Chapter 3 - Corporate governance

Question 1

What is corporate governance?

Answer 1

means by which a company is operated and controlled

Question 2

What is the aim of corporate governance?

Answer 2

to ensure that companies are run well in the interests of their shareholders, employees, and other key stakeholders such as the wider community

Question 3

What are some advantages of following good corporate governance?

Answer 3

• greater transparency
• greater accountability
• efficiency of operations
• better able to respond to risks
• less likely to be mismanaged

Question 4

The UK corporate governance code provides what guidance?

Answer 4

• board leadership and company purpose
• division of responsibilities
• Composition, succession and evaluation
• remuneration
• audit, risk and internal control

Question 5

What are responsibilities of board leadership and company purpose?

Answer 5

• effective board who take responsibility for the long-term success of the company
• board should ensure the necessary resources are in place for company to meet objectives
• ensure conflicts of interest are managed
• encourage participation from shareholders and stakeholders

Question 6

How should the board of directors be balanced?

Answer 6

with at least half of the members (exc the chair) being independent

Question 7

The chair should be independent or dependent?

Answer 7

Independent on appointment, and should ensure the directors have the info they need

Question 8

Should a business have one chair and one chief exec or one person doing both?

Answer 8

2 different people, to avoid them having too much power

Question 9

What should non-executive directors be responsible for?

Answer 9

should appoint and remove executive directors and scrutinise performance

Question 10

What is the chair responsible for?

Answer 10

leads the board and is responsible for its overall effectiveness

Question 11

Appointment of directors should what in terms of composition, succession and evaluation?

Answer 11

• be made by a nomination committee
• follow a transparent procedure
• be based on merit
• be subject to annual re-election
• take into account succession planning

Question 12

The chair should only be in post for how long?

Answer 12

9 years to ensure independence

Question 13

How should NED’s be recruited?

Answer 13

open advertising or an external consultancy firm

Question 14

What is the difference between an executive director and a non-executive director?

Answer 14

Executive directors handle internal affairs and decision-making, while non-executive directors bring external perspective

Question 15

What should remuneration encourage?

Answer 15

long-term sustainable success of the company using a fornal and transparent process

Question 16

What does a remuneration committee determine?

Answer 16

pay for the executive directors, chair and senior management

Question 17

NED remuneration should reflect what?

Answer 17

time commitment and respsonsibilities

Question 18

Share awards should be subject to what?

Answer 18

to a total vesting and holding period of at least 5 years

Question 19

What salary should be pensionable?

Answer 19

basic salary

Question 20

A remuneration committee comprises of what?

Answer 20

a min of 3 independent NEDs

Question 21

An audit committee should be established with a minimum of how many members?

Answer 21

2 or 3 Independent NEDs (at least one with financial expertise)

Question 22

Who should not be a member of the audit committee?

Answer 22

the chair

Question 23

What are the main provisions of the board in regards to audit, risk and internal control?

Answer 23

• they should monitor the internal control and risk management systems and report on the effectiveness
• should explain how it has assess the prospects of the company in the annual report

Question 24

What is the role of the audit committee?

Answer 24

• review and monitor FS
• review and monitor internal controls
• oversee internal audit function
• monitor independence of external auditor

Question 25

What are some problems with audit comittees?

Answer 25

• finding the right people
• additional cost
• slows decisions down and stifles decision making

Question 26

What are the objectives of an audit committee?

Answer 26

• increase public confidence
• provide financial awareness
• strengthen independence

Question 27

What is reporting by exception?

Answer 27

need to report only if something is wrong

Question 28

What are the areas we need to consider if we report by exception?

Answer 28

• we disagree with the annual report
• comments about the audit committee are not correct
• there are inconsistencies between the annual report and our findings