Chapter 12: Corporate Governance

Question 1

What is the UK Corporate Governance Code?

Answer 1

The UK Corporate Governance Code is a code of practice embodying a shareholder-led approach to corporate governance

Question 2

Who does the code apply to?

Answer 2

The code applies to all premium listed companies. Smaller listed companies can be more flexible about how they apply the code

Question 3

Is the code a legal requirement?

Answer 3

Compliance with the code is not a legal requirement. However, premium listed companies are expected to comply with the main principles

Question 4

If companies don’t comply, what happens?

Answer 4

A ‘comply or explain’ approach is taken to the Code. Companies are required to provide an explanation of any non-compliance in their annual report

Question 5

What are the perks of being a premium listed company?

Answer 5

There are three ways a company can be listed on the London Stock Exchange - a Premium Listing, a Standard Listing and via the high growth segment.

More exacting regulatory and governance requirements which gives investors greater confidence, allowing access to cheaper capital

Question 6

What are the contents of the UK Corporate Governance Code?

Answer 6

The Code is set out as five sections, each of which has a series of main principles:

• Board leadership and company purpose
• Division of responsibilities
• Composition, succession, and evaluation
• Audit, risk and internal control
• Remuneration

Question 7

What is the board responsible for?

Answer 7

• long-term success of the company, creating wealth for the shareholders and benefiting the community
• Consideration of what makes a successful company
• Engage with stakeholders and encourage their participation
• Set the purpose, values and strategy and ensure the culture is in line with these - behave with integrity and promote the right culture
• Risk assess whether the necessary resources are in place for the company to meet and measure performance against the objectives. Put in place mitigation and effective internal controls
• Support company values with appropriate policies and procedures for the workforce - safe space for the workforce to communicate any areas that concern them

Question 8

What should the board do? What should the annual statement include?

Answer 8

The board should meet regularly enough to discharge their duties effectively, with a formal agenda.

The annual statement should include a statement of how the board operates, including a high level statement of which type of decisions are taken by the board, and which are delegated to management

• how the board operates
• the decisions they make
• what is delegated to management

Question 9

What is the role of the chair?

Answer 9

The chair should discuss governance and strategy with major shareholders and ensure that the views of shareholders are communicated to the board

• Discuss strategy w/ shareholders
• Communicate shareholder views to board

Question 10

What is the role of the senior independent director?

Answer 10

The senior independent director should attend sufficient meetings with a range of major shareholders to develop a balanced understanding of their issues and concerns

Question 11

What do non-executive directors do?

Answer 11

They should be offered the opportunity to attend scheduled meetings with major shareholders or to attend meetings when requested by major shareholders

Question 12

If 20% or more of shareholders vote against a board recommendation what happens?

Answer 12

If 20% or more of shareholders vote against a board recommendation, effective action must be planned and communicated to consult with shareholders over the issue

Question 13

What roles should the annual report identify?

Answer 13

The board’s Chair, the Deputy Chair (when applicable), the Chief Executive and the senior independent (non-executive) director

Question 14

Should the Chair be independent? What about the Chief Executive?

Answer 14

• The Chair should be independent on appointment
• The Chair and Chief Executive must be different individuals
• The Chief Executive should not go on to be the Chair of the same company

Question 15

What are the duties of the Chair? (3)

Answer 15

• Setting the board’s agenda and ensuring the directors receive accurate, timely and clear information
• Promoting a culture of openness and debate and constructive relations between all directors
• Ensure effective communication with shareholders

Question 16

What are non-executive directors? What are their duties?

Answer 16

Non-executive directors should constructively challenge and help develop proposals on strategy

Responsibilities:

• Review the financial controls and risk management to help ensure the integrity of financial information
• Appoint, remove and set the remuneration of Executive Directors
• Scrutinise management performance and monitor the reporting of performance
• The Chair should hold meetings with the NEDs without the Executive Directors being presents
• The NEDs should meet without the Chair present at least annually to appraise the Chair’s performance
• On resignation NEDs should submit a written statement of any such concerns to the board

Question 17

How should appointments to the board be conducted?

Answer 17

There should be a formal, rigorous, transparent appointment process for new directors
Appointments should be objective, on merit, and consider diversity

Question 18

What is a nominations committee and who should it consist of?

Answer 18

There should be a nomination committee which should lead the process for board appointments and make recommendations to the board.

• Over 50% of members should be independent non-executive directors
• NEDs should be appointed for specified terms subject to re-election
• NEDs serving longer than 6 years should be subjected to a rigorous review

Question 19

Who can chair the nominations committee?

Answer 19

The Chair or an NED

However the Chair should not chair the committee when it is dealing with the appointment of their successor

Question 20

How do we know who is involved in the nominations committee?

Answer 20

The annual report should identify the chair and members of the nomination committee

Question 21

How is the performance of directors regulated?

Answer 21

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors

• The Chair should act on the performance evaluation proposing the need for appointments/resignations
• Each director should be evaluated based on the effectiveness of contribution and time commitment
• The Chair should ensure that directors continually update their skills

Question 22

What are the commitments of directors?

Answer 22

All directors should be able to allocate sufficient time to the company to discharge their responsibilities

Question 23

What should Executive Directors NOT do?

Answer 23

Executive Directors should not take on the role of Chair of a Premium Listed company. They should not take on more than one NED role in a premium listed company.

Question 24

What can the Chair and NEDs do in regard to commitment?

Answer 24

• The Chair may chair more than one premium listed company
• The Chair and NEDs should disclose any other significant commitments to the board before appointment and inform them of any significant changes
• For the Chair, these should also be disclosed in the Annual Report

Question 25

What should the directors do in the annual financial report?

