Corporate Governance

Question 1

Corporate governance is

Answer 1

the means by which a company is operated and
controlled

Question 2

The aim of corporate governance is

Answer 2

to ensure that companies are run well in the
interests of their shareholders, employees, and other key stakeholders such as
the wider community

Question 3

Advantages of a company following good corporate governance principles

Answer 3

Greater transparency
 Greater accountability
 Efficiency of operations
 Better able to respond to risks
 Less likely to be mismanaged

Question 4

The Organisation for Economic Co-operation and Development (OECD) has
produced a set of

Answer 4

six principles of corporate governance to guide policy makers
when setting regulations for their own country

Question 5

The six OECD principles are:

Answer 5

 Ensuring the basis of an effective corporate governance framework
 The rights and equitable treatment of shareholders and key ownership
functions
 Institutional investors, stock markets, and other intermediaries
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board

Question 6

The UK Corporate Governance Code is particularly important for publicly traded
companies because

Answer 6

large amounts of money are invested in them, either by
‘small’ shareholders, or from pension schemes and other financial institutions.
The wealth of these companies significantly affects the health of the economies
where their shares are traded

Question 7

The code is split into five parts:

Answer 7

 Board leadership and company purpose
 Division of responsibilities
 Composition, succession and evaluation
 Audit, risk and internal control
 Remuneration

Question 8

Board leadership and company purpose - Principles

Answer 8

 A successful company is led by an effective board whose role is to
promote long-term sustainable success thereby generating value for
shareholders.
 The board should establish the company’s purpose, values and strategy.
The directors should lead by example and promote the desired culture.
 The board should ensure that the necessary resources are in place for the
company to meet its objectives. The board should establish a framework
of effective controls to enable risk to be assessed and managed.
 The board should ensure effective engagement with, and encourage
participation from shareholders and stakeholders.
 The board should ensure that workforce policies and practices are
consistent with the company’s values. The workforce should be able to
raise matters of concern

Question 9

Board leadership and company purpose - Main provisions

Answer 9

 The board should describe in the annual report how opportunities and
risks to the future success of the business have been considered and
addressed.
 The board should assess and monitor culture. Where behaviour
throughout the business is not consistent with the purpose, values or
strategy, the board should ensure management has taken corrective
action.
 In addition to formal general meetings, the chair should seek regular
engagement with major shareholders. The board as a whole should
understand the views of the shareholders.
 When 20% or more of votes have been cast against the board
recommendation for a resolution, the company should explain what
actions it intends to take to understand the reasons behind the result.
 The board should understand the views of the company’s other key
stakeholders and describe how their interests have been considered in
board discussions. For engagement with the workforce, the company
should use a director appointed from the workforce, a workforce advisory
panel or a designated non-executive director (NED).
 The workforce should be able to raise concerns in confidence and
anonymously (‘whistleblowing’).
 The board should take action to manage conflicts of interest.
 Directors’ concerns about the operation of the board or management of
the company that cannot be resolved should be minuted. On resignation, a
NED should provide a written statement to the chair for circulation to the
board if they have any concerns

Question 10

The chair’s role

Answer 10

 Leads the board of directors.
 Enables flow of information and discussion at board meetings.
 Ensures satisfactory channels of communication with the external
auditors.
 Ensures effective operation of board sub-committees.
 The chair should be independent to enhance effectiveness

Question 11

The chief executive’s role

Answer 11

 Ensures the effective operation of the company.
 Head of the executive directors

Question 12

Executive directors

Answer 12

The executive directors have responsibility for running the company on a
day to day basis

Question 13

Non-executive directors (NEDs

Answer 13

The NEDs monitor the executive directors and contribute to the overall
strategy and direction of the organisation. They are usually employed on
a part-time basis and do not take part in the routine executive
management of the company

Question 14

Advantages of participation by NEDs

Answer 14

 Oversight of the whole board.
 As they are independent they act as a ‘corporate conscience’.
 They bring external expertise to the company

Question 15

Disadvantages

Answer 15

 It may be difficult to find the right NEDs who have the relevant
skills and experience required by the company.
 They, and the sub-committees, may not be sufficiently well-
informed or have time to fulfil the role competently.
 They are subject to the accusation that they are staffed by an ‘old
boys’ network and may fail to report significant problems and
approve unjustified pay rises.
 The cost. NEDs are normally remunerated and their fees can be
quite expensive.

Question 16

At least X the board, excluding the chair should be independent NEDs

Answer 16

Half

Question 17

Independence would be deemed to be affected if a director:

Answer 17

− is, or has been, an employee of the company or group within the last
five years
− has, or has had within the last three years, a material business
relationship with the company either directly, or as a partner,
shareholder, director or senior employee of a body that has such a
relationship with the company
− has received or receives remuneration from the company in addition
to a director’s fee, participates in the company’s share option or a
performance-related pay scheme, or is a member of the company’s
pension scheme
− has close family ties with any of the company’s advisers, directors or
senior employees
− holds cross-directorships or has significant links with other directors
through involvement in other companies or bodies
− represents a significant shareholder
− has served on the board for more than nine years from the date of
their first appointment.

Question 18

The chair should not remain in post for more than X years from the date
of their first appointment. This period can be extended for a limited time to
facilitate effective succession planning

Answer 18

9

Question 19

A risk map enables the company to

Answer 19

assess the likelihood or probability
of a risk occurring and the likely impact to the company

Question 20

It is the X responsibility to implement internal controls and
monitor their application and effectiveness

Answer 20

Directors

Question 21

in accordance with ISA 265 Communicating
Deficiencies in Internal Control to Those Charged With Governance and
Management, auditors are required to report

Answer 21

significant deficiencies in
client controls and any significant risks identified during the audit to
those charged with governance

Question 22

The role of the remuneration committee is to

Answer 22

set the remuneration
packages for the chair, executive directors and senior management.
This is to ensure that they are paid fairly, but not excessively