Corporate governance in the UK

Question 1

Name 6 early reports and reviews on CG conducted in the UK in the 90s and 00s and a brief description of each.

Answer 1

1. Cadbury Report (1992) - set out principles of good governance
2. Greenbury Report (1995) - Addressed director’s remuneration
3. Turnbull Report (1999) - Board’s internal control systems and reporting requirements
4. Higgs Report (2003) - review on role and effectiveness of NEDs
5. Smith Report (2003) - FRC report on AC roles and responsibilities
6. Tyson Report (2006) - recruitment and development of NEDs

Question 2

Why was the Cadbury Committee established?

What were 3 common themes on why companies were collapsing?

Answer 2

• Following many high-profile company collapses (Coloroll and Polly Peck)

• Common themes on why companies were collapsing:

1. Investors were not kept informed about what was really going on in the company
2. The published financial statements were misleading
3. Risk management systems were inadequate or ineffective

Question 3

Give 6 examples of recommendations in the Cadbury Report (1992)

Which companies did these apply to?

How have recommendations evolved?

Answer 3

1. Board of Directors = should be a separate chairman and CEO
2. NEDs = should be sufficient NEDs for their views to carry weight (most should be independent)
3. EDs = service contracts should not exceed 3 years without shareholder approval
4. The Audit Committee = Listed companies should establish an AC
5. A ‘going concern’ statement should be included in annual report and accounts
6. Internal financial controls = Directors should report to shareholders on the company’s system of internal controls

• some of them applied to FTSE 350 companies

Evolved into UK Corporate Governance Code (2010) updated every 2 years by FRC = 2018 is the latest code

Question 4

What relevance does knowing the historical development of corporate governance have for advising on today’s governance practices?

Why should the chair and CEO not be combined?

Answer 4

Important to understand how CG has developed to be able to advise boards on their governance practices.

= designed to counter the power of one dominant individual who runs the company for their own benefit. If governance advisor is aware of this = can advise board wishing to combine the roles what other practices should be put in place

e.g. appointing a majority of INEDs or a SID

Question 5

What approach to CG does the UK predominantly follow?

Name 5 laws where aspects of CG can be found.

Answer 5

A principles-based approach through codes of best practice

1. Companies laws
2. Financial markets and financial services laws
3. Insolvency laws
4. Money laundering and insider dealing laws
5. Health and safety laws

Question 6

What is the main piece of company legislation and which companies does it apply to?

Name 3 other regulations that have been introduced since to expand on the original Act and how each has done so.

Answer 6

Companies Act 2006 applies to companies registered in the UK

1. The Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 = companies must include a strategic report in their annual report and accounts
2. The Large and Medium Sized Companies and Group (Accounts and Reports) Regulations 2013 = new requirements for reporting on directors’ remuneration
3. The Companies (Miscellaneous Reporting) Regulations 2018 = guidance for companies on s.172 CA2006 requirements and CG arrangements for large, privately held businesses

Question 7

What type of UK companies can be listed?

What is the main difference between a public and a private company in the UK?

Answer 7

Only public limited companies can be listed

Public companies can offer shares to the public. Private companies cannot.

Question 8

Which companies must comply with the rules issued by the UK Listing Authority (the FCA?)

Where are the rules found and what do they consist of?

Answer 8

Companies listed on the LSE.

Current rules are set out in the FCA Handbook = UK Listing, Prospectus, and Disclosure Guidance and Transparency Rules (LPDTR)

Question 9

What do the Listing Rules say about the UK CG Code?

Which companies don’t have to comply with the UK CG Code?

What must they do instead? (2)

Answer 9

All companies with a premium listing on the LSE must comply with the UK CG Code or explain their noncompliance in a governance statement in the company’s annual report and accounts. = comply or explain regime

Companies listed on AIM do not have to comply with the UK CG Code

But they do have to:
1. Adopt a set of governance standards = most choose Quoted Companies Alliance (QCA) Code
2. Make a statement on the code they have adopted, how they have applied it, and explain reasons for departure

Question 10

What does DTR 7 say?

Answer 10

Corporate governance = sets out the requirements for listed companies in relation to:
○ Having an audit committee
○ Including a corporate governance statement in its annual directors’ report
○ Related party transactions

Question 11

What 4 new requirements are included in the UK CG Code 2018 compared to its predecessors?

Answer 11

boards need to consider the needs of:

1. a wider range of stakeholders (employees, customers and suppliers)
2. corporate culture
3. diversity
4. how the overall governance of the company contributes to its long-term success

Question 12

Who does the UK CG Code apply to?

What is its aim?

Who enforces the requirements of the UK CG Code and how?

Answer 12

• All companies listed on the premium market of the LSE are required to comply or explain with the UK CG Code

• Aim of the 2018 Code = to get away from a box-ticking or boilerplate responses
• Hoped that the statements will provide the basis for constructive dialogue with shareholders

Shareholders enforce the requirements of the code through dialogue with the company and voting at general meetings.

Question 13

What is the difference between principles and provisions in the 2018 UK CG Code?
(There are 18 principles and 41 provisions)

What are Listed companies required to do in their annual report and accounts?

Answer 13

The Principles state what a company should be aspiring to.
The Provisions provide guidance on how the principles could be achieved.

Listed companies are required to make a statement in their annual report and accounts on how they have:
• applied the spirit of the Principles;
• complied with, or explain why they have not complied with, the provisions

Question 14

What are the 4 main pieces of FRC Guidance?

Answer 14

1. Guidance on Board Effectiveness (2018) - based on Higgs Report
   • Primary purpose = to stimulate boards’ thinking on how they can carry out their role effectively
2. Guidance on Audit Committees (2016) - previously Smith Report
3. Guidance on Risk Management, Internal Control, and Related Financial and Business Reporting (2014)
4. Guidance on the Strategic Report (2018) = recognises the importance of non-financial reporting

Question 15

What CG guidance is there from investors?

What are the 2 representative bodies?

Answer 15

Institutional shareholders and their representative bodies have issued a series of guidelines on CG issues

2 representative bodies:
• Pensions and Lifetime Savings Association (PLSA)
• The Investment Association

Question 16

What is the QCA?

What is their CG Code?

What must companies adopting this code do?

Answer 16

• = Quoted Companies Alliance (QCA) = a body that represents smaller quoted companies

Quoted Companies Alliance Corporate Governance Code = QCA CG Code = consists of 10 principles that are similar to the UK CG Code for listed companies, but are less rigorous

• Companies adopting the QCA Code must issue an annual statement on how they have complied with the code and provide justifications for any departures from it

Question 17

Name 5 of the 10 principles of the QCA CG Code

Answer 17

1. Establish a strategy which promotes long-term value for shareholders
2. Seek to understand and meet shareholder needs and expectations
3. Consider wider stakeholders and social responsibilities for long-term success
4. Embed effective risk management throughout the organisation
5. Maintain the board as a well-functioning balanced team
6. Ensure directors collectively have the necessary up-to-date skills
7. Evaluate board performance, seeking continuous improvement
8. Promote an ethical corporate culture
9. Maintain governance processes that are fit for purpose
10. Communicate with stakeholders how the company is governed and its performance

Question 18

Describe the case of BHS (2016)
regrading CG in private companies.

What did the government do in response?

What were the 2 outcomes?

Answer 18

BHS went into administration in 2016 leading to a loss of 11,000 of jobs and a deficit of £570+ million in its pension schemes. Sir Philip Green (owner) previously took large amounts of money out of the company. He sold BHS in 2015 to a former Bankrupt with no retail experience for £1 to try and avoid the pension deficit, but ended up paying £360+ million to rescue the pensions.

• The gov published the Green Paper and raised the issue of extending CG frameworks to the largest privately held companies

1. The Companies (Miscellaneous Reporting) Regulations 2018
2. The Wates Corporate Governance Principles for Large Private Companies

Question 19

What did The Compnaies (Miscellaneous Reporting) Regulations 2018 do for large private unlisted companies?

Which companies are considered large?

What are the 2 CG requirements under this regulation?

Answer 19

• Introduced CG arrangements for large private unlisted companies

• Large = those with more than 2,000 employees or with turnover of more than £200 million and a balance sheet of more than £2 billion

1. Must include a statement as part of their director’s report stating:
   • Which CG code they are following
   • Explain any deviations
   • Or explain why not following a code and what CG arrangements have been applied instead
2. Must also provide a s.172 statement within their strategic reports = describing how directors have had regard to the matters in s.172 CA2006

Question 20

What does The Wates Corporate Governance Principles for Large Private Companies consist of?

Which approach does it use?

Answer 20

6 principles that seek to introduce a high-level approach to good CG for large private companies

Apply and explain approach

Question 21

What are the 6 principles of The Wates Corporate Governance Principles for Large Private Companies (2018)?

Answer 21

1. Purpose and Leadership = Directors’ ensure values, strategy and culture align with the company purpose;
2. Board Composition = size of the board should be guided by the scale and complexity of company
3. Director Responsibilities = BoD should understand the need for accountability and their directorial responsibilities
4. Opportunities and Risk = BoD promote long-term success of company… establish oversight for identifying and mitigating risks
5. Remuneration = BoD should promote remuneration structures aligned to the long-term success of company taking into considerations conditions and pay elsewhere in the company
6. Stakeholder Relationships and Engagement = Directors should foster effective stakeholder relationships

Question 22

Which corporate governance code(s) applies to:
• UK premium listed companies (plc);
• UK AIM listed companies
• Large private companies (listed or unlisted) (2)
• UK unlisted companies e.g private limited company (Ltd) (2)

Answer 22

UK Premium Listed Companies:
2018 UK Corporate Governance Code

UK AIM Listed Companies:
QCA Code

Large private companies:
1. The Wates Corporate Governance Principles for Large Private Companies 2018
2. UK CG Code (optional)

UK Unlisted Companies:
1. Institute of Directors Corporate Governance Guidance and Principles for Unlisted Companies (2010)
2. UK CG Code (optional)

Question 23

What is the argument for and the argument against the application of corporate governance codes of best practice to large private companies?

Answer 23

For:
1. Recent high-profile corporate scandals e.g. BHS has raised issues of protecting wider stakeholder groups (e.g. employees, former employees and suppliers of the company) = enlightened shareholder value approach to governance has led to arguments for large companies to follow CG requirements.

Against:
1. CG was traditionally aimed at creating and protecting shareholder value where there was a separation of ownership and control = Owners in private companies are often managers so issue doesn’t tend to exist = argued CG not appropriate for private companies where no separation

Question 24

What 3 things did the Corporate Insolvency and Governance Act 2020 introduce? (Government’s response to Covid-19)

Answer 24

1. extensions for filing period of various documents at CH e.g. company accounts
2. Relaxation of certain requirements relating to shareholder meetings.
3. Changes to insolvency laws which leave the current directors In office with an opportunity to restructure the business