Chapter 5 - Corporate governance Flashcards
What is corporate governance?
System by which companies are directed and controlled in the interest of shareholders and to others stakeholders
Why is corporate governance important?
In most countries listed companies are required to comply
It is often built into stock exchange listing rules
Major influence on, and key part of, a company’s risk management strategy
What are the limitations of corporate governance?
Does not prevent company failure or collapse
Cannot prevent companies failing to achieve their objectives
What five areas does the UK corporate governance code cover?
Board leadership and company purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Remuneration
What are the roles of NED’s?
Strategy role: challenging strategy and offering advice on direction
Scrutinising role
Risk role: ensure companies has an adequate system of internal controls and systems of risk management in place
People role
What is included in the UK Corporate Governance code - CEO, Chair and EDs?
CEO and chair must be different individuals
CEO cannot go on to be chair of the same company
Chair should be independent on appointment
Full time ED can’t take on more than 1 FTSE 100 NED role
Full time ED can’t also be chair of a FTSE 100 company
Significant portion of EDs’ pay should be performance related
What is included in the UK Corporate Governance code - INEDs?
Appoint one independent NED as senior independent director
INEDs serving longer than 6 years should be subjected to a rigorous review
When may a director not be independent?
Were an employee within last 5 years
Represent a significant shareholder
Have close family ties with Co
Recieve other pay or benefits in addition to directors’ fee
Had material business relationship with the Co. with last 3 years
Served on the board for more than 9 years
What are the typical roles and responsibilities of nomination committee?
Review regularly the structure, size, composition and balance of board
Consider balance between execs and NEDs on board
Ensure appropriate management of diversity to board composition
Reduce domination in executive selection by the CEO/Chair
Give full consideration to succession planning for directors
Prepare a description of the role and capabilites required for any particular board appointment including that of the Chair
Identify and nominate board candidates to fill board
Make recommendations concerning the standing for reappointment of directors
What are the typical roles and responsibilties of the audit committee?
Monitor integrity of Financial statements of the company
Review companies internal control and risk management systems
Review effectiveness of the company’s internal audit function
Make recommendations re the appointment, reappointment and removel of the external auditor
Review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process
Develop and implement policy re non-audit services by external auditor
What are the typical roles and responsibilities of the remuneration committee?
Setting remuneration for EDs and the Chair, including pension rights and any compensation payments
What are the components of a remuneration package?
Basic salary
Performance related bonuses
Benefits in kind
Pensions
Share options
What are the boards responsibilities?
Maintaining a sound system of internal control
Reviewing the effectiveness of internal controls
Reporting to shareholders that this review has been carried out
What is the turnbull report?
Required that internal controls should be established using a risk-based approach.
Specifically a company should:
Establish business objectives
Identify associated key risks
Decide upon controls to address the risks
Set up a system to implement the required controls
Review intenral controls under the five headings identified by COSO
What is the difference of SOX to the UK combined code?
Enforcement
Documentation
What are the key points of SOX?
Audit independence
Audit partner
Restrictions on dealing
Increased financial disclosures
Certification of accuracy of FS
Internal control report
Audit committee
