Chapter 14 Corporate governance

Question 1

1.1 Relevance of corporate governance

Answer 1

Corporate governance is the means by which a company is operated and controlled. Scandals in the past highlighted the need to tackle various risks and problems that can arise in an organisation. This includes domination by a single individual, lack of board involvement, poor internal control, lack of independent scrutiny, lack of contact with shareholders, short-term focus and lack of transparency.

Question 2

2.1 UK Corporate governance code

Answer 2

This applies to all companies with a premium listing (FTSE 350 or above) but all companies should consider. All companies incorporated in the UK or listed on the London stock exchange must disclose in their annual reports, how they have applied the code.
The code includes leadership and company purpose (role of the board, culture, resources, engagement and workforce), division of responsibilities (chair, balance, non-executives and support), composition, succession and evaluation (appointment, qualities and assessment), audit, risk and internal control (audit and reporting, viability and risk and control) and remuneration (policy, procedure and judgement).
The UK corporate governance code recommends three committees:
- Nomination committee: comprise of a majority of NEDs and oversee the process for board appointments via a formal, rigorous and transparent procedure
- Remuneration committee: develop a transparent remuneration policy and set individual directors’ packages. This committee should consist entirely of NEDs, ideally a minimum of three
- Audit committee: review effectiveness of internal audit function, recommend removal and appointment of external auditors and review internal control system. Consist of NEDs, ideally with a min of three and at least one having financial experience

Question 3

3.1 Sarbanes-Oxley Act 2022

Answer 3

This was developed in the US following collapse of Enron. This is a rules-based approach, all companies listed on the securities and exchange commission (SEC) are required to comply. The main requirements are:
- Audit committee responsible for financial reporting and accuracy
- Increased account disclosures
- Companies required to have an internal code of ethics
- Restrictions imposed on share trading by company officers
- Internal controls must be properly documented and tested. The report is attested by the external auditors
- The audit committee has to closely monitor the level of non-audit revenue the external audit firm receives
The key provisions from an audit perspective include:
- New regulator to set standards, with disciplinary power
- Auditing standards tightened
- Provision of other services restricted
- Auditor to discuss accounting policies, management letter and unadjusted differences with audit committee
- Increased whistle-blower protection in case of fraud