Corporate governance Flashcards
What corporate governance means
Corporate governance is the means by which the company is operated and controlled
The aim of corporate governance is to …
… ensure companies run well and in the interests of their shareholders and stakeholders
The aim of corporate governance is to try and ….
… prevent directors from abusing their power
Advantage of following good corporate governance principles:
- greater transparency - greater accountability - efficiency of operations - better able to respond to risks - less likely to be mismanaged
The Corporate Governance Code is split in 5 parts
1) Board leadership 2) Division of responsibilities 3) Composition, succession and evaluation 4) Audit, risk and internal control 5) Remuneration
The 6 OECD (Organisation for Economic Co-operation and Development) principles are:
- Basis for an effective corporate governance framework - Rights and equitable treatment for shareholders and key ownership functions - Institutional investors, stock markets and other intermediaries - The role of stakeholders in CG - Disclosure and transparency - The responsibilities of the Board
Board leadership - Principles / role
Role: - To promote long-term sustainable success, generating value for shareholders - Establishes co’s purpose, values and strategy - Ensures necessary resources are in place - Establish a framework for effective controls - Ensure effective engagement with shareholders / stakeholders - Workforce policies that are in line with co’s values
Board leadership - Main provisions
Board should: - describe in annual report how opportunities and risks are addressed to the future success - assess and monitor culture - chair should remain engaged with shareholders - 20% + votes for Board recommendations, need to understand the reason behind the vote - understand and consider the interests of other stakeholders - allow workforce to raise confidence concerns and anonymously (whistleblowing) - manage conflicts of interests - concerns not resolved in meetings should be minuted
The chair’s role
- leads Board of directors - enables flow of information and discussion at meetings - ensures satisfactory channels of communication with the external auditors - effective operation of the Board and sub-committees - should be independent to enhance effectiveness
Role of chief executive
- ensures the effective operation of the company - head of executive directors
Role of executive directors
- running the company on a day to day basis
Role of Non-executive directors
- contribute to the overall strategy - part-time
Non-Executive directors will..
- be part-time employees - participate at Board meetings - bring experience and expertise - sit on sub-committees as independent experts
Advantages of participation of NEDs
- oversight of the whole Board - independent so they act with ‘‘corporate conscience’’ - bring expertise
Disadvantages of NEDs
- difficult to find the NED with right expertise, experience and skills - may not keep well-informed at all times so limited in fulfilling their role - their fees are expensive
Division of responsibilities - Principles Chair
Chair: - leads the Board and resp. for effectiveness - ensure effective contribution of all Board members - ensure dirs receive clear, accurate, timely information
Division of responsibilities - Principles Board
Board: - should be balanced, no domination between groups - ensure it has the policies, processes, inf, time and resources to function properly
Division of responsibilities - Principles NEDs
NEDs: - should have sufficient time to fulfill their resp. - should keep management accountable
Division of responsibilities - Main Provisions Chair
- Chair independent on appointment - Chair cannot be same as the chief executive
Division of responsibilities - Provisions NEDs - Independence of NEDs would be deemed to be affected if a director:
- is/has been employee in last 5 yrs - has/had within last 3 yrs material business relationship with the company, directly or indirectly, as a part of a body that has such relationship - has received other than director’s fee: - other remuneration - share options - part of pension plan through the co. - has close family ties with other company advisers, dirs, senior employees. - holds other directorships/has links with other dirs through involvment in other companies - represents a significant shareholder - has been on the Board 9+ yrs from date of first appt
Division of responsibilities - Main Provisions NEDs
- At least half of Board should be NEDs, excl. chair - Independent NEDs should be identified in the annual reports - Recommended that a NED is appt as senior independent director - NED’s & senior indep. dir have a separate meeting to review the chair performance - NED’s appoint and remove executive dirs and review their performance against objectives
Division of responsibilities - Main Provisions Appointments and removals
- New appts take into account time needed from the new dir - Appt should not be made without Board approval - Appt/removal of co. sec.- matter for the whole Board
Division of responsibilities - Main Provisions Responsibilities / Annual report
- Responsibilities of chair, chief executive, senior independent director, board and committees in writing and public - Annual report - contains no meetings and attendance of each dir
Composition of a Board - Principles
- should promote diversity - combination of skills, experience and knowledge
Appointment / Succesion to the Board - Principles
- formal, rigorous and transparent - effective succession plan maintained - based on merit and objective criteria - should promote diversity
Evaluation of a Board - Principles
Annual evaluation of the Board should consider:
Annual evaluation of the Board should consider its composition, diversity and efficience of the Board in achieving objectives
