Chapter 3 - Corporate Governance Flashcards
1.
What is Corporate Governance?
Definition 1:
Corporate Governance is the system by which organizations are directed and controlled. UK Cadbury Report.
Definition 2
Corporate Governance is a set of relationships between a Company’s directors, it’s shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance, are determined. (OECD)
Corporate Governance attempts to align the interests of those responsible for managing the company with the interest of those who own the company.
1.1.2
Comments on the two definitions of Corporate Governance. (7)
1) The Management, awareness, evaluation, and mitigation of risks are fundamental in all definitions of good Governance.
This includes the operation of an adequate and appropriate system of control.
2) The notion that overall performance is enhanced by good supervision and management within set best practice guidelines, underpins both definitions.
3) Good Governance provides a framework for an organization to pursue it’s strategy, in an ethical and effective way and offers safeguards against misuse of resources, human, financial, physical or intellectual.
4) Good Governance is not just about externally established codes, it also requires a willingness to apply the spirit as well as the later of the law.
5) Good Corporate Governance can attract new investments.
It means that shareholders can trust those responsible for running and monitoring the company.
6) Accountability is generally a major theme in all Governance frameworks.
That is Accountability to shareholders, stakeholders, Auditors.
7)Corporate Governance underpins capital market confidence in companies and in the regulatory authorities that administer them.
It helps protect the value of the shareholders investment.
1.2
Agency Theory in Corporate Governance
This is whereby the Principals (owners) of joint stock companies not being able to run businesses themselves and therefore having to rely on Agency (Directors) to do so for them.
Disadvantages
1) There can be conflict of interest between management and shareholders.
2) If there is separation of ownership from Shareholders, directors can pursue their own interest.
1.3
Resolving the Agency Problem:
Alignment of Interests definition
This is accordance between the objectives of Agency acting within an organization and the objectives of the organization as a whole.
Alignment of Interests is sometimes referred to as goal congruence.
Examples of remuneration incentives to achive better alignment of Interests and therefore solve the Agency Problem.
1) Profit-Related / Economic value - added pay.
Pay or bonuses related to the size of profits or Economic value added.
2) Rewarding managers with shares.
3) Executive share option plans - Executive (ESOPs)
In a Share option scheme, selected employees are given share option, each of which gives the holder the right after a certain date to subscrib for shares in the company at a fixed price.
2.
Corporate Governance concepts.
2.1 Fairness
The company deals even handedly with others meaning it takes into consideration everyone who has a legitimate interest in the Company, respecting their rights and views.
2.
Corporate Governance concepts.
2.2 Transparency
Transparency means open and clear disclosure of relevant information to shareholders and other stakeholders, as well as not concealing information when it may affect decisions.
Disclosure in the context refers to FS information, Directors report, operating ,financial and business review reports.
Voluntary Disclosure refers to reports like: Management forecasts, press releases, website information and social reports.
Disclosed information by Directors must be reliable in order for it to help resolve the Agency Problem conflict, because Shareholders will not be on the ground.
2.
Corporate Governance concepts.
2.3 Independence
Independence is the avoidance of being unduly influenced by vested interests and free from any constraints that would prevent a correct course of action being taken.
Being Independent is the ability to stand apart from inappropriate influences and be free of managerial capture, be able to make the correct and uncontaminated decision on a given issue. It’s an essential component of professionalism and professional behavior.
Independent of mind means providing an opinion without being influenced.
Independence of appearance means avoiding situations or relationships that can comprise your judgements.
2.
Corporate Governance concepts.
2.4 Probity
Probity means being honest and acting with integrity and transparency so as not to mislead shareholders and other stakeholders.
UNDERPIN - Definition or meaning
Support or to form the basis for something.
Something that serves as a foundation!.
2.
Corporate Governance concepts.
2.5 Responsibility
Responsibility means management accepting the credit or blame for Governance decisions.
2.
Corporate Governance concepts.
2.6 Accountability
Corporate ACCOUNTABILITY refers to whether an organization and its Directors is answerable in some way for the consequences of its actions.
Directors provide ACCOUNTABILITY to Shareholders through the quality of financial statements they produce.
2.
Corporate Governance concepts.
