Chapter 3 - Corporate governance Flashcards
What is corporate governance?
means by which a company is operated and controlled
What is the aim of corporate governance?
to ensure that companies are run well in the interests of their shareholders, employees, and other key stakeholders such as the wider community
What are some advantages of following good corporate governance?
- greater transparency
- greater accountability
- efficiency of operations
- better able to respond to risks
- less likely to be mismanaged
The UK corporate governance code provides what guidance?
- board leadership and company purpose
- division of responsibilities
- Composition, succession and evaluation
- remuneration
- audit, risk and internal control
What are responsibilities of board leadership and company purpose?
- 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
How should the board of directors be balanced?
with at least half of the members (exc the chair) being independent
The chair should be independent or dependent?
Independent on appointment, and should ensure the directors have the info they need
Should a business have one chair and one chief exec or one person doing both?
2 different people, to avoid them having too much power
What should non-executive directors be responsible for?
should appoint and remove executive directors and scrutinise performance
What is the chair responsible for?
leads the board and is responsible for its overall effectiveness
Appointment of directors should what in terms of composition, succession and evaluation?
- 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
The chair should only be in post for how long?
9 years to ensure independence
How should NED’s be recruited?
open advertising or an external consultancy firm
What is the difference between an executive director and a non-executive director?
Executive directors handle internal affairs and decision-making, while non-executive directors bring external perspective
What should remuneration encourage?
long-term sustainable success of the company using a fornal and transparent process
What does a remuneration committee determine?
pay for the executive directors, chair and senior management
NED remuneration should reflect what?
time commitment and respsonsibilities
Share awards should be subject to what?
to a total vesting and holding period of at least 5 years
What salary should be pensionable?
basic salary
A remuneration committee comprises of what?
a min of 3 independent NEDs
An audit committee should be established with a minimum of how many members?
2 or 3 Independent NEDs (at least one with financial expertise)
Who should not be a member of the audit committee?
the chair
What are the main provisions of the board in regards to audit, risk and internal control?
- 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
What is the role of the audit committee?
- review and monitor FS
- review and monitor internal controls
- oversee internal audit function
- monitor independence of external auditor
What are some problems with audit comittees?
- finding the right people
- additional cost
- slows decisions down and stifles decision making
What are the objectives of an audit committee?
- increase public confidence
- provide financial awareness
- strengthen independence
What is reporting by exception?
need to report only if something is wrong
What are the areas we need to consider if we report by exception?
- we disagree with the annual report
- comments about the audit committee are not correct
- there are inconsistencies between the annual report and our findings
