Learning Objective 3 - Chapter 4 (3 marks) Flashcards
what is corporate governance?
A system by which an organisation is directed and controlled; the process where company objectives are established, chieved and monitored.
CG is also concerned with the relationships between the board, management, shareholders and othe releant stakeholders within a legal and regulatory framework
what are the two most important parts of good corporate governance?
Transprarency and accountability
what is a corporate governance framework?
This comprises rules and practices through which a board of directors nsures accountability, fairness, and transparency in a companys relationship with its stakeholders.
what are the four levels that the Corporate Governance framework in the UK operates?
- Through Legislation - The Companies act 2006
- Through Regulation - In particular for listed companies on the London Stock exchange, through the listing rles which is the responsibility of the FCA
- Through reporting; via the UK corporate governance code, which is the responsibility of the Financial Reporting council.
- for all companies not listed on the LSE, adopting equivilnt approaches to corporate governance to those that are listed, as the UK CG code is considered to represent best practice standards of supervision and management by directors and stakeholders
what was the first full UK corporate governance code?
The Cadbury Report, published in 1992.
The initiative to form a committee (Under the chairman of Sir Adrian Cadbury) in order to publish a code of practice followed several high profile corporate failures
what was the corporate governance code formerly known as?
The combined code
What is the FRC and what is its mission?
The Financial Reporting Council
The FRC’s mission is to promote transparency and integrity within business, it sets the UK corporate governance and stewardship codes and UK standards for accounting and actuarial work.
what is the most up to date corporate governance code and when did it come into play?
The 2018 CG code, which came into play 01 Jan 2019, replacing the 2016 code.
what was the 5 main sections of the 2016 code?
- Leadership
- effectiveness
- accountability
- remuneration
- relations with shareholders
what are the 5 main sections of thr 2018 code?
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
what does the ‘Board leadership and company purpose’ section of the 2018 Corporate Governance code entail?
- the principal that a successful company will be led by an effective board, promoting long term sustainable success and generating value for shareholders
- All directors must act with integrity, lead by example and contribute to wider society
- the board should ensure that there is a framework in place which allows for risk to be assessed and managed
what does the ‘Division of responsibilities’ section of the 2018 Corporate Governance code entail?
-The chair will lead the board and is responsible for its overall effectiveness in directing the company.
- The board should include an appropriate combination of executive and non-executive
(and, in particular, independent non-executive) directors, such that no one individual or
small group of individuals dominates the board’s decision-making.
-The board, supported by the company secretary, should ensure that it has the policies,
processes, information, time and resources it needs in order to function effectively and
efficiently
what does the ‘Composition, succession and evalution’ section of the 2018 Corporate Governance code entail?
- appointments to the board should be formal, thorough and transparent and an effective succession plan should be maintained for board and senior management.
- The board 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 whetehr each director continues to contribute effectively
what does the ‘Audit, risk and internal control’ section of the 2018 Corporate Governance code entail?
- The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions.
- the board shouls establish procedures to manage risk, oversee internal framework and determine the nature and extent of principal risks the company is willing to take in order to achieve its long term strategic objectives.
what does the ‘Remuneration’ section of the 2018 Corporate Governance code entail?
- Remuneration policies and practices should be designed to support strategy and promote long term sustainable success. Executive remuneration should be aligned to the companies purpose and values, and linked to the companies long term strategy.
- a formal and transparent procedure should be developed on executive remuneration. no director should be involved in the deciding of their own remuneration outcome.
what 4 things should companies do in terms of going concern, risk management and internal control according to the CG code 2018?
- Identify any material uncertainties in their ability to trade as ongoing concern,
- assess their principal risks and explain how they are being managed
- state whether they are able to continue in operation and meet their liabilities
- monitor their risk management and internal control systems at least annually.
is compliance with the Corporate Governance Code a legal requirement?
It is not a legal requirement however it is part of the Stock Exchange Listing Rules. i.e companies are required to state in their annual report that they are in compliance with the code, or if not fully complaint, to detail (explain) where they are not compliant and why.
what is Turnball guidance?
Set up under the chairmanship of Nigel Turnball - set out best practivce on internal control for UK listed companies, and assisted them in applying the section of the UK CGC that deald with internal control.
When was the turnball guidance published?
