Why do you need corporate governance?
Because in most organisations, there is a separation between ownership and control
what is the process of setting up a company called?
incorporation
what is the agency relationship?
as a corporation is a separate legal entity from its owners, the ownership and control of the company can become separated as the shareholders aren’t the same people as those who run the company
benefits of the ownership/control separation
- specialist managers run the business more efficiently than those who own it
- managers can’t contribute all the capital, so they bring in external capital from investors who have no interest in the day to day operations
Corporate governance
set of processes and policies by which a company is directed, administrated and controlled (ensures business is run in the best interests of shareholders)
Main 4 recommendations of best practise in effective corporate governance:
- membership of board of directors
- how director’s remuneration is decided and disclosed
- role of both and internal and external audit
- how the public, as legit stakeholder in large company, has a right to know how the company is being governed
4 reasons companies adopt good corporate governance?
- business success
- investor confidence
- minimisation of wastage
- listing requirement
Directors who are involved in day to day running of company
executive directors
- types of directors
Executive directors and …
Non-executive directors (NEDS) - not employees of company and have no managerial responsibilities however, they do attend board meetings and have a say in strategic decision making of company
Role of NEDS:
- Strategy (challenge and contribute to development of strategy)
- Performance (scrutinise performance of management in meeting agreed goals and monitoring senior management)
- Risk (should be satisfied that financial info. is accurate and financial controls and systems of risk management are robust and defensible)
- People (have to determine appropriate levels of remuneration for executives and have a prime role in appointing, and removing senior management as part of succession planning)
Who should be independent in a company?
NEDS (non-executive directors)
NEDS must not…..:
- have been an employee of company in last 5 years
- have had a material business interest in company for last 3 years
- participate in company’s share options or pension schemes
- have close ties with company directors or senior employee’s
- serve as a NED for 9+ years with same company
Half of the board of directors should be what?
NEDS
What does good corporate governance recommend?
the role of chairman should be distinct from the Chief Executive office - if one person has both roles, it gives them too much power and allows them to individually dominate the running of the company
What is a remuneration committee?
A committee made up of NEDS which is responsible for deciding the pay and incentives offered to executive directors
Responsibilities of a remuneration committee?
- set clear policies on directors’ remuneration that is supported by shareholders
- performance packages for executive directors should be aligned with long-term shareholder interests and include challenging targets
- ensure compliance with disclosure of directors’ remuneration
What is an audit committee?
Consists of independent NEDS who are responsible for monitoring and reviewing the company’s intera; financial controls and integrity of the financial stat. - they act as interface between board of directors and internal/external audit
responsibilities of the audit committee:
- reviewing accounting policies and financial statements
- review systems of internal controls and risk mgmt. within organisation
- agreement of work agenda for internal audit department and reviewing the results of internal audit work
- making recommendations to the board
- liasing with external auditors
What is the nomination committee?
Formed in order to ensure that the composition of the board is balanced - monitors process for appointment of directors to the board as well as make recommendations for appointments to board.
The nomination committee needs to consider what when recommending appointmnets?
- consider overall size of board
- various skills needed to be present on board
- mix of executive and NEDS
- need for continuity in board through succession planning
- need to attract directors from diverse backgrounds
What is a risk committee?
An independent committee of the board with the sole function of determining risk mgmt. policies for company (more likely to be present in large companies)
Risk committee responsabilities:
Review of:
- risk mgmt. policies
- company’s risk exposure and risk appetite
- significant risks identified by internal audit department
- reports from regulatory authorities relating to risk mgmt. and compliance issues
what is a committee?
a group of people who are appointed to administer, discuss or make reports concerning a subject
4 characteristics of a committee:
- tend to be permanent, or at least long term
- have authority
- follow well-established procedures
- provide a way of making difficult decisions by involving key individuals and departments