2.7 Reputation
Reputation is determined by how others view a person, organization or profession and covers things like competence, supply of good quality goods and services on a timely basis, etc.
There is poor or negative Reputation which can be caused by poor service among others.
2.
Corporate Governance concepts.
2.8 Judgement
Judgement means the Board making decisions that enhance the long-term prosperity of the organization. Thus directors must be able to provide meaningful direction to the organization.
2.
Corporate Governance concepts.
2.9 Integrity
Integrity means straightforward dealing and completeness.
The Integrity of reports depends on the Integrity of those who prepare and present them. Cadbury Report.
Integrity can be taken as meaning someone of HIGH MORAL CHARACTER, who sticks to high moral or ethical principles no matter the pressure to do otherwise.
In working life this means adhering to the highest standards of professionalism and probity.
Straightforwardness, fair dealing and honesty in relationships with different people you meet are particularly important. Thus, trust is vital.
The Cadbury Report definition highlights the need for personal honest and integrity!.
2.
Corporate Governance concepts.
2.10 Scepticism
Scepticism means having an inquisitive mind and approaching all management decisions with an open and enquiring mind full of suspicion or mistrust.
2.
Corporate Governance concepts.
2.11 Sustainability
Sustainability means putting in place strategies that will ensure long-term success of the organization.
3.
Stakeholders and their interests
Corporate Governance is concerned with protecting the rights of Stakeholders, especially Shareholders.
3.
Stakeholders and their interests
3.1 Rights of Shareholders
OECD Guidlines.
The right to secure methods of ownership registration.
Rights to convey or transfer shares.
Rights to obtain relevant and material information.
Rights to participate and vote in general meetings.
Rights to Share profits of the company.
Rights to participate and be informed of decisions to make ammendments to the company’s constitution.
3.
Stakeholders and their interests
3.2 Relationship with Shareholders
Directors are Accountable to Shareholders must regularly communicate.
3.
Stakeholders and their interests
3.3 Instituitional Investors
Institutional Investors have large amounts of money to invest.
They include investors managing funds invested by individuals.
Examples of Institutional Investors are:
- Pension funds
- Insurance Companies
- Investment and Unit Trusts
- Venture Capital Organizations. (These are Investors who are particularly interested in Companies that are seeking to expand.)
The funds are managed by a Fund Manager.
3.
Stakeholders and their interests
3.3.1 Advantages and Disadvantages of Institutional Investors
a) Excessive market influence.
b) Playing safe by buying only shares of leading reputable companies whose shares are expensive.
c) Short-term speculation which sometimes result in great losses.
d) Lack of power of Investors.
3.
Stakeholders and their interests
3.3.2 Role of Institutional Investors
UK guidance stresses that Institutional Investors should consider companies’ governance arrangements that relate to Board Structure and Composition.
3.
Stakeholders and their interests
3.3.3 Statement of best practice
UK Corporate Governance Code.
Institutional Investors should:
a) Disclose how they will discharge their responsibilities.
b) Operate a clearly disclosed policy for managing conflicts of interest.
c) Monitor performance of Invedtee Companies.
d) Establish clear guidelines on when they will actively intervene.
e) Be willing to act collectively with other investors.
f) Operate a clear policy on voting and disclosure of voting activity.
g) Report to their clients on their stewardship and voting activities.
3.
Stakeholders and their interests
3.3.4 Means of exercising Institutional Investors’ Influence
a) One to one meetings where Strategy is discussed, whether objectives are being achieved and how, the quality of management.
b) Voting is emphasized since it has importance of Institutional Investors exercising their votes regularly and responsibly.
c) Focus list - Means putting companies’ names on a list of underperforming companies.
d) Contributing to Corporate Governance rating system - These measure key Corporate Governance performance indicators such as the number of NEDs.
3.
Stakeholders and their interests
3.3.5 Intervention by Institutional Shareholders
Institutional Shareholders may intervene more actively, by say calling for a company meeting in an attempt to unseat the board.
Reasons for this are:
- Fundamental concerns about the strategy being pursued in terms of products, markets and investments.
- Poor operational performance.
- Management being fominated by a small group of executive directors.
- Major failures in internal controls.
- Failure to comply with laws and regulations.
- Excessive levels of directors’ remuneration
- Poor attitudes towards corporate social responsibility.