Answer 25

• Confirm their responsibility for preparing the annual report and accounts
• State that they consider these to present a true and fair view of the company
• Confirm whether the going concern basis of accounting has been adopted
• Report any material uncertainties regarding going concern
• Confirm that they have carried out a robust assessment of principle risks

The board should maintain risk sound risk management and internal control systems and review the effectiveness of these systems at least annually

Question 26

Who should be on the audit committee?

Answer 26

• At least three NEDs for premium listed companies
• At least two NEDs for smaller listed companies
• At least one member of the audit committee should have recent and relevant financial experience
• In smaller companies the board Chair may be a member in addition the the NEDs

Question 27

Who can chair the audit committee? How do we know who is involved?

Answer 27

The committee must be chaired by a NED. The Chair should not chair this committee.
The annual report should identify the chair and members of the audit committee

Question 28

What are the responsibilities of the audit committee in relation to the financial statements?

Answer 28

• Reviewing the integrity of the financial statements and any formal announcement of financial performance
• When requested by the board they may also report on whether the financial statements are fair, balanced and understandable

Question 29

What are the responsibilities of the audit committee in regard to financial controls?

Answer 29

• Reviewing the company’s internal financial controls and the effectiveness of the company’s internal audit function
• If an internal audit function does not exist, then the audit committee should consider whether one is needed

Question 30

What are the responsibilities of the audit committee in regard to the external auditor?

Answer 30

• Making recommendations regarding the appointment, re-appointment and removal of external auditors
• They should also approve the remuneration of the external auditor and monitor independence and provision of non-audit services

Question 31

What are the responsibilities of the audit committee in relation to whistle-blowing?

Answer 31

• Reviewing arrangements by which the staff of the company may, in confidence, raise concerns
• Arrangements should be in place, with regards to the process of investigating and following up these concerns

Question 32

What is remuneration?

Answer 32

Remuneration should be sufficient to attract, retain and motivate quality directors but should not be more than necessary

Question 33

Who should set the remuneration?

Answer 33

Executive directors: The remuneration committee should determine the remuneration of all executive directors
NEDs: The board or (where required by the company’s Articles) should determine the remuneration of the NEDs.

Question 34

How should remuneration be set?

Answer 34

Exec: Remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent and rigorously applied.
NEDs: Remuneration should reflect the time commitment and responsibilities of the role. Remuneration should not include performance-related elements or share options

Question 35

When is shareholder approval needed?

Answer 35

Exec: The shareholders should be invited specifically to approve all new long-term incentive schemes or changes to existing schemes
NEDs: If any share options are granted then shareholder approval should be sought in advance and any shares exercised should be held until at least one year after the NED leaves the board

Question 36

What is the remuneration committee? Who is on the committee, how do we know who is involved?

Answer 36

No director should be involved in deciding his or her own remuneration.
The board should establish a remuneration committee to set remuneration for the following individuals: Executive Directors, Chair, Senior Management

At least 3 NEDs should be on the committee for premium listed companies. At least two NEDs for smaller listed companies. The board Chair may be a member.

The committee must be chaired by an NED. The Chair should not chair this committee. The annual report should identify the chair and members of the remuneration committee.

Question 37

Who is responsible for corporate governance?

Answer 37

The board of directors have overall responsibility for ensuring that the company is governed appropriately. But the others are expected to provide assistance:

• Institutional shareholders: should engage with companies to help improve long-term returns and the efficient exercise of governance responsibilities
• External auditors: for listed companies’ external auditors should report on the company’s compliance with the UK Corporate Governance code and the directors’ remuneration report.
• Internal auditors: the internal audit department helps to promote good governance by reviewing and reporting on the internal control and risk assessment systems.

Question 38

What is the stewardship and the shareholder engagement?

Answer 38

Stewardship is the accountability of management for the resources entrusted to them as agents of the company’s owners

Shareholder engagement considers the procedures designed to ensure that shareholders derive value from their investments by dealing effectively with concerns over under-performance

Question 39

What is the Stewardship Code?

Answer 39

The Stewardship Code states that institutional investors should:

1. Publicly disclose their policy on how they will discharge their stewardship responsibilities
2. Have a robust policy on managing conflicts of interest in relation to stewardship, and this policy should be publicly disclosed
3. Monitor their investee companies
4. Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
5. Be willing to act collectively with other investors where appropriate
6. Have a clear policy on voting and disclosure of voting activity
7. Report periodically on their stewardship and voting activity

Question 40

What is the purpose of an external audit?

Answer 40

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 financial performance and financial position of the company

Question 41

Who can perform the external audit?

Answer 41

To act as an external auditor a body corporate, partnership or individual must be a member of a recognised supervisory body, such as the ICAEW. They must also hold an appropriate qualification

Question 42

Is the external auditor responsible for identifying fraud?

Answer 42

Although the external auditor may identify fraud as part of their audit, the responsibility for preventing and detecting fraud and error still ultimately lies with the directors of the company

Question 43

How do external auditors assist corporate governance?

Answer 43

The external auditor reports an independent and expert opinion on how the company is complying with the UK Corporate Governance Code. The overall responsibility still remains with the directors and shareholders.

Question 44

What is internal audit?

Answer 44

Internal audit is a semi-independent part of the company which monitors the effective operation of its internal control and risk management systems

Question 45

What are the responsibilities of internal auditors?

Answer 45

• Assessing how risks are identified, analysed and managed
• Advising management on risk management processes and improvements to internal controls
• Ensuring that the company’s assets are safeguarded and that operations are conducted effectively
• Ensuring the laws and regulations are complied with and that records and reports are reliable and accurate
• Helping management to detect or deter fraud and to identify saving and opportunities