Corporate governance Flashcards
What is the corporate governance code?
A code of practice that applies to premium listed companies (smaller companies can be more flexible about how they apply the code). Not a legal requirement. Has a ‘comply or explain’ approach
Contents of the UK corporate governance code
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
Board leadership and company purpose
the board must; - Consider what makes a successful company
- Effectively engage with shareholders
- Set the purpose, values and strategy
- Ensure resources to be able to measure performance
- Make sure company values are supported by policies and procedures
Composition of ‘the board’
- Chief executive (responsible for managing day to day business)
- Chair + non-executive directors (NEDs) (constructively challenge the proposed strategies) - need to make up 50% of the board
The chair
Appointment; - independent - chair and CEO must be different - CEO should not go on to be the chair Duties; - Setting the boards agenda - Promoting openness and debate - Effective communication with shareholders
NEDs
Responsibilities;
- Reviewing financial controls
- Appoint, remove and set remuneration for exec directors
- Scrutinise management performance
- The chair should hold meetings without the exec. directors being there
- NEDs should meet at least once a year without the chair
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Nominations committee
Leads the process for board appointment
- 50% independent NEDs
- NEDs appointed for specific terms
- NEDs appointed for 6 years should be subject to a rigorous review
- Chair of committee can be the chair or an NED
- Annual report should identify chair and members of the committee
Performance of directors
- Board should take on formal and rigorous annual evaluation of its own performance
- Each director evaluated on effectiveness and time commitment
- The chair to ensure directors continuously update their skills
Commitment of directors
- The chair may chair more than one premium listed company
- The chair and NEDs should disclose any other significant commitments to the board before appointment
Directors role in financial statements
- Confirm their responsibility for preparing annual report and accounts
- State they consider these to be true and fair
- Confirm whether the going concern basis has been adopted
- Report any material uncertainties regarding going concern
- Confirm they have carried out an assessment of principles risk
Audit committee
- At least 3 NEDs for premium listed companies (2 for smaller listed companies)
- At least 1 member with recent and relevant financial experience
- In smaller companies, the chair may be a member
- Committee must be chaired by an NED not chair
- Annual report should identify chair and members
Responsibilities of audit committee
- Review integrity of financial statements
- When requested may report on whether financial statements are fair, balanced and understandable
- Review the companies internal financial controls
- If internal audit function doesn’t exist, should consider whether one is needed
- Make recommendations regarding external auditor
- Approve the remuneration of external auditor
- Review arrangements for staff to raise concerns
- Arrangements in place for follow up of these concerns
Remuneration (wages)
Executive directors - set by remuneration committee - performance related elements should be transparent - shareholders should be invited to approve incentive schemes
NEDs - set by the board - should reflect time and responsibilities, not performance related
Remuneration committee
Sets wages for Chair, CEO and senior management
- At least 3 NEDs for premium listed (2 for smaller listed)
- The chair may be a member
- Committee must be chaired by a NED, not chair
- Annual report should identify chair and members
The stewardship code
institutional investors must;
- Publicly disclose their stewardship responsibilities
- Robust policy on managing conflicts of interest
- Monitor their investee companies
- Clear guidelines of escalating their activities
- Act collectively with other investors
- Clear policy on voting and voting activity
- Report periodically on stewardship and voting activity
