Governance And Corporations - 45% Flashcards
What is the role of the board
- develop and ensure implementation of strategy
- take major decisions ( mergers assets, acquisition, financing )
- oversea chief executive
- monitor risk and control systems
- monitor human capital
- oversea communication
- develop corporate social responsibility policies
What are personal qualities of directors
Directors should have relevant expertise and there should be a mix of experience on the board. They should be independent, objective, sceptical and resourceful
board structure
In the uk most boards are single or unitary, boards can be split into 3 options;
All executive directors
Majority executive directors
Majority non executive directors
- the mix is down to the company concerned and best practice suggests that half of the board should be subject to re- election *
What are the advantages of a single board?
NEDS can bring considerable expertise to the board
NEDS are empowered and thus are more active
Compromise is sought as there is no need to present extreme decisions to a supovisory board
The lack of supervisory board leads to better collective decision making
The points above lead to higher investor confidence
What is a multi tier board?
In Europe, supervisory and management functions are often split into to boards ( supervisory & management )
Advantages of multi tier / two tier boards
Separation of power between those that manage the business and those that control it for the benefit of the share holders
Implicit shareholder involvement is strong
Wider stakeholder involvement via worker representation on the board
More independent thinkin as separate board meetings are held
Managers are empowered through the ability to make appointment onto management board
Disadvantages of multi tier / Two tier board
Dilution of power and confusion over roles and decision making
The supper very board are remote from the actual business
The ageency problem occurs where the board acts on behalf of each other leading to confusion over who has actual authority
Lack of transparency over appointments to the supervisory board
The uk corporate governance code
Guidance relating to the composition of unitary board can be found in the uk corporate governance code which is set out in the form of principles with supporting provision. The code must be followed by all uk listed companies, but other companies are encouraged to follow it as ‘ best practice ‘
Uk corporate governance and the financial statement
Any departures from the code should be disclosed and explained in the financial statement
Give 7 examples of rules in the uk corporate governance code
Board leadership & company purpose
- a successful company is led by an effective and entrepreneurial board, whose role is to promote long term sustainable success of the company
- Half of the board excluding the chair should consist of non executive director whom the board considers to be independent
The chairman devote chairman chief executive officer senior independent directors and members and chair board committee should be identified in the annual report
The board should establish the company’s purpose, value and strategy and satisfy itself that these and its culture are aligned
The board should establish a framework of prudent and effective controls which enable risk to be assed and managed
The board should esnure effective engagement with, and encourage participation with stakeholders and shareholders
The board should ensure that workforce policies and practices are consistent with the company’s values and support its long e term sustainable success
Where are the division of responsibilities
- the role of chairman ( the chair ) should be separate
- The CEO is responsible for the day to day running of the company
- The chair leads the board and is responsible for its overall effectiveness
- the board should include an appropriate combination of executives and non executive ( and in particular independent non executive ) directors
- non executive directors should have sufficient time to meet their board responsibilities
- there are a number of rules to ensure the independence of non executive directors
- the board is supported by the company secretary, should ensure that t has the policies, processes, information, time and resources it needs in order to function effectively and efficiently
Composition succession and evaluation
Appointment to the board should be subject to a formal, rigorous and transparent procedure
An effective sucession plan should be maintained for board and senior management
A nomination committee consisting of 50% of Ned’s should ensure appointments are made on merit and suitability whilst ensuring the board remains balanced
Th board and its commits should have a combination of skills, experience and knowledge
Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives
Individual evaluation should demonstrate whether each director continues to contribute effectively
Half of the board excluding the chairman must be Ned’s ( non executive directors )
One Ned should be appointed as senior independent director whom the shareholders can contact outside of the normal channels of communication
Audit risk and internal control
The the board should establish formal and transparent, policies and procedures to ensure they’re independent and effectiveness of internal and external audit, functions
- The board to present a fair, balanced and understandable assessment of the composition and prospects
- An audit committee considering entirely of NED’s ( three for large and two for small companies) should be established
- One member of the audit committee must have recent financial experience
- The audit committee should review effectiveness of risk management and internal controls at least annually and report to shareholders on this
- The audit committee should review the work and effectiveness of the audit team and monitor the independence and objectivity of external auditors.
Remuneration
- remuneration, policies and practices should be designed to support strategy and promote long-term sustainable success
- Executive remuneration should align to the company purpose and values, and be clearly linked to the successful delivery of the companies long-term strategy.
- A formal And transparent procedure for developing policies on executive remuneration and determining the director and senior management remuneration should be established .
- a remuneration committee should be established and consist of at least thee Ned’s ( two for smaller companies )
- The objective is the remuneration that is sufficient to attract, retain motivate quality directors, but not to pay more than necessary.
- significant amount of remuneration should be based on performance
- Directors should exercise, independent judgement, and this question when authorising remuneration of taking account of company info, individual performance and wider circumstances
Audit committee responsibilities
- appointing compensation and overseeing the external auditors
- monitoring accounts
- reviewing internal controls and risk management systems
- considering the external auditors independent and objectivity
- approving any non0 audit work awarded to the exertnal auditors
- reviewing the work of internal auditors
- reviewing whistleblowing procedures
