Unit 1b - Corporate Governance Flashcards
What is Corporate Governance? Problem with bad CG?
System by which companies are directed and controlled.
Shareholders own companies, but day-to-day management and direction of companies is handled by board of directors. In large companies many shareholders are relatively passive, board of directors can do whatever they want.
Why was auditing instituted?
What would happen without that assurance?
So at least once a year, when the financial statements were presented to the members of the company, the auditors would examine them and give some expression of opinion to the members of the company as to whether the financial statements were true and fair.
Without that assurance the members of the company really would have a little idea whether or not the information is reliable.
Auditors therefore examine the financial statements and add credibility to these statements, shareholders then have a much better idea of the performance of the directors and the company.
Main principles of UK Corporate Governance?
Board Leadership and Company Purpose Division of Responsibilities Composition, succession and Evaluation Audit, Risk and Internal Control Remuneration
What is Comply or explain?
Code has no force in law and is enforced on listed companies through the stock exchange. Listed companies are expected to “comply or