Chapter 2 Flashcards
Define corporate governance (short)
The system by which companies are directed and controlled
A set of relationships between a company’s management, its board, its shareholders and other stakeholders,
that provides the structure through which
the objectives of the company are set, attained and monitored.
What is the purpose of corporate governance
- directors manage company
- in the interests of their owners, the shareholders.
What is an organisation?
Social arrangements
for the controlled purpose
of collective goals
What has driven corporate governance?
Financial crisis
reporting scandals
executive greed
What is agency theory?
assumes that Agents (who run the organisations e.g. directors) will act in their own best interests. Hence organisations must align the interests of the agent with those of the organisation to get the best performance out of the agent
What does the companies act 2006 law state about decisions
- Directors act as a board
- decisions should be taken collectively at board meetings
- unless the board has delegated aurthority to a sub committee or to an individual director
What does an Executive Director do?
- day-to-day running of the company.
- FTE
- paid a salary
What does a Non executive director do?
- part-time directors
- scrutinize the company’s affairs
- Generally only attend board meetings and any rel committees
- Usually paid a fee depending on experience and time commitment to the company
What are directors duties
APIRA (TE)
- To act within their Powers
- To promote the success of the company
- To exercise independent judgement
- To exercise reasonable skill, care and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties that could five rise to a conflict of interest
- To declare interest in proposed transaction or arrangement
- To declare interest in existing transation
What are the consequences of breach of duty
- Civil liability
- Damages
- Restoration of Company Property
- Repayment of profits made by director
- Cancellation of contracts for non-disclosure of interest
- Articles can authorise an action that might otherwise be a breach of statutory duty
OECD corporate governaance
ERIRDR
1.Ensuring the basis for an effective corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership functions
3. Institutional investors, stock markets and other intermediaries
4. The role of stakeholders in corporate governance
5.Disclosure and transparency
6. The responsibilities of the board:
Expand on OECD Principles of Corporate Governance: Ensuring basis for an
effective corporate governance framework (CGF)
- Promotion of transparent and fair markets
- Efficient allocation of resources
- Consistency with rule of law
Expand on OECD Principles of Corporate Governance: The responsibilities of the board
- guidance of the company
- monitoring of management
- Accountability to shareholders
Expand on OECD Principles of Corporate Governance: Institutional investors, stock markets and other intermediaries
Shareholder engagement
Expand on OECD Principles of Corporate Governance: The role of stakeholders in corporate governance
Cooperation
Expand on OECD Principles of Corporate Governance: Disclosure and transparency
Timely and Accurate
Expand on OECD Principles of Corporate Governance: The rights and equitable treatment of shareholders and key ownership functions
Information and participation
What is the UK’s Corporate Governance Code?
The FRC’s UK Corporate Governance Code
Applies to all UK listed companies,
considered good practice for all UK companies
Principles based
COMPLY OR Explain
For the UK Corp Gov Code, what is comply or explain?
All listed UK companies must either comply with UK CGC principles or explain why they are not complying
Explanations can be justified w reference to many factors, including company size.
What are 6 important principles in the UK Corporate Governance Code
- Board Leadership and Company Purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, Risk and Internal Control
- Renumeration
- Independance
UK CGC Principles: Board leadership and company purpose
Board leadership and company purpose
* Company led by entrepreneurial board to promote long term success
* Board:
* * values and objectives
* * sufficient resources
* * stakeholder engagement
* * workplace policies are consistent
UK CGC Principles: Division of responsibilities (5)
Division of responsibilities
* Chair leads board
* Balance of ED and NED
* No individual should dominate
* Clear division of responsibilities between Chair and CEO
* NED have enough time to do job and challenge execs
UK CGC Principles: Composition, succession and evaluation
Composition, succession and evaluation
* Rigorous procedure for appointment to the board (C)
* Succession plan maintained (S)
* Board evaluated annually to ensure good balance of skills/diversity (E)
UK CGC Principles: Audit risk and internal control
Audit risk and internal control
* Tensure independence and effectiveness internal/external audit
* Present Assessment of company’s position and prospects which is fair and balanced
*Assess risk and put in IC
UK CGC Principles: Renumeration
Renumberation
* Designed to support strategy/success
* Procedures to determine renumeration
* No individual should set own renumeration
UK CGC Principles: Independence
The board should consider whether its NEDs are independent and objective
Corporate Governance: Noteworthy requirements of the code
- The chair should be independent on appointment and no serve 9+ years from entry to board
- Roles of chair and chief executive should not be held by same person
- At least half the board should be independent non-executives
- ALL directors subject to annual re-election
- Board evaluation annually (by external agent at least every three years for FTSE 350)
- Form a nominations committee with at least half of members independent non execs
- Form an audit committee of independent non execs
- Form a remuneration committee of independent non execs
- Only basic salary pensionable
- Notice periods 1 year or less
What does a typical annual report comprise of:
- The Chairmans message
- A narrative report (by management on market environment, business model, strategic priorities and risks)
- Governance reporting (inc compliance reporting)
CGMA believes this is formulaic and doesnt include what investors actually want to know
What do CGMA suggest a solution to the Annual report is (concepts)?
Adopt a new reporting structure
that integrates key governance information with other business reporting
Show how it implements, measures and communicates sound governance principles
Tell its ‘governance story’ whilst also complying w regulations
How was the UK Code developed?
