composition, succession and evaluation
4 Audit, risk and internal control
5 Remuneration.

Question 7

What is the focus of the ‘Board leadership and company purpose’ section of the UK Corporate Governance Code?

Answer 7

It focuses on the overall role of the board, particularly its importance in setting the overall purpose, values, and strategy of the business.

Question 8

What principle does the UK Corporate Governance Code specify for effective leadership in a successful company?

Answer 8

A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.

Question 9

What is the board’s responsibility regarding the company’s purpose, values, and strategy according to the UK Corporate Governance Code?

Answer 9

The board should establish the company’s purpose, values, and strategy, and ensure these are aligned with its culture. All directors must act with integrity, lead by example, and promote the desired culture.

Question 10

What should the board ensure about resources and controls for the company?

Answer 10

The board should ensure that the necessary resources are in place to meet objectives and measure performance. It should also establish a framework of prudent and effective controls to assess and manage risks.

Question 11

How should the board engage with shareholders and stakeholders?

Answer 11

The board should ensure effective engagement with, and encourage participation from, shareholders and stakeholders to meet its responsibilities.

Question 12

What is the board’s responsibility regarding workforce policies and practices?

Answer 12

The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.

Question 13

What do the provisions in the UK Corporate Governance Code provide?

Answer 13

The provisions provide more details about the actions a company needs to take to comply with the overall principles. Premium listed companies must either comply with the provisions or explain why they have not done so.

Question 14

What is one example of a provision regarding value generation in the UK Corporate Governance Code?

Answer 14

The board should assess the basis on which the company generates and preserves value over the long term.

Question 15

What is a provision regarding culture in the UK Corporate Governance Code?

Answer 15

The board should assess and monitor culture.

Question 16

What should the Chair do to engage with major shareholders according to the UK Corporate Governance Code?

Answer 16

In addition to formal general meetings, the Chair should seek regular engagement with major shareholders to understand their views on governance and performance against the strategy.

Question 17

What does the ‘Division of responsibilities’ section of the UK Corporate Governance Code focus on?

Answer 17

It focuses on how the board should be organized, the roles of the Chair, the executive, and the NEDs (non-executive directors), and how the board should be supported by the company secretary.

Question 18

What are the responsibilities of the Chair according to the UK Corporate Governance Code?

Answer 18

The Chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgment, promote a culture of openness and debate, facilitate constructive board relations, and ensure directors receive accurate, timely, and clear information.

Question 19

What is required for the composition of the board in the UK Corporate Governance Code?

Answer 19

The board should include an appropriate combination of executive and non-executive directors, particularly independent non-executive directors, ensuring no individual or small group dominates decision-making. There should be a clear division of responsibilities between board leadership and executive leadership.

Question 20

What are the responsibilities of non-executive directors (NEDs)?

Answer 20

NEDs should have sufficient time to meet their responsibilities, provide constructive challenge, strategic guidance, offer specialist advice, and hold management to account.

Question 21

What is the role of the board and the company secretary in ensuring effective governance?

Answer 21

The board, supported by the company secretary, must ensure it has the policies, processes, information, time, and resources needed to function effectively and efficiently.

Question 22

What is the requirement for the Chair’s independence according to the UK Corporate Governance Code?

Answer 22

The Chair should be independent on appointment when assessed against the circumstances set out in Provision 10. The roles of Chair and Chief Executive should not be exercised by the same individual.

Question 23

What should the board include in the annual report regarding NEDs?

Answer 23

The board should identify in the annual report each NED it considers to be independent. Circumstances impairing independence include being an employee of the company within the last five years or having close family ties with any company advisers, directors, or senior employees.

Question 24

What is the composition requirement for independent NEDs on the board?

Answer 24

At least half the board, excluding the Chair, should be NEDs whom the board considers to be independent.

Question 25

What role do NEDs play in appointing and removing executive directors?

Answer 25

NEDs have a prime role in appointing and removing executive directors. They should scrutinize and hold management and individual executive directors accountable against agreed performance objectives.

Question 26

What should the board consider when making new appointments?

Answer 26

When making new appointments, the board should take into account other demands on directors' time.

Question 27

What is the guideline for full-time executive directors taking on non-executive directorships?

Answer 27

Full-time executive directors should not take on more than one non-executive directorship in an FTSE 100 company or other significant appointment.

Question 28

What does the 'Composition, succession and evaluation' section of the UK Corporate Governance Code focus on?

Answer 28

It focuses on the work of the nominations committee to appoint new directors. It also explains that all directors are subject to annual re-election, and the board and its committees are subject to annual performance review.

Question 29

What are the requirements for board appointments and succession plans?

Answer 29

Appointments to the board should be subject to a formal, rigorous, and transparent procedure. An effective succession plan should be maintained for board and senior management. Both should be based on merit and objective criteria, promoting diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.

Question 30

What combination should the board and its committees have?

Answer 30

The board and its committees should have a combination of skills, experience, and knowledge. Consideration should be given to the length of service of the board as a whole, and membership should be regularly refreshed.

Question 31

What should the annual evaluation of the board consider?

Answer 31

The annual evaluation should consider the board's composition, diversity, and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.

Question 32

What is the role of the nomination committee according to the UK Corporate Governance Code?

Answer 32

The board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.

Question 33

What is the requirement for directors regarding re-election?

Answer 33

All directors should be subject to annual re-election.

Question 34

What is the maximum term for a Chair according to the UK Corporate Governance Code?

