Corporate Governance Flashcards
What is the UK corporate governance code?
A code of practice embodying a shareholder-led approach to corporate governance
Who does the UK corporate governance code apply to?
All premium listed companies
Is the UK corporate governance code
a legal requirement?
No
What happens if companies don’t comply with the UK corporate governance code?
Must explain on their annual report
5 Sections of UK Corporate Governance Code
{DRAB C}
- Division of responsibilities
- Remuneration
- Audit, risk and internal control
- Board leadership + company purpose
- Composition, succession and evaluation
Board leadership and company purpose: What are the responsibilities of the board?
{C BEER}
Creating shareholder wealth
Benefiting community
Effective
Entrepreneurial
Responsible for: company’s long term success
UKCGC: Board responsibilities
Considering success
Stakeholder engagement
Set purpose values and strategy
Align culture to them
Directors should set example
Meet and measure performance
Risk assessment and mitigation
Internal controls
Support values with policies + procedures
Ability for workforce to communicate concerns
Meet regularly
With formal agenda
UKCGC: Annual statement should include
How board operates
Which type of decisions taken by board and which are delegated to management
Board attitude to shareholders
- Satisfactory dialogue
- Equal access to info
Types of board members
- Chair
- Senior independent director
- Non-executive director
Chair responsibilities
Discuss governance and strategy with major SHAREHOLDERS
Communicate to BOARD
Senior independent director responsibilities
Attend sufficient meeting w. range of major shareholders
Develop balanced understanding of issues and concerns
Non-executive directors responsibilities
Opportunity to attend scheduled major shareholder meetings
Attend when requested by major shareholders
What % of shareholders disagreement against board recommendation vote = effective action must planned and communicated to consult with shareholders over the issue?
20%
Which members of the board does the annual report have to identify?
- Chair
- Deputy chair (if applicable)
- Chief executive
- Senior independent (non-executive) director
Who is below the chief executive?
Executive directors
Who is below the chair?
Non-executive directors (NEDs)
What are executive directors responsible for?
Managing day to day business
What are NEDs responsible for?
Constructively challenge and help develop proposed strategies
Requirements of new chair
- Independent
- Different to chief executive
Can’t become later and vice versa
Duties of the chair
{PEES}
Promoting openness and debate
Ensuring directors recover accurate timely and clear info
Effective shareholder communication
Setting the board’s agenda
NED responsibilities
Review financial controls and risk management
Appoint/remove/set remuneration of executive directors
Monitoring performance
Monitor reporting of performance
Meet chair without executive directors
Meet without chair present at least annually to appraise chair’s performance
Submit chair concerns to board on resignation
Appointments to the board requirements
- Formal, rigorous, transparent appointment process
- Objective, on merit, diversity considered
Who should be on nominations committee?
Over 50% members should be independent non-executive directors
What should NEDs be appointed for?
Specified terms
Subject to reelection
After how long service should NEDs receive a rigorous review?
6y
Who can chair the appointments committee?
The chair
Or a NED
The chair can’t chair the committee for their successor
Should the chair and members of the nomination committee be reported in the annual report?
Yes
How is director’s performance measured?
Annual evaluation
Formal and rigorous
Including committees and individual directors
How should the chair act on the annual director evaluation?
Proposing appointments/resignations
How is each director evaluated in the annual review?
Effectiveness of contribution
Time commitment
What should the chair ensure all directors do?
Continually update their skills
What do all directors have to commit to the company?
Sufficient time to discharge their responsibilities
What restrictions do executive directors have?
Can’t become chair of premium listed company
Can’t have more than one NED role in a premium listed company
Can a chair chair more than one premium listed company?
Yes
What do the chair and NEDs have to disclose to the board before appointment and inform if it significantly changes?
Other significant commitments
Who’s significant commitments must also be disclosed in the annual report?
The chair’s
Does the board’s responsibility to present fair, understandable and balanced documents apply just to financial statements?
No
It also covers all price sensitive information e.g. interim reports, reports to regulators
What should the directors do in the annual report?
- Confirm responsibility for preparing annual report and accounts
- Confirm whether true and fair view of company
- Confirm going concern
Report any material uncertainties about it - Confirm they have assessed principal risks robustly
Should the board maintain sound risk management and internal control systems?
Yes
How often should the board review the effectiveness of internal control systems?
At least annualy
Purpose of the audit committee
Establishing formal and transparent arrangements for maintaining an appropriate relationship with the C’s auditors
Who should be on the audit committee?
At least three NEDs if a premium listed company
At least two if a smaller listed company
At least one member must have recent and relevant financial experience
In smaller companies the board chair may be a member as well as NEDs
Who must chair the audit committee?
A NED
Can’t be the chair
What should the annual report disclose in terms of members of the audit committee?
Chair and members
What do the responsibilities of the audit committee cover?
- Financial statements
- Financial controls
- The external auditor
- Whistleblowing
Audit committee: Financial statements responsibilities
Reviewing integrity
Formal announcements of performance
Reporting of fairness, balance and understandability when requested
Audit committee: Financial controls responsibilities
Reviewing internal controls
Reviewing effectiveness of internal audit function or considering starting one
Audit committee: External auditor responsibilities
Recommending appointment, re-appointment, removal
Approve remuneration
Monitor independence and provision of non-audit services
Audit committee: Whistleblowing responsibilities
Reviewing process
Incl investigating and following up staff concerns
Directors remuneration requirements
Enough to attract retain and motivate
Not more than necessary
Who should set executive director’s remuneration?
Remuneration committee
Who should set executive directors’ remuneration?
The board
How should executive directors’ remuneration be set?
To promote long term success of company
Performance-related elements should be transparent and rigorously applied
How should NED remuneration be set?
Reflecting time commitments and responsibilities of role
Should not include performance related elements or share options
When is executive director remuneration shareholder approval needed?
Invited specifically to approve all new/changed long-term incentive schemes
When is NED remuneration shareholder approval needed?
If share options granted
(approval needed in advance)
NED share options rule
Must be held until at least 1y after leaves board
Can a director ever be involved in setting their own remuneration?
No
Remuneration committee: For who?
- Chair
- Executive directors
- Senior management
Who should be on the remuneration committee?
At least 3 NEDS if premium LC
At least 2 NEDS if smaller
Can the chair be a member of the remuneration committee?
Yes
What counts as a smaller listed company?
Sub FTSE 350
Who must chair the remuneration committee?
A NED
Can’t be the chair
Which remuneration committee members must be reported?
Chair and members
Who is ultimately responsible for corporate governance?
The board of directors
Which 3 parties provide assistance to the board in relation to corporate governance?
- Institutional shareholders
- External auditors
- Internal auditors
Institutional shareholders’ responsibility to corporate governance
Engage with companies to:
1. Provide long term returns
2. Exercise governance responsibilities efficiently
External auditors’ governance
responsibilities
Report on (listed) C’s compliance with:
1. UK Corporate Governance Code
2. Directors’ remuneration report
Internal auditors’ governance responsibilities
Reviewing internal control and risk assessment systems
Purpose of an external audit
Confirm true and fair view of financial performance and position