C
G
H
T
HT
S
W
UK CGC: reporting The principles contain areas which the board should report on in the annual report including
- Which directors are considered independent
- meetings and attendance
*RAN committee work - Board responsibility for preparing the annual report and accounts
- Confirmation that the board has carried out risk assessment,
- Statement in annual and half yearly accounts that the company is a going concern and any relevant uncertainties
Some matters are delegated to committees, however the whole board maintains responsibility for these issues.
Name the three major committees
Nominations committee
Audit committee
Remuneration committee
What is the Nominations committee
Nominations committee
* Leads process for appointments
* Ensures diverse pipeline for succession
Half NED
What is the Audit committee
- monitor the integrity of the financial statements
- Review IC and RM systems
*Review IA - Conduct tender process for EA
- Review EA
- Develop policy on whether company uses external auditor for other services
What is the Remuneration committee
- Responsible for setting board pay
- Review workforce remuneration policy and take this into account when setting board pay
France and Germany: Corporate Governance
Two Tier boards:
Supervisory Board
Executive board
USA Corporate Governance
Majority of board is non-executives
All listed US companies must provide:
– certificate of accuracy of financial statements from CEO and CFO
Senior audit partner rotation every five years
If financial statements restated due to noncompliance – CEO and CFO pay back bonuses
If no audit committee, company must put in place before it may continue trading
Greater Disclosure requirements
Directors may not trade in own-company shares at certain times
EU Corporate Governance
Believes that corporate governance is a matter for individual states but:
1) Has issued directives on disclosure of directors remuneration and other issues
1) Created the EU corporate governance forum
Aim is to co-ordinate governance across member states
South Africa Corporate Governance
South Africa
Principle-based system
Apply and explain
Ultimate compliance officer is the company’s stakeholders
King IV guidelines
Seeks to achieve: Ethical culture, good performance, effective control, legitimacy
17 principles in following areas:
King IV report applies to all entitie. Includes developents globally in governance. E.g.:
* Risk-based internal audit
* Shareholder approval of non-executive directors’ remuneration
* Evaluation of directors’ performance
* Integrated reporting and disclosure
IFAC list
IFAC
How legal is the Corporate Gov Code in UK
not contained in any statute
Who is the principle stakeholder?
the most important stakeholder
traded companies - shareholder
Who is represented at board level in the UK?
Shareholders only
What does implicit and explicit mean?
Implicit - suggested though not directly expressed - Principle based
Explicit - fully revealed or expressed without vagueness, implication, or ambiguity - rules based
Development of UK Code
*Cadbury report 1992
Separation of Chair and CEO; communication; investor dialogue; part of stock exchange listing rules: ‘comply or explain’
Development of UK Code
Greenbury report 1995
Director remuneration
Development of UK Code
Hampel report 1998
Consolidation into Combined Code
Development of UK Code
Turnbull report 1999
Internal controls
Development of UK Code
* Higgs and Tyson reports 2003
NEDs
Development of UK Code
* Smith report 2003
Auditors, audit committee
Development of UK Code
* Walker/FRC report 2010
UK Corporate Governance Code (updated again following consultation 2018)
What do CGMA suggest adding in to the annual report?
Add in the follow for the reporting:
Personal reporting on governance by the company chairman in a Chairman’s statement on governance within the Chairman’s message
* Integrating governance reporting with the narrative report by showing governance activities in key areas
* Separate compliance reporting of corporate governance compliance
What factors could impair the independence of a NED
-Recent employee or Material business relationship w company (3-5 years)
-Receipt of remuneration or pension from the company
-Close family ties or significant links w other directors
-Represents a major shareholder
-Longer than 9 years’ service as director of the company
Requirements of the code: The Chair
1) Independent on appointment
2) not serve 9+ years from entry to board
3) Chair and CEO not held by same person
Requirements of the code: election and evaluation
1) Board eval annual - FTSE 350 external every 3 years
2) ALL directors subject to annual re-election
Requirements of the code: Salary/notice periods
1) Only basic salary pesionable
2) Notice periods one year or less
Requirements of the code: board composition
At least half - Independent NED
Requirements of the code: committees
1) Nominations - at least half NED
2) Audit - all NED
3) Remuneration - all NED
What is the audit committee made of:
- All independent – at least 3 and smaller companies 2
- Should not include the chair
- One member should have recent financial experience
Compositon of numeration comittee
Remuneration committee
* All independent – at least 3, smaller companies 2
* Can include independent chair (but must not chair this committee
France/Germany what is a supervisory board
No executive function, strategic oversight of the organisation. Contains representatives of the employees and the shareholders
France/Germany What is Executive board
Runs company. Elected by the supervisory board
management board
Principles or rules based
UK- UK CGC - principles based
France/Germany - principles based
USA - rules based (SOX created PCAOB) after Enron
South Africa - principles based
Advantages of Two tier board
Good
-Seperates management from ownership
-SH + StH engagement
-Direct Power over management
In the UK CGC, is there a standard approach for all sizes of comany?
NO
- does not standardise the way companies are run
Disadvantages of two tier board
Dilution of power
agency problems
slower decisions
lack of transparancy
What is an all-executive board?
Is comprised of directors, all of whom have managerial roles
