Test your knowledge - Part 2 Flashcards
- What are the 7 statutory duties of directors under the Companies Act 2006 and what recourse do shareholders have against directors breaching their duties?
Sections 171 to 177 set out a duty to:
- Act within powers
- Promote the success of the company
- Exercise independent judgement
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties
- Declare any interest in a proposed transaction or arrangement
Shareholders can bring a ‘derivative action’ which is a special court procedure which enables them to bring a legal action in the name of the company. It can be brought in relation to an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director. If the action succeeds, compensation is awarded to the company (see p. 127-129 ICSA Study Text)
- What are the 7 criteria for judging independence of NEDs under the UK Corporate Governance Code?
- Employee within the last 5 years
- Significant shareholder
- In post for more than 9 years
- Material business relationship in last 3 years
- Close family ties
- Cross-directorships
- Receives additional remuneration (including pension scheme, share options, performance related pay)
- What is the recommended size and composition for a board?
The recommended size and composition for a board…
The board of a large public listed company in the UK commonly consists of:
- a chairman
- possibly a deputy chairman
- a chief executive officer (CEO)
- a senior independent director (SID)
- executive directors; and
- non-executive directors (NEDs) (usually independent).
At least one half of the board (excluding the chairman) should comprise NEDs determined by the board to be independent. (Provision 11 of UK CG Code).
- Why is it important for the roles of chair and CEO to be separate and under which provision of the UK Corporate Code is this recommended?
Chair and CEO to be separate…
Where one individual holds both roles they will have a dominant position on the board and, to some degree, unfettered powers – particularly if there are no strong personalities on the board.
There will no clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business (per Principle G of the Code).
Provision 9 of the Code states that the chair and CEO roles should not be exercised by the same person.
- Explain the recommended composition of a nomination committee and its main role.
Should comprise a majority of independent NEDs. The chair of the board or a NED can chair the committee. Chair of the board should not chair the committee when it is dealing with the appointment of their successor (Provision 17 of the UK CG Code).
Main role is to recommend new appointment to the board and succession planning.
- Explain the recommended composition of an audit committee and its main role.
Should comprise all independent NEDs and at least three (at least 2 in smaller companies).
The chair of the board should not be a member. At least one member of the audit committee should have recent and relevant financial experience.
The committee as a whole shall have competence relevant to the sector in which the company operates (Provision 24 of UK CG Code).
The main role of the audit committee should be set out in written terms of reference and should include (Provision 25 of the UK CG Code):
- monitor the integrity of the financial statements
- review internal financial controls
- monitor and review the effectiveness of the company’s internal audit function
- monitor and manage the appointment and relationship with the external auditor
- to report to the board on how it has discharged its responsibilities
- Explain the recommended composition of a remuneration committee and its main role.
Remuneration committee:
Should comprise all independent NEDs and at least three (at least 2 in smaller companies).
The board chair may also be a member of the remuneration committee (but not chair), but only if he was independent on appointment as board chair.
Before appointment as chair, the appointee should have served on a remuneration committee for at least 12 months (Provision 32 of the UK CG Code).
Main role is to determine the policy for executive director remuneration and setting remuneration for the chair, executive directors and senior management.
- What is the difference between wrongful and fraudulent trading?
Wrongful trading – (Section 214 Insolvency Act 1986) the directors allowed the company to continue trading even though they knew (or ought to have known) that there was no reasonable prospect that the company could avoid going into insolvent liquidation.
Directors may be liable to contribute to the assets of the company if regarded as having authorized wrongful trading.
Fraudulent trading – (Section 213 Insolvency Act 1986) the directors have acted with intent to defraud creditors. A criminal offence, even if the company does not go into liquidation (s.993, CA2006). Directors may be required to contribute to the assets of the company.
- Explain the provisions of sections 232 and 233 of the Companies Act 2006 in respect of directors’ indemnities and insurance respectively.
Section 232 generally renders void any attempt by a company to exempt directors from any of their liabilities or to indemnify them against those liabilities.
However, section 233 specifically authorises companies to take out and maintain insurance policies on the directors’ behalf as an exception to this rule.
- What factors contribute to the effectiveness of NEDs?
Factors contribute to the effectiveness of NEDs are:
- Being independent
- Not holding too many NED positions on other boards
- Having skills and experience not otherwise represented on the board
- Having sufficient knowledge about the industry and business of the company
- Having sufficient time to commit to the company
- Constructively challenging and scrutinising the performance of the executive management
- Provide six factors of good boardroom practice
Boardroom practice and behaviours – a board should have established methods of carrying on its business, but its effectiveness will depend largely on the character of its members.
- Corporate culture – strong governance underpins a health culture.
- Frequency of board meetings – should be sufficiently regularly to discharge its duties effectively and there should be a formal schedule of matters reserved for the board
- Agenda – chairman decides what the board will discuss and sets the agenda
• Information – board should be supplied with information in a timely manner and of a quality
appropriate to enable it to discharge its duties
• Support – NEDs especially may look for additional information and this may be from the company secretary, in-house lawyer and/or professional advisers.
- What were the main recommendations made in the Davies Report (2011)?
- By 2015 FTSE100’s should have minimum of 25% female representation on their board. (In 2016 raised to 33% on FTSE350 boards by 2020)
- Listed companies should disclose annually the proportion of women on their board, in senior executive positions and the company as a whole.
- Listed companies should establish and report progress annually on policy for boardroom diversity, including measureable policy objectives.
- Companies should consider advertising for board members, may result in more diverse pool of applicants
- Voluntary code for executive search consultants should be developed to address gender diversity and best practice in searching for and nominating more diverse board members in FTSE350’s
- What specific amendment was made to the UK Corporate Governance Code, when revised in 2018, in relation to the development of Lord Davies’ work?
For FTSE350’s to include in annual report information on the gender balance of members of their executive committees and the direct reports to executive committee members.
- What does the UK Corporate Governance Code say about culture?
Principle B states that in establishing the company’s purpose, values and strategy, the board should satisfy itself that these are aligned to its culture. In addition it states that directors must, amongst other matters, promote the desired culture.
Provision 2 states that the board should:
- assess and monitor culture;
- seek assurance that management has taken corrective action where it is not satisfied that policy, practices or behaviour throughout the business are aligned with purpose, values and strategy;
- explain in the annual report its activities and any action taken; and
- include in the annual report an explanation of the company’s approach to investing and rewarding its workforce.
- What does the UK Corporate Governance Code say about succession planning and who should it be delegated to?
Principle J states that an effective succession plan should be maintained for board and senior management; and that succession plans should be based on merit and objective criteria – promoting diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
Provision 17 states that the nomination committee should lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.