3.4
Small Investors
The OECD suggested that Shareholders should be treated equally. However in practice, Institutional Investors have influence and receive better treatment from company managers.
3.5
General Meetings
3.5.1 - Annual General Meetings
The Annual General Meeting is a formal means of communication with shareholders.
- At an AGM members discuss about their company and it’s management.
- Shareholders vote on the Appointment of Directors, Auditors and the level of dividends to be paid.
3.5
General Meetings
3.5.2 - Other General Meetings
Other General Meetings are called to authorize a major strategic move, such as a major acquisition or when having urgent concerns about how the company is being run.
3.6
Proxy Votes
A PROXY is a person appointed by a Shareholder to vote on behalf of that Shareholder at company meetings.
3.7
Relationships with other Stakeholders
How much the Board is responsible for the interests of Stakeholders other than Shareholders is a matter of debate.
However companies behave ethically and have regard for the environment and society as a whole.
3.8
Communicating with Shareholders and Stakeholders
Annual reports must convey a fair and balanced view of the organization.
Disclosure must be given the Board, Internal Control reviews, Going Concern status and relations with Stakeholders.
3.8
Communicating with Shareholders and Stakeholders
3.8.1 - Importance of Reporting
The Singapore Code of Corporate Governance summed it up.
‘Companies should engage in regular, effective and fair communication with Shareholders. In disclosing information, companies should be as descriptive, detailed and forthcoming as possible, and avoid boilerplate disclosures’
Good disclosures helps reduce the Gap between the information available to directors and the information available to Shareholders, and addresses one of the key difficulties of the Agency relationship between Directors and Shareholders.
3.8.2
Principles vs Compulsory
Principles-based corporate Governance put emphasis on complying or explaining why they did not.
3.8.3
Reporting Requirements
Directors should explain their responsibility for preparing accounts.
They should report that the business is a going concern, with supporting assumptions and qualifications as necessary.
Further information is required:
a) Information about the board of directors, the composition of the board in the year.
b) Brief reports on the remuneration, audit, risk and nomination committees.
c) An explanation of directors and Auditors’ responsibilities in relation to the accounts.
d) Information about relations with Auditors.
e) An explanation of the basis on which the company generates or preserves value.
f) A statement that the directors have reviewed the effectiveness of internal controls, including risk management.
g) A statement on relations and dialogue with Shareholders.
h) Sustainability reporting.
i) A business review or operating and financial review (OFR)
3.8.4
Management Commentary
In 2010 IASB issued an IFRS Practice Statement Management Commentary, which should follow the below principles:
a) To provide Management’s view of the entity’s performance, position and progress.
b) To supplement and complement information presented in the financial statements.
c) To include forward-looking information.
d) To include information that possess the Qualitative Characteristics described in the Conceptual Framework.
3.8.5
Voluntary Disclosure
Voluntary disclosure can be defined as any disclosure above the mandated minimum, ie going beyond what is required by law or stock exchange listing rules.
Advantages of Voluntary disclosure:
a) Wider information provision which can attract investors.
b) Different focus of information eg can focus on future strategies and objectives.
c) Assurance about management since Shareholders will view managers as actively concerned with all aspects of the company’s performance.
d) Consultation with equity investors and other stakeholders.
3.9
Integrated Reporting
The International Integrated Reporting Council (IIRC) has defined an Integrated report as a concise communication about how an organization’s strategy, Governance, performance and prospects, in the context of its commercial, social and environmental context, lead to the creation and enhancement of value over the short, medium and long-term.
3.9.1
Six Capitals
All organizations depend on different forms of capital for their success, and these different capitals should be seen as part of the organization’s business model and strategy.
a) Capital - Funds available for use in production or service provision.
b) Manufactured - Buildings, Equipment and Infrastructure.
c) Human - Skills, experience and motivation to innovate.
d) Intellectual- Intangible assets, providing competitive advantage.
e) Natural - Inputs to goods and services, and natural environment ie, Water, land, minerals and forests.
f) The institutions and relationships established within and between each community, stakeholder group and network to enhance collective well-being.
3.9.2
Aspects of an integrated report
An integrated report should answer the following questions:
a) Overview - What does an organization do, and what are the circumstances under which it operates?
b) Governance - How does the organization’s Governance structure support its ability to create value in the short, medium and long-term.
c) Opportunities and Risk - What are the specific opportunities and risks that affect the organization’s ability to create value over the short, medium and long-term and how is the organization dealing with them?
d) Strategy and Resource allocation - Where does the organization want to go, and how does it intend to go there?
e) Business Model - What is the organization’s business model, and to what extent is it resilient?
f) Performance - To what extent has the organization achieved its strategic objectives and what are the outcomes in terms of effects on the Capitals?
g) Future Outlook - What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and its future performance?
Integrated Reporting help companies make better decisions and create value for their key stakeholders.
4.
The Role of Directors and the board
The board of Directors is responsible for taking major policy and strategic decisions. Directors should have a mix of skills.
4.
The Role of Directors and the board
4.1 - Definition of Board’s role
South African King Report:
‘To define the purpose of the company and the values by which it will perform its daily existence and to identify the stakeholders relevant to the business of the company. The board must then develop a strategy combining all three factors and ensure management implements that strategy.’
The UK Governance Code Definition:
‘The Board is collectively responsible for promoting the success of the company by directing and supervising the company’s affairs.’
Primary functions:
- Establishing the organization’s strategic direction and aims, in conjuction with the executive.
- Ensuring Accountability to the public for the organization’s performance.
- Ensuring that the organization is managed with probity and integrity.
4.
The Role of Directors and the board
4.2 - Scope of role
To be effective, Boards must meet frequently, as warranted by circumstances.
4.
The Role of Directors and the board
4.2.1 - Matters for board decision
Decisions such as:
- mergers and takeovers
- Acquisitions and disposals of assets of the company.
- Investment, Capital projects, bank borrowing facilities, loans and foreign currency transactions.
4.
Scope of. Role
4.2.2 - Other Tasks
- Monitoring the Chief executive officer.
- Overseeing strategy.
- Monitoring risks. Control systems and Governance
- Monitoring the human capital aspects of the company eg. Succession, moral, training, remuneration, etc.
- Managing power conflicts of interest.
- Ensuring that there is effective communication of it’s strategic plans, both internally and externally.
4.3
Attributes of directors
Directors need to have relevant expertise in Industry, company and functional area and Governance. There should be board balance between Executive Directors and Independent Non-Executive Directors, ie 50-50.
4.3.1
Moral Attributes
The King Report 5 Moral Attributes for Directors.
1) Conscience - Acting with intellectual honesty and independence of mind in the best interests of the company and its stakeholders, avoiding conflicts of interest.
2) Inclusivity - Taking into account the legitimate interests and expectations of stakeholders.
3) Competence - Having the knowledge and skills required to govern a Company effectively.
4) Commitment - Diligently performing duties and devoting enough time to company affairs.
5) Courage - Having the courage to take the necessary risks and to act with integrity.
Corporate Governance expert Professor Richard Leblanc commented that ‘Good boards are Independent, Competent, Transparent, Constructively challenge management and set the ethical tone and culture for the entire organization.
4.4
Diversity
Diversity is the variation of Diversity social and cultural identities among people existing together in a defined employment or market setting.
Primary Categories of Diversity:
- Age
- Race
- Ethnicity
- Gender
Secondary Categories of Diversity:
- Education
- Experience
- Marital Status
- Beliefs
- Background
Diversity in the Board can bring:
a) Talent
b) Broad range of knowledge
c) Greater range of constituencies
d) Independence and Judgement
e) Corporate Citizen - By understanding it’s citizens.
4.5
Role and Function of Nomination Committee
The Nomination Committee overseas the process for board appointments and make recommendations to the board.
- Must consider the Balance between Executives and Independent non-executives.
- Must also consider the skills, knowledge and experience possessed by the current board.
- Consider the need for continuity and succession planning.
- Consider the desirable size of the board.
- Consider the need to attract board members from a Diversity of backgrounds, eg Lawyers, Accountants and Consultants can bring skills that are useful to the board.
4.6
Induction of New Directors.
The Higgs Report - Induction Program.
4.6.1 - Build an understanding of the nature of the company, its business and its markets.
- The Company’s culture and values.
- The Company’s products or services
- Group structure or subsidiaries or joint ventures.
