Corporate Governance

Question 1

What is corporate governance?

Answer 1

The set of systems and practices used to direct and control a corporate entity

Question 2

What do the set systems aim to ensure?

Answer 2

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

Question 3

What are companies listed on the London Stock Exchange required to comply with?

Answer 3

Under Company law to comply with the UK Corporate Governance Code

Question 4

Is the UK corporate governance code a rigid set of rules?

Answer 4

No, but a comply or explain approach

Question 5

What are companies today accountable for as well as shareholders?

Answer 5

A variety of stakeholders: suppliers, lenders, employees, etc

Question 6

What does corporate governance aim to overcome?

Answer 6

The agency problem.

Ex-ante monitoring of management behaviour and decisions

Question 7

What does ex-ante mean?

Answer 7

During the process

Question 8

What does ex-post mean?

Answer 8

After the process

Question 9

Who are executive management?

Answer 9

control the day-to-day decisions on how
the funds are spent (agent). Led by the Chief Executive Officer

Question 10

Who do shareholder elect and what do they perform?

Answer 10

Directors of the company to monitor management decisions and ensure they (management) act in the
interests of shareholders

Question 11

Who so shareholders legally appoint?

Answer 11

Auditors to examine the accounts and give an independent opinion on whether the accounts represent a true and fair view of the entity

Question 12

What are the Board of Directors responsible for?

Answer 12

Responsible for monitoring the executive decisions of management on behalf of shareholders

Question 13

What are the BoD in UK listed companies composed of?

Answer 13

composed of executive
directors and non-executive directors (NED)

Question 14

Who are NEDs?

Answer 14

directors without management responsibilities

Question 15

What is the role of NEDs?

Answer 15

to provide oversight and constructive challenge to the executive directors.

Question 16

What are independent NEDs (iNEDs)?

Answer 16

Directors who do not have a
material or pecuniary relationship with the company or related
persons

Question 17

What should the mix of exec vs NEDs accomplish?

Answer 17

No one individual
or group dominates the Board

Question 18

Are NEDs generally present in the company on a day-to-day basis?

Answer 18

No

Question 19

What do NEDs have access to?

Answer 19

They should have access to legal advice at the
company’s expense, and access to advice and guidance of the Company Secretary

Question 20

Who leads the BoD?

Answer 20

The Chair

Question 21

What should the Chair not be the same as in the UK?

Answer 21

Can’t be the CEO (Comply or explain)

Question 22

Why in the US is the chairman more likely to be the CEO?

Answer 22

Emphasis on ex-post monitoring of management
via audit. Stricter auditing

Question 23

What are good reasons foe the seperation of Chair and the CEO?

Answer 23

• 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

Question 24

What are board committees?

Answer 24

Smaller groups who advise the Board on specific
governance areas or mechanisms

Question 25

Give examples of the board committees. (Only required to know top three in the list)

Answer 25

• Audit committee
• Nominations committee
• Remuneration committee
• Risk committee
• Environmental, Social & Governance (ESG)/
  Sustainability committee

Question 26

For listed companies in the UK, what is the audit committee composed of?

Answer 26

should be constituted with at least three independent NEDs; two in
the case of smaller companies

Question 27

What is the audit committee responsible for?

Answer 27

• 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

Question 28

What should the nominations committee be made up of?

Answer 28

Should be constituted by a majority of independent NEDs

Question 29

What are the duties of the nominations committee?

Answer 29

• 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

Question 30

What do the remuneration committee set?

Answer 30

Set the remuneration policy for the BoD Chair, executive
directors and senior management, including the proportion that is linked to company performance

Question 31

Who should not be apart of the remuneration committee?

Answer 31

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

Question 32

For UK listed companies, who should be apart of the remuneration committee?

Answer 32

should be constituted with at least three independent NEDs; two in the case of smaller companies

Question 33

Why should the BoD not be apart of the remuneration committee?

Answer 33

So senior management and directors are not overpaid