Corporate Governance and Business Ethics Questions Flashcards
What is the status and Purpose of the UK Corporate Governance Code?
Corproate governance is the system by which companies are directed and controlled.
The shareholders role is to appoint the directors and the auditors and satisfy themselves that the appropriate governance structure is in place
The board’s responsibilities are to set the company’s strategic aims, prove the leadership to up them into effect, supervise the management of the business and report to shareholders on their stewardship
The revised code (July 2018, takes effect in Jan 2019) broadens the definition of governance and emphasise the importance of:
1) Positive relationships between companies, shareholders and stakeholders
2) A clear purpose and strategy aligned with healthy corporate culture
3) High-quality board composition and a focus on diversity
4) Remuneration which is proportionate and supports long- term success
It is designed to:
1) Set higher standards of corporate governance to promote transparency and integrity
2) Attract Investment in the UK for the long term, benefitting the economy and wider society
The UK Corporate Governance Code applies to which firms?
The UK Corporate governance code applies to all companies with a premium listing of equity shares in the UK, regardless of whether they are incorporated in the UK or overseas
The code is not part of the listing rules, however, the listing rules require all companies with a premium listing in the UK to include a corporate governance report in their annual report and accounts
(Not companies with a standard listing, where compliance is voluntary, not companies quoted on the AIM or NEX Exchange Growth Market)
This corporate governance report must show whether the company has complied with the provisions and the reasons for any non-compliance.
What are the 5 different sections of the corporate governance code?
The five different sections of the corporate governance code are:
1) Board Leadership and Company Purpose - guidance n leadership, strategy and policy from and of the board
2) Division of responsibilities - within the board
3) Composition, succession and evaluation - of the board
4) Audit, risk and internal control - policies of the company and the board
5) Remuneration - of the board
When can a company not comply with the code?
Non-compliacne with a specific provision of the code may be justified in particular circumstances if good governance can be achieved by other means. A condition of non-compliance is that the reasons for it should be explained to shareholders, whose voting may be influenced as a result.
This is the Comply or Explain Approach.
Smaller listed companies may judge that some provisions are disproportionate or less relevant, and some provisions do not apply to companies below the FTSE 350.
The code is voluntary for companies quoted on the AIM or the Nex Exchange Growth Market. However, such companies may consider that it would be appropriate to adopt the approach in the code.
The Quoted Companies Alliance provides an alternative, simpler standard for companies quoted on AIM or the NEX Exchange Growth Market
What are the ten principles that The Quoated Companies Alliance Corporate Governance Code is based around?
The UK Corporate Governance Code is less prescriptive and based around 10 principles:
1) Establish a strategy and business model which promotes long-term value for shareholders
2) Seek to understand and meet shareholder needs and expectations
3) Take into account wider stakeholder and social responsibilities and their implications for long term success
4) Embed effective risk management, considering both opportunities and threats, throughout the organisation
5) Maintain the board as a well-functioning, balanced team led by the chair
6) Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
7) Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
8) Promote a corporate culture that s based on ethical values and behaviours
9) Maintain governance structures and processes that are fit for purpose and support good decision making by the board
10) Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stake holders
What are the main principles under the Board Leadership and Company Purpose?
The provisions are focused around building a strong corporate culture
1) A successful company is led by an entrepreneurial board whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to the wider society
2) The board should establish the company’s purpose, values and strategy and satisfy itself that there and it culsture are aligned. All directors must act with integrity, lead by example and promote the desired culture
3) The board should ensure that the necessary resources rei n place for the company to meet its objectives and measre performances against them. The board should also establish a framework of prudent and effective controls, which enables risk to be assessed and managed
What are the main principles under the Division of Responsibilities?
The provisions of this section focus on the independence of the chair and appropriate non-executive directors from the executive team and shareholders
1) The Chair leads the board and is responsible for its effectiveness in directing the company. They should demonstrate objective judgement and promote a culture of openness and debate. The chair also facilitates constructive board relations and the effective contribution of all non-executive directors and ensures that directors receive accurate, timely and clear information
2) The board should include a combination of executive, non-executive and independent non-executive directors, such that no individual or small group of individuals dominates decision making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business
3) Non - executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance and offer specialist advice and hold management to account
4) The board should ensure it has the policies, processes, information, time and resources needed to function effectively.
What are the main principles under Composition, Succession and Evaluation?
The provision in this section focus on the use of effective board committees for nominations and remuneration, and rigorous assessment of performance and suitability
1) Appointments to the board should be subject to the formal, rigorous and transparent procedure and an effective succession plan should be maintained for the board and senior management. Appointments should be based on merit and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths
2) the board and its committees should have a combination of skills, experience and knowledge. The board should be regularly refreshed, with consideration given to the length of service of the board as a whole
3) Annual evaluation of the board should consider its composition, diversity and how effectively members work together. Individual evaluation should determine if each director contributes effectively
What are the main principles under Audit, risk and internal control?
The provisions focus on the effectiveness of the audit committee and the embedding of risk management in the corporate culture
1) The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements
2) The board should present a fair, balanced and understandable assessment of the company’s position and prospects
3) The board should establish procedures to manage risk, oversee the internal control framework and determine the nature and extent of the principles of risk the company is willing to take in order to achieve its long term strategic objectives
What are the main principles under Remuneration
The provisions are centered around remuneration being linked to performance and the independence of the remuneration committee
1) Remuneration policies and practices should be designed to support strategy and promote long term sustainable success. Executive remuneration should be aligned to company purpose and values and be clearly linked to the delivery of the company’s long term strategy
2) A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome
3) Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of the company and individual performance and wider circumstances
What 4 types of figures are employers from Great Britain required by law to publish, in regards to diversity?
Employers with more than 250 employees are required by law to publish the following 4 types of figures annually on their own website and on a government website
1) Gender pay gap (mean and median averages)
2) Gender bonus gap (mean and median averages)
3) Proportion of men and women receiving bonuses
4) Proportion of men and women in each quartile of the organisation’s pay structure
This is separate from the provisions of the UK Corporate Governance Code
What are the 6 Wates Corporate Governance Principles for Large Private Companies?
The 6 Wates Corporate Governance Principles for Large Private Companies are:
1) Purpose and Leadersihip - an effective board developed and promotes the purpose of a company and ensures that its values, strategy and culture align with its purpose
2) Board composition - effective board composition requires an effective chair and a balance of skills, backgrounds, expertise and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of the board should be guided by the scale and complexity of the company
3) Board Responsibilities - the board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision making and independent challenge
4) Opportunity and RIsk - a board should promote the long term sustainable success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks
5) Remuneration - a board should promote executive remuneration structures aligned to the long-term sustainable success of a company
6 ) Stakeholder relationships and engagements - directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders and regarding their view when making decisions
Which type of investors is the stewardship code aimed at?
The stewardship code is aimed at institutional investors and operates alongside the UK corporate governance code for listed companies
The purpose of the code is to improve the quality of corporate governance through promoting better dialogue between shareholders and company boards, and to increase transparency about the way investors oversee the companies they own.
Compliance with the code is not mandatory for institutional investors, however, the comply or explain principle applies. The FRC encourages institutions to disclose how far they have complied. The FRC publishes on its website a list of those investors who have made such a disclosure
What are the 7 principles of the stewardship code?
The 7 principles of the stewardship code state that institutional investors should:
1) Publically disclose their policy on how they will discharge their stewardship responsibilities
2) Have a robust policy on managing conflicts of interest in relation to stewardship, and this policy should be publically disclosed
3) Monitor their investee companies
4) Establish clear guidelines on when and how they will escalate their stewardship activities
5) Be willing to act collectively with other investors where appropriate
6) Have a clear policy on voting and disclosure of voting activity
7) Report periodically on their stewardship and voting activities
What is the status and purpose of the CISI’s Code of Conduct?
Membership of the CISI includes an obligation to meet the standards of the CISI’s Principles. These impose an obligation on members to act in a manner that goes beyond compliance.
A material breach of the Code of Conduct is incompatible with membership of the CISI
Members who may need to act in a manner contrary to the principles are encouraged to:
- Discuss their concerns with a line manager
- Seek advice from their internal complaints department
- Approach their firm’s NEDs or Audit committee
- If unable to resolve concerns, contract the CISI for advice