- The Company’s constitution, board procedures and matters reserved for the board.
- The Company’s principal assets, liabilities, significant contracts and major competitors.
- Major risks and risks management strategy.
- Key performance indicators.
- Regulatory constraints.
4.6
Induction of New Directors.
The Higgs Report - Induction Program.
4.6.2 - Build a link with the Company’s people.
- Meetings with senior management.
- Visits to company sites other than headquarters, to learn about production and services, meet employees and build profile.
- Participating in board’s strategy development.
- Briefing on internal procedures.
4.6
Induction of New Directors.
The Higgs Report - Induction Program.
4.6.3 - Build an understanding of the company’s main relationships including meetings with auditors.
- Major Customers
- Major Suppliers
- Major shareholders and customer relations policy.
4.7
Continuing Professional development of board
The Higgs Report
The Higgs Report points out that to remain effective, directors should extend their knowledge and skills continously.
Significant issues for professional development:
- Strategy
- Management of Human and Financial Resources.
- Audit and Remuneration issues.
- Legal and Regulatory issues.
- Risk management.
- The effective behavior of a board director such as influencing skills, conflict resolution, chairing skills and board dynamics.
- The technical background of the company’s activities so that directors can properly appreciate the strategic consideration, eg in technology.
4.8
Performance of board
Appraisal of the board’s performance is an important control, aimed at improving board effectiveness, maximizing strength and tackling weaknesses.
Performance of the board, it’s committees and individual directors should be formally assessed once a year.
Board Appraisal to include:
- A review of the board’s systems. ie conduct of meetings, work of committees.
- Performance measurement in terms of the standards it has established, financial criteria etc.
- Assessment of the board’s role in the organization, ie dealing with problems.
List of criteria to be used according to The Higgs Report:
- Performance against objectives.
- Contribution to testing and development of Strategy and setting of priorities.
- Contribution to robust and effective risk management.
- Contribution to development of Corporate philosophy (values,ethics etc.)
- Appropriate composition of board and committees.
- Responses to problems or crises.
- Internal and External communication.
- Effectiveness of board committees.
- Quality of information.
- Quality of feedback provided to management.
- Fulfilling legal requirements.
4.8
Performance of board
4.8.1 - Types of board, Strength and Weaknesses.
Type of board: Effective Board
Strength:
- Clear strategy aligned to capabilities.
- Vigorous implementation of strategy.
- Key performance drivers monitored.
- Effective risk management.
- Focus on views of city and other stakeholders.
- Regular evaluation of board performance.
Type of board: The Rubber Stamp
Strength:
- Makes Clear Decisions.
- Listens to in-house expertise.
- Ensures decisions are implemented.
Weaknesses:
- Fails to consider alternatives.
- Dominated by executives.
- Relies on fed information.
- Focuses on supporting evidence.
- Does not listen to criticism.
- Role of Non-executives limited.
Type of Board: The Talking Shop
Strength:
- All options given equal weight.
- All options considered.
Weaknesses:
- No Effective decision making process.
- Lack of direction from Chairman.
- Failure to focus on critical issues.
- No evaluation of previous decisions.
Type of board: The Number Crunchers
Strength:
- Short term needs of investors considered.
- Prudent decision-making.
Weaknesses:
- Excessive focus on financial impact.
- Lack of long-term, wider awareness.
- Lack of Diversity of board members.
- Impact of social and environmental issues ignored.
- Risk averse.
Type of board: The dreamers
Strength:
- Strong long-term focus
- Long-term strategies
- Consider social and environmental implications.
Weaknesses:
- Insufficient current focus.
- Fail to identify or manage key risks.
- Excessively optimistic.
Type of board: The Adrenaline junkies
Strength:
- Clear decisions.
- Decisions implemented.
Weaknesses:
- Lurch from crisis to crisis.
- Excessive focus on short-term
- Lack of Strategic direction.
- Internal focus.
- Tendency to Micro manage.
Type of board: The semi-detached
Strength:
- Strong focus on external environment.
- Intellectually challenging.
Weaknesses:
- Out of touch with the company.
- Little attempt to implement decisions.
- Poor monitoring decision-making.
