Corporate Governance - Lecture 3 Flashcards
How can bad governance occur?
.Boards and sub-committees may lack expertise
.Boards dominated by Chairman’s contacts
.Remuneration policies that exploit short-term options
.Lack of succession planning
What is agency problem?
.Derives from the principals (shareholders) not being able to run the business themselves and therefore they have to rely on the agents (Directors, managers) to do so for them
What controls to the shareholders possess?
.Right to remove directors from office
.Verify what the board is doing
.Introduce mechanism to control the activities of board
Guidance is needed for companies in the form of…..
Rules and Principles
What is corporate governance as defined by the UK corporate governance code of July 2018?
.The system by which companies are directed and controlled
.Board of directors are responsible for the governance of their companies
.The shareholders role in governance is to appoint directors and auditors
What are the 5 areas of focus from the UK corporate governance code?
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
What is board leadership and company purpose?
.Regular engagement between chair and shareholders - clear reporting outcomes
.Workforce engagement required
What is the Chair’s division of responsibilities?
.Independent
.Leads the board
.Responsible for Board’s effectiveness
.Chair and chief executive to be separate
What is the Board’s division of responsibilities?
.No group to dominate decision making
.Requires combination of executive directors and non-executive directors
What are the Non-executive directors (NED’s) division of responsibilities?
.Constructive challenging of ED’s
.Provide guidance and advice
.Shareholder’s voices
.Hold management to account
.One NED to be appointed as senior independent director
.Regular meeting with Chair - absence of ED’s
NED’s must be independent, how is this established?
.Not an employee in last 5 years
.No material relationship with company
.No remuneration except for fee
.Not a significant shareholder
.Has not served for less than 9 years on board
What is composition, succession and evaluation?
.Effective succession planning
.Board to have a combination of skills and experience - regularly refreshed
.Annual evaluation required to consider composition, diversity and working relationship
What is Audit, risk and internal control?
.Audit committee to be constituted
.Composed of NED’s (Min 3)
.All members to have relevant experience
.Board to annually appraise existing and emerging risks
What is remuneration in relation to corporate governance?
.Remuneration policy to support and promote long-term strategy
.Directors not involved in deciding own remuneration
.Remuneration committee to exist and consist of NED’s (min 3)
What may remuneration compromise?
.Basic pay
.Shares at preferential rate
.Pension contributions
