Module 2: Corporate Governance Flashcards
What is corporate governance?
The system by which companies are directed and controlled.
Allows companies to mitigate the agency risk that arises as a result of the directors running a company on behalf of the shareholders.
What is the corporate governance code?
Bob Drives a CAR
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
What are the roles of: Executive director (ED) Non-executive director (NED) Chairman Chief executive officer (CEO)
- ED - Day to day operational management of company
- NED - Sits on board of directors, not involved in day to day operations. Independent and challenges strategic decisions.
- Chairman - Head of the board and responsibility for chairing board meetings. Independent
- CEO - Responsible for ED team and ultimately responsible for day to day operations and implementing board strategies.
Board leadership and company purpose
Company should be led by effective and entrepreneurial board which promotes the long term success of a company
Ensures necessary resources are in place to meet company objectives
Establish a framework of prudent and effective controls
Ensure effective engagement with shareholders/stakeholders
Division of responsibilities
Chair should be independent on appointment.
CEO and chair cannot be the same person
NEDs should have sufficient time to meet their responsibilities
Half the board (Excluding the chair) should be NEDs that are independent.
Composition, succession and evaluation
Appointments to board should be subject to formal, rigorous and transparent procedures.
Effective succession plan should be in place for members
Appointments should be based on merit and objective criteria, should promote diversity.
Board/Committees should have combinations of skills, experience and knowledge.
Formal and rigorous annual evaluation
Audit, risk and internal control
Board should establish and audit committee of independent NEDs, minimum of 3. At least 1 needs relevant financial experience. Also competence of sector company operates in.
They should state that the annual reports are fair, balanced and understandable.
Should carry out robust assessment of company’s emerging and principal risks.
Monitor company’s risk management and internal controls
Should state whether it considers it appropriate to adopt going concern basis of accounting and identify any material uncertainties.
Remuneration
Remuneration policy and practice should support and promote long-term sustainable success
Board should establish a remuneration committee of independent and NEDs (minimum of 3)
All NEDs remuneration should not include share options or other performance related elements.
Overview of Committees:
Audit
Nomination
Remuneration
Audit committee is independent NEDs, minimum of 3. Responsible for financial reporting process, internal control and audit and relations with external auditor.
Nomination committee is made of up majority independent NEDs. Responsible for nomination of new members to board
Remuneration is made up of independent NEDs, minimum of 3. Responsible for ED and chairmans remuneration.
Explain comply or explain approach?
Although compliance is expected from all companies, some may use a different approach which is more appropriate to their circumstance. When this happens they must explain to shareholders who will then decide whether they accept the new approach
Who must comply with UK corporate governance code?
Only entities with premium listing on the LSE main market are required to comply or explain with code.
Unlisted companies have no requirement to comply or explain.
Listed companies must include a corporate governance section in their annual report. What is the two-part statement in relation to compliance with the code.
- Narrative statement - Includes a description of how the company has applied the principles of the code
- Compliance statement - The company must state whether or not it has complied with all of the relevant provisions throughout the accounting period. If it has not complied this must be detailed reasoning why
What companies does the Sarbanes-Oxley Act 2002 (SOX) affect?
- Registered with the SEC in the US
- Included in the consolidated accounts of a company which is registered with SEC
- Non-US publicly traded companies operating in the US
What is the difference between UK corporate gov and SOX in relation to annual report certification?
Reports must be certified by CEO and CFO in SOX
In UK, only one director needs to sign off on account on behalf of board.