4.9
Performance of Individual Directors
Separate appraisal of the performance of the Chairman and CEO should be carried out by NEDs.
All the other Directors must also be appraised according to the following criteria:
a) Independence- Free thinking and avoid conflict of interest.
b) Preparedness- Must know key staff, organization and industry.
c) Practice- Must participate actively and undertakes professional education.
d) Committee Work - Understand process of Committee work.
e) Development of the organization- must make suggestions on innovation and strategic decisions.
4.10
Legal rights and responsibilities
Directors are entitled to fees and expenses.
Seven Statutory duties of Directors according to The UK Companies Act 2006:
1) Act within their powers.
2) Promote the success of the company.
3) Exercise Independent Judgement.
4) Exercise reasonable skill, care and diligence.
5) Avoid conflict of interest.
6) Do not accept benefits from third parties.
7) Declare an interest in a proposed transaction or arrangement.
4.10.1
Insider Dealing/ Trading
It is a criminal offense for Directors and others to use inside information that they have to gain from buying or selling shares in a stock market.
4.10
Legal rights and responsibilities
4.10.2 - Departure from office
A Director may leave office in the following ways:
a) Resignation (written)
b) Not offering themselves for re-election when their term of office ends.
c) Failing to be re-elected
d). Death.
e) Dissolution
f)Being removed.
g) Prolonged absence.
h) Being disqualified
i) Agreed departure.
4.10
Legal rights and responsibilities
4.10.3 - Time limited Appointments
Some roles, particularly those of Chief Executive Officer or Chairman, maybe for a fixed period.
Non-Executive Directors should also hold their posts for a limited length of time.
4.10
Legal rights and responsibilities
4.10.4 - Retirement by rotation
Directors are often required to retire from the board and seek re-election, say after every three years or one year for large listed companies, UK Guidance.
Benefits to organization due to retirement by rotation:
a) Shareholder rights.
b) Evolution of the board
c) Costs of contract termination will be low.
4.10
Legal rights and responsibilities
4.10.5 - Removal from office
Directors are removed from office for many reasons like:
- Absence from board meetings for a long time.
- Mental health problems.
- Bankruptcy.
- By board vote.
- By Shareholders vote.
4.10
Legal rights and responsibilities
4.10.6 - Disqualification
Directors may be legally disqualified by court or Government for failing to keep proper Accounting records, not filing filing accounts returns etc.
4.12
Division of Responsibilities
The roles of the Chairman and CEO must be held by two different people, for many reasons:
a) Demands of the two roles. - Both roles are too demanding such that no one person would be able to do both jobs.
The Chairman can run the board.
The CEO can run the Company.
b) Authority. - The Chairman carries the Authority of the board, ie acts on behalf of the board.
- The CEO has the Authority that is delegated by the board as per terms of his or her appointment.
c) Conflicts of interest- Can be avoided by appointing two people.
d) Accountability- There will be Accountability.
e) Board opinions can be expressed freely.
f) Separation enables compliance with Governance best practice and hence reassures shareholders.
4.13.1 Role of the Chairman
The Chairman leads the board of Directors.
According to UK Higgs Report, the Chairman is responsible for)
a) Running the board and setting its agendas as they focus on Strategic matters.
b) Ensures that the board receives accurate and timely information.
c) Ensuring effective communication with Shareholders.
d) Ensuring that sufficient time is allowed gor discussion of controversial issues.
e) Taking the lead in board development.
f) Facilitating board appraisal and evaluation at least once a year.
g) Encouraging active engagement by all the members of the board.
h) Reporting in and signing off accounts.
4.13.1
Effective Chairman according to the UK Higgs Report :
Should:
a) Upholds the highest standards of Untegrity and Probity.
b) Leads board discussions to promote effective decision-making and constructive debate.
c) Promotes effective relationships and open communication between executive and Non-Executive Directors.
d) Builds an effective and complementary board, initiating change and planning succession.
e) Promotes the highest standards of Corporate Governance.
f) Ensures a clear structure for, and the effective running of, board committees.
g) Establishes a close relationship of trust with the CEO, providing support and advice while respecting executive responsibility.
h) Provides coherent leadership of the company.
4.13.2
Role of the CEO
The CEO is the senior executive in charge of the management team and is answerable to the board for its performance. The CEO implements the decisions of the board and its committees, develop the main policy statements and reviews the business’ organizational structure and operational performance.
UK Combined Code - CEO’s responsibilities:
a) Business Strategy development and management and thrive to achieve objectives.
b) Investments and Financing.
c) Risk Management.
d) Establishing the company’s management in liason with the nomination committee.
e) Liaising with Board committees and submitting recommendations.
f) Liason with other major Stakeholders.
4.16
Role of Non-Executive Directors (NEDs)
NEDs provides a balancing influence in reducing conflicts between Shareholders and Management or Executive Directors.
NEDs Roles:
a) Strategy
- NEDs should contribute towards Stragy and challenge the direction of Strategy.
b) Scrutiny
- They should scrutinize and monitor performance of the EDs.
c) They must also ensure that proper Risk management and Internal Control Systems are put in place.
d) People
- NEDs are responsible in the recruitment and determination of remuneration for EDs.
4.19
Characteristics of NEDs
The UK Higgs Report
a) Upholds the highest ethical standards of integrity and Probity.
b) Supports executives in their leadership of the business while monitoring their conduct.
c) Questions intelligently, debates constructively, challenges rigorously and decides dispassionately.
d) Listens sensitively to the views of others inside and outside the board.
e) Gains the trust of other board members.
d) Promotes the highest standards of Corporate Governance and seeks compliance with the provisions of the Code wherever possible.
4.19
The UK Higgs Report
Things to consider when appraising the performance of NEDs
a) Preparation for meetings.
b) Attendance levels
c) Willingness to devote time and effort to understand the company and its business.
d) Quality and value of contributions to board meetings.
e) Contribution to development of Strategy and Risk Management.
f) Demonstration of independence by probing, maintaining own views and resisting pressure from others.
g) Relationships with fellow board members and senior management.
h) Up to date awareness of technical and Industry matters.
i) Communication with other directors and shareholders.
4.22
Directors’ Remuneration
Adequate remuneration has to be paid to Directors in order to attract and retain individuals of sufficient calibre.
Good remuneration motivates Directors to achieve performance levels that are in the company and shareholders’ interests as well as their own personal interests.
However according to the UK Greenbury Committee, Companies must put in place a good remuneration policy,ie:
a) Directors’ remuneration should be set by Independent members of the board.
b) Any form of bonus should be related to measurable performance or enhanced Shareholder value.
c) There should be Full Transparency of Directors’ Remuneration, including pension rights, in the annual accounts.
The above is mainly because there was an outcry of Directors being paid excessive salaries and bonuses which has been a major corporate abuse for many years.
4.23
Role and Function of the Remuneration Committee.
The Remuneration Committee determines the organization’s general policy on Remuneration of EDs and specific Remuneration packages for each Director.
Remuneration Policy issues must include:
a) The pay scales applied to each Director’s package.
b) The proportion of the different types of reward within each package.
c) The period within which performance related elements become payable.
d) What proportion of rewards should be related to measurable performance or enhanced Shareholder value, and the balance between short - and long term performance elements.
e) Transparency of Directors’ Remuneration, including pension rights, in the annual accounts.
4.25
Elements of Remuneration Packages
Packages will need to attract, retain and motivate Directors of sufficient quality, while at the same time taking Shareholders’ interests into account.
Basic Salary
- This must be in accordance with the Directors’ contract of employment and determined by the experience, performance and responsibilities of the Director as well as the market rate.
Performance Related Bonuses
- Directors may be paid cash Bonuses for good performance.
Loyalty Bonuses can also be rewarded to Directors and other employees for remaining with the company.
Shares
- Directors may be awarded shares in the company with limits
Share Options
- Share Options give Directors the right to purchase shares at a specified exercise price over a specified time period in the future.
4.25.5
Benefits in Kind
Benefits in kind could include a Car, health provisions, life assurance, holidays, expenses and loans.
4.25.6
Pensions
Many companies may pay pension contributions for Directors and staff.
4.27
Remuneration of Non-Executive Directors (NEDs)
The International Corporate Governance Network (ICGN) issued guidance on the Remuneration of Non-Executive Directors in 2010. It suggested that, an Annual Fee or Retainer fee should be preferred method of cash Remuneration.
