Corporate Governance Flashcards
What is corporate governance?
The set of systems and practices used to direct and control a corporate entity
What do the set systems aim to ensure?
Aim is to ensure those who direct and control the entity are accountable and act with integrity towards stakeholders who have a relationship with the entity
What are companies listed on the London Stock Exchange required to comply with?
Under Company law to comply with the UK Corporate Governance Code
Is the UK corporate governance code a rigid set of rules?
No, but a comply or explain approach
What are companies today accountable for as well as shareholders?
A variety of stakeholders: suppliers, lenders, employees, etc
What does corporate governance aim to overcome?
The agency problem.
Ex-ante monitoring of management behaviour and decisions
What does ex-ante mean?
During the process
What does ex-post mean?
After the process
Who are executive management?
control the day-to-day decisions on how
the funds are spent (agent). Led by the Chief Executive Officer
Who do shareholder elect and what do they perform?
Directors of the company to monitor management decisions and ensure they (management) act in the
interests of shareholders
Who so shareholders legally appoint?
Auditors to examine the accounts and give an independent opinion on whether the accounts represent a true and fair view of the entity
What are the Board of Directors responsible for?
Responsible for monitoring the executive decisions of management on behalf of shareholders
What are the BoD in UK listed companies composed of?
composed of executive
directors and non-executive directors (NED)
Who are NEDs?
directors without management responsibilities
What is the role of NEDs?
to provide oversight and constructive challenge to the executive directors.
What are independent NEDs (iNEDs)?
Directors who do not have a
material or pecuniary relationship with the company or related
persons
What should the mix of exec vs NEDs accomplish?
No one individual
or group dominates the Board
Are NEDs generally present in the company on a day-to-day basis?
No
What do NEDs have access to?
They should have access to legal advice at the
company’s expense, and access to advice and guidance of the Company Secretary
Who leads the BoD?
The Chair
What should the Chair not be the same as in the UK?
Can’t be the CEO (Comply or explain)
Why in the US is the chairman more likely to be the CEO?
Emphasis on ex-post monitoring of management
via audit. Stricter auditing
What are good reasons foe the seperation of Chair and the CEO?
- Both roles require substantial and fully engaged
commitment. - Combining these two roles in one person would give
that individual “unfettered” power over the direction
and management of the company - To mitigate conflict of interest between the BoD and management - the role of the BoD as led by the
chairman includes the appointment, remuneration and performance review of executive management
What are board committees?
Smaller groups who advise the Board on specific
governance areas or mechanisms
Give examples of the board committees. (Only required to know top three in the list)
- Audit committee
- Nominations committee
- Remuneration committee
- Risk committee
- Environmental, Social & Governance (ESG)/
Sustainability committee
For listed companies in the UK, what is the audit committee composed of?
should be constituted with at least three independent NEDs; two in
the case of smaller companies
What is the audit committee responsible for?
- Monitoring the integrity of the company financial statements
- Conducting the external audit tendering process and making recommendations to the Board re the (re)appointment or
removal of the external auditor, and reviewing the terms of engagement including potential conflicts of interest - Reviewing the company’s internal controls, risk management
systems and internal audit function
What should the nominations committee be made up of?
Should be constituted by a majority of independent NEDs
What are the duties of the nominations committee?
- Lead the process for Board appointments
- Ensure plans are in place for orderly succession to Board and senior management positions
- Ensure that the Board has the appropriate mix of skills,
knowledge, experience and independence - Decide NED terms of appointment (normally no more than 6 years)
- Ensure that directors have sufficient time to discharge their responsibilities
What do the remuneration committee set?
Set the remuneration policy for the BoD Chair, executive
directors and senior management, including the proportion that is linked to company performance
Who should not be apart of the remuneration committee?
The BoD Chair should not be a member of the remuneration
committee unless they were independent on appointment; the
BoD Chair cannot lead the remuneration committee
For UK listed companies, who should be apart of the remuneration committee?
should be constituted with at least three independent NEDs; two in the case of smaller companies
Why should the BoD not be apart of the remuneration committee?
So senior management and directors are not overpaid