1999 originally, then updated versions were issued by the FCA in 2005, 2009 wiith the latest being 2014
What were the key changes to the 2014 issue of the ‘turnball guidance’?
The turnball guidance was republished and called ‘Guidance on Risk Management, Internal Control, and Related Financial and Business Reporting’ (the ‘Risk Guidance’). It applies to listed companies for accounting periods beginning on or after 01 October 2014.
what are the legal requirements for compliance to the Corporate Governance Code?
UK companies are not legally required to comply with the CGC, however if the firm is listed on the London Stock Exchange, then compliance (or a reason as to why they are not compliant) is required under the Listing Rules.
what is the stance on CGC for mutual companies?
They have no legal obligation to comply, as with any UK company. However, under The Association of Financial Mutuals (AFM), they have their own version of the code which adapts the requirements to the particular needs of mutual companies.
i.e this includes gudance around the role of shareholders (adapting this to members) and the appointment of directors that have specific experience of the intrests of members. A good example of this is the Met police friendly society, where certain non-exec directors or retired police officers serve.
what were the main intentions of the 2018 publication of the revised Guidance on Audit Committees by the FCA?
This intended to stimulate thinking on how boards can carry out their role most effectively and is designed to help boards with their actions and decisions when reporting on the application of the codes principles.
The key areas addressed:
1. Making sure best practice is followed out, the audit committes arrangements need to be proportionate to the task, and will vary according to the sixe, complexity etc.
2. The audit commitee has a particular role, acting independently from the executive, to ensure that the interests of the shareholders are properly protected in relation to financial reporting and internal control, while directors have a duty to act in the interests of the company. If there is any dispute between the board and the audit committee, this is to be resolved at board level
3.The guidance contains recommendations about the conduct of the audit committee’s relationship with the board, exec management and internal and external auditors.
4. The management is under obligation to ensure the audit committee is kept properly informed.
what are the 7 main roles and responsibilities of the audit committee?
- Monitoring the integrity of the companies financial statements
- Reviewing the companies internal financial records
- Monitoring and reviewing the effectiveness of the companies internal audit function
- Making recommendations to the board regrding appointment of ext auditor and approving remuneration and terms for the engagement of the ext auditor
- Reviewing and monitoring the ext auditors independence and objectivity in the audit process
-developing and implementing policy on the engagement of an ext auditor - to report to the board, identifying any matters where is considers that action or imrpovement is needed
when did the FRC publish the Guidance on Board Effectiveness?
2018
What does the Guidance on Board Effectiveness, as published by the FRC in 2018 relate to?
Primarily, sections A & B of the CGC on leadership and effectiveness of the board
Who developed the Guidance on Board Effectiveness after the FRC published it in 2018? and what were the main topics dealt with?
The Institute of Chartered Secretaries and Administrators (ICSA).
The main topics:
-Board leadership and company purchase
- Division of responsibilities
- Audit, Risk, and internal control
- Remuneration
what is Germans version as adopted by the UK CGC?
The Deutscher Corporate Governance Kodex
What is the Australian version of the UK CGC?
The Corporate Governance Principals and Recommendations
What is the South East Asian CGC version?
South East Asia Corporate Governance Initiative - launched in 2014
What isthe USA approach to CGC?
The USA take a different approach. Companies with a listing on a stock exchange in the USA are required to comply with requirements of the Sarbanes-Oxley Act 2002 (SOX). Therefore this legilsation is relevant for many UK companies that have a US stock exchange share listing.
The results of the SOX legislation continue to receive mixed reviews, although a 2017 study published by the American Accounting Association provides evidence that the requirements SOX set for financial reporting and public audits have, in fact, served as an extremely effective warning process in detecting corporate fraud.
what other countries have adopted a SOX type law?
apan, Germany, France, Italy, Australia, Israel, India, South Africa and Turkey
in terms of company law, what is the difference for publicly listed companies?
They have to not only abide by the standard company law as all companies are, but also have to abide by ‘listing rules’, which effectively have the force of law.
What do the listing rules dictate?
The contents of the prospectus for a company seeking a listing for the first time.
There is an ongoing obligation to disclose sensitive information, and communicate on new share offers, rights issued, and potential or actual takeover bids for the company.
The Listing Rules require quoted companies to produce half yearly financial reports as well as annual reports.
what is the process called whena company seeks a listing for the first company?
An Initial Public Offering ‘IPO’
What do all public companies and The London stock exchange have in common
They are both required to abide by the Listing Rules.
what is the main legislation currently covering limited companies in the UK
The companies act 2006
What does the Companies Act 2006 include regulation affecting?
- Company formation
- Statutory reporting
- Company meetings
- Responsibilities of company directors and officers
what does companies house do?
Keeps public record of companies registered in the UK
What are the three statutory functions done by companies house?
- Incorporate and dissolve limited companies
- Exampine and store company information under the Companies Act and related legislation
- Make this available to the public
who is responsible for making sure information about the company & its accounts are sent off to companies house?
The company director has a personal responsibility to do this.
what must a company do before it wants to enter into any contracts or undertake any business?
Register with companies house, as without registration, it has no legal existence.
if a company wants to issue shares, what must it do?
it must register as a public company and comply with certain additional rules such as having allotted share capital of at least £50,000
what do the registration documents set out?
1 - companies name
2- whether the company is public or private
3 - whether the liability of the members of the company is limited and if so, if this is by shares or by guarentee. If the company is to be limited by shares, the document must also include a statement of capital and the initial shareholdings.
4 - the situation of the companies registered office. (in the UK )
5 - The statement of the proposed officers
6 - the proposed articles of association
what are the two types of documents that companies are legally required to submit to companies house as part of statutory requirements?
- Confirmation statement
-Reports and accounts
what is a confirmation statement?
this is essentially an information document, including the company’s registered address, the principal business activities, information about the company’s directors, company secretary (where applicable), shareholders and the companies share capital.
how often must a confirmation statement be issued to companies house?
At least once every 12 months.. The company has 28 days from the date to which the return is made to do this. The return is a summary of the company’s details to a particular date, being the ‘made up date’
the latest date that it may be made up is the anniversary of the previous return
what does the companies act say about the retaining of accounting records?
Companies Act requires that every company must keep accounting records which are sufficient to show the company’s transactions.
i.e, to:
- disclose with reasonable accuracy & at any time, the financial position of the company at that time
- enable the directors to ensure that any accounts required to be prepared comply with the requirements of the act
what are the accounts useful for?
Investors and other stakeholders who want to know the condition of the company in which they have invested their capital and to assess the performance of the directors.
Creditors, to obtain reassurance that their debts will be paid or alert them to any possibility that it may not be paid
By law, what must the accounts show in terms of view?
They must show a true and fair view.
what is there to aid companies to give a true and fair view of their economic position?
to aid this process, companies are required to comply with accounting standards, i.e preparing their consolidated accounts;
companies listed on the London Stock Exchange have to follow International Financial Reporting Standards
For most companies, what 3 things will the annual accounts include?
- Income statement (profit and loss account)
- A balance sheet signed by a director
-A directors report signed by a director or the company secretary.
what is the set of required documents (income statement, balance sheet and directors report) when grouped together, called?
The annual report and financial statements
what is a directors report and when is it required?
This is a report that should include a fair view of the company’s business and a description of the principal risks and uncertainties facing the company
This is required by the CA 2006 to include a business review, unless the company is subject to the small companies regime.
what 5 things must the business review include if it is a quoted company?
- The main trends and factors likely to affect the future development, performance and position of the company’s business
info about:
-environmental matters
-the company’s employees
-social and community issues
-info about which persons to with whom the company has contractual or other arrangements which are essential to the business.
what is a directors remuneration report?
This has to be submitted by the directors of a quoted company
-must be approved by the board of directors and signed by a director or the secretary of the company.
-must include a detailed summary of any performance conditions for share options & long term incentive schemes and why these were chosen.
-details of directors service contracts, salaries, fees, bonuses, share options, long term incentive schemes, pensions, retirement benefits, compensation for past directors & sums to third parties for directors services.
what is the main influence on directors reports?
The Large & medium sized companies and groups accounts and reports (amendment) regulations 2013 - issued by the Association of British Insurers (ABI
what is a chairman’s statement?
This is usually included in the annual report & is normally a broad statement about the company’s activities attributed to the company’s chairman. This is not required by the companies Act.
