Chapter 3 - Corporate governance

Question 1

what is corporate governance?

Answer 1

Corporate governance is the means by which a company is operated , directed and
controlled. It describes the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with each of its stakeholders.

Question 2

what is the aim of corporate governance

Answer 2

The aim of corporate governance is to ensure that companies are run well in the interests of their shareholders, employees, and other key stakeholders such as the wider community. The aim is to try and prevent company directors from abusing their power which may adversely affect these stakeholder groups

Question 3

what are the advantages of following corporate governance ?

Answer 3

Advantages of a company following good corporate governance principles:
 Greater transparency
 Greater accountability
 Efficiency of operations
 Better able to respond to risks
 Less likely to be mismanaged.

Question 4

how do management and directors take advantage of the trust placed in them?

Answer 4

This abuse of trust usually takes one of two forms:
 Direct extraction from the company of excessive benefits by management, e.g. large salaries, pension entitlements, share
options, use of company assets (jets, apartments etc.)
 Manipulation of the share price by misrepresenting the company’s profitability, usually so that shares in the company can be sold or
options ‘cashed in’.

Question 5

what are the OECD principles?

Answer 5

The six OECD principles are:
 Ensuring the basis of an effective corporate governance framework
 The rights and equitable treatment of shareholders and key ownership
functions
 Institutional investors, stock markets, and other intermediaries
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board.

Question 6

what are the principles Board leadership and company purpose ?

Answer 6

A successful company is led by an effective board whose role is to promote long-term sustainable success thereby generating value for
shareholders.
 The board should establish the company’s purpose, values and strategy. The directors should lead by example and promote the desired culture.
 The board should ensure that the necessary resources are in place for the company to meet its objectives. The board should establish a framework of effective controls to enable risk to be assessed and managed.
 The board should ensure effective engagement with, and encourage participation from shareholders and stakeholders.
 The board should ensure that workforce policies and practices are consistent with the company’s values. The workforce should be able to raise matters of concern.

Question 7

what are the main provisions of board leadership and company’s purpose

Answer 7

Main provisions
 The board should describe in the annual report how opportunities and risks to the future success of the business have been considered and
addressed.
 The board should assess and monitor culture. Where behaviour throughout the business is not consistent with the purpose, values or
strategy, the board should ensure management have taken corrective action.
 In addition to formal general meetings, the chair should seek regular engagement with major shareholders. The board as a whole should
understand the views of the shareholders.
 When 20% or more of votes have been cast against the board recommendation for a resolution, the company should explain what actions it intends to take to understand the reasons behind the result.
 The board should understand the views of the company’s other key stakeholders and describe how their interests have been considered in
board discussions. For engagement with the workforce, the company should use a director appointed from the workforce, a workforce advisory panel or a designated non-executive director (NED).
 The workforce should be able to raise concerns in confidence and anonymously (‘whistleblowing’).
 The board should take action to manage conflicts of interest.
 Directors’ concerns about the operation of the board or management of the company that cannot be resolved should be minuted. On resignation, a
NED should provide a written statement to the chair for circulation to the board if they have any concerns.

Question 8

what is the chair’s role ?

Answer 8

 Leads the board of directors.
 Enables flow of information and discussion at board meetings.
 Ensures satisfactory channels of communication with the external
auditors.
 Ensures effective operation of board sub-committees.
 The chair should be independent to enhance effectiveness.

Question 9

chief executives role

Answer 9

 Ensures the effective operation of the company.

 Head of the executive directors.

Question 10

what is an executive director ?

Answer 10

The executive directors have responsibility for running the company on
a day to day basis.

Question 11

what is a NED?

Answer 11

The NEDs monitor the executive directors and contribute to the overall
strategy and direction of the organisation. They are usually employed
on a part-time basis and do not take part in the routine executive
management of the company.

Question 12

what is the time limit of chairs role?

Answer 12

9 years

Question 13

what comprises NED independence?

Answer 13

• Employment with the company or group in the last 5 years
• Material business relationship with the company in the last 3 years
• Remuneration beyond the basic agreed upon fee ( bonus shares, pension schemes and stock option )
• Representing a significant shareholders
• Close family ties with company’s directors, advisors or senior employee
• serving longer than 9 years on board

Question 14

What are the advantages of NED?

Answer 14

 Oversight of the whole board.
 As they are independent they act as a ‘corporate conscience’.
 They bring external expertise to the company.

Question 15

what are the disadvantages of NED

Answer 15

It may be difficult to find the right NEDs who have the relevant skills
and experience required by the company.
 They, and the sub-committees, may not be sufficiently well informed or have time to fulfil the role competently.
 They are subject to the accusation that they are staffed by an ‘old boys’ network and may fail to report significant problems and approve unjustified pay rises.
 The cost. NEDs are normally remunerated and their fees can be quite expensive.

Question 16

what are the principles of chairs division of responsibilities ?

Answer 16

 The chair leads the board and is responsible for its overall effectiveness.
 The chair should ensure effective contribution of all board members.
 The chair should ensure that directors receive clear, accurate and timely information.
 The board should be balanced so that no individual or small group of individuals can dominate board decisions.
 NEDs should have sufficient time to meet their board responsibilities and should hold management to account.
 The board should ensure it has the policies, processes, information, time and resources it needs to function effectively and efficiently.

Question 17

what are the main provisions on division of responsibility ?

Answer 17

• the chair should be independent on appointment
• the chair and the chief executive should not be the same person
• At least half the board excluding the chair should be NEDs
• One of the independent NEDs should be appointed as a senior independent director to provide a sounding board for the chair.
  -The NEDs and the senior independent director should meet without the chair present at least annually to appraise the chair’s performance.
• NEDs appoint and remove executive directors and scrutinise performance against agreed performance objectives.
• The responsibilities of the chair, chief executive, senior independent director, board and committees should be set out in writing and publicly available.
• The annual report should set out the number of meetings of the board and its committees and the attendance of each director.
• New appointments to the board should take into account other demands on the director’s time. Full time executive directors should not take on more than one NED role in a FTSE 100 company or other significant
  appointment. Appointments should not be made without prior approval of
  the board.

Question 18

what are the principles of composition, succession and evaluation?

Answer 18

 Appointments to the board should be subject to a formal, rigorous and transparent procedure.
 An effective succession plan should be maintained for board and senior management.
 Appointments and succession should be based on merit and objective criteria and should promote diversity.
 The board and its committees should have a combination of skills, experience and knowledge.
 Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives.

Question 19

what are the provisions of composition, succession and evaluation?

Answer 19

 A nomination committee should be established to appoint board members.
 A majority of the committee members should be independent NEDs.
 The chair should not be a member of the committee when the committee
is dealing with the appointment of their successor.
 All directors should be subject to annual re-election.
 The chair should not remain in post for more than nine years from the date
of their first appointment. This period can be extended for a limited time to
facilitate effective succession planning.
 Open advertising and/or an external search consultancy should be used
for the appointment of the chair and NEDs.
 There should be a formal and rigorous annual evaluation of the
performance of the board, its committees, the chair and the individual
directors.
 The chair should consider having a regular external board evaluation at
least every three years for FTSE 350 companies, and the external
evaluator should be identified in the annual report.
 The annual report should describe the work of the nomination committee
including the process used in making appointments, how the board
evaluation has been conducted, the policy on diversity and inclusion and
the gender balance of those in senior management.