Answer 34

The Chair should not remain in post beyond nine years from the date of their first appointment to the board.

Question 35

What is the focus of the 'Audit, Risk, and Internal Control' section of the UK Corporate Governance Code?

Answer 35

The focus is to support the integrity of financial statements by ensuring organisations have formal and transparent policies and procedures to allow independent and effective internal and external audit functions, with internal controls in place to manage risk.

Question 36

What policies should the board establish regarding audit functions?

Answer 36

The 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.

Question 37

What should the board's assessment of the company's position and prospects be?

Answer 37

The board should present a fair, balanced, and understandable assessment of the company's position and prospects.

Question 38

What procedures should the board establish regarding risk management?

Answer 38

The 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 to achieve its long-term strategic objectives.

Question 39

What are the requirements for an audit committee according to the UK Corporate Governance Code?

Answer 39

The board should establish an audit committee of independent NEDs, with a minimum membership of three (or two for smaller companies). The Chair of the board should not be a member. At least one member must have recent and relevant financial experience, and the committee as a whole should have competence relevant to the company's sector.

Question 40

What are some roles and responsibilities of the audit committee?

Answer 40

Roles include monitoring the integrity of the company's financial statements, conducting the tender process and recommending external auditors, reviewing the external auditor's independence and objectivity, and developing policies for engaging external auditors for non-audit services.

Question 41

What should directors explain in the annual report regarding financial statements?

Answer 41

Directors should explain their responsibility for preparing the annual report and accounts, and state that they consider it fair, balanced, and understandable. It should provide information necessary for shareholders to assess the company's position, performance, business model, and strategy.

Question 42

What is the board's responsibility regarding risk management and internal controls?

Answer 42

The board should monitor the company's risk management and internal control systems. It should annually review their effectiveness and report on that review in the annual report.

Question 43

What should the board state in annual and half-yearly financial statements regarding the going concern basis?

Answer 43

The board should state whether it considers it appropriate to adopt the going concern basis of accounting and identify any material uncertainties about the company's ability to continue over at least 12 months from the date of financial statement approval.

Question 44

What is the focus of the 'Remuneration' section in the UK Corporate Governance Code?

Answer 44

The focus is on the work of the remuneration committee to develop policy on the remuneration of executive directors and how remuneration should be set.

Question 45

What are the principles for remuneration policies and practices?

Answer 45

Remuneration policies and practices should support strategy and promote long-term sustainable success. Executive remuneration should align with company purpose and values, and link to the successful delivery of the company's long-term strategy.

Question 46

What procedure should be established for executive remuneration?

Answer 46

A formal and transparent procedure should be established for developing policy on executive remuneration and determining director and senior management remuneration. No director should be involved in deciding their own remuneration outcome.

Question 47

What should directors consider when authorizing remuneration outcomes?

Answer 47

Directors should exercise independent judgment and discretion, considering company and individual performance and wider circumstances.

Question 48

What are the requirements for the composition of the remuneration committee?

Answer 48

The remuneration committee should consist of independent NEDs, with a minimum membership of three (or two for smaller companies). The Chair of the board can only be a member if they were independent on appointment and cannot chair the committee.

Question 49

How should the remuneration of NEDs be determined?

Answer 49

The remuneration of NEDs should align with the Articles of Association or be determined by the board. It should reflect the time commitment and responsibilities of the role and not include share options or performance-related elements.

Question 50

What is the guideline regarding pensionable remuneration?

Answer 50

Only basic salary should be pensionable.

Question 51

What is the guideline for notice or contract periods?

Answer 51

Notice or contract periods should be one year or less. If it is necessary to offer longer periods to new directors recruited from outside the company, such periods should reduce to one year or less after the initial period. The remuneration committee should ensure compensation commitments in directors' terms of appointment do not reward poor performance. They should be robust in reducing compensation to reflect departing directors' obligations to mitigate loss.

Question 52

What is the purpose of an external audit?

Answer 52

The purpose of the external audit is to issue an opinion in an audit report on whether the financial statements produced by the directors give a 'true and fair view' of the company's financial performance during the reporting period and its financial position at the end of the period.

Question 53

Who appoints external auditors 1, and what is their role 3?

Answer 53

External auditors are appointed by a shareholder vote, following recommendations by the board and audit committee. Their role is to: 1. give an opinion on whether the financial statements are materially free from fraud and error 2. the directors' remuneration report is fairly stated 3. the company has complied with the UK Corporate Governance Code.

Question 54

Who is responsible for preventing and detecting fraud and error? 2

Answer 54

The responsibility for preventing and detecting fraud and error lies with: 1) Directors, who ensure that systems of internal control and risk management are working effectively as per the UK Corporate Governance Code and the Turnbull Guidance, and 2) Management, who implement and monitor the system of internal control determined by the directors.

Question 55

What is the purpose of internal audit in a company?

Answer 55

Internal audit is a semi-independent part of the company that monitors the effective operation of its internal control and risk management systems. It is a key element of the company's system of internal control.

Question 56

What are some key responsibilities of internal audit? 7

Answer 56

1) Advising management on improving internal controls, 2) Ensuring that assets are being safeguarded, 3) Ensuring that operations are conducted effectively, efficiently, and economically in line with company policies, 4) Ensuring compliance with laws and regulations, 5) Ensuring that records and reports are reliable and accurate, 6) Helping management to detect or deter fraud, 7) Helping management to identify savings and opportunities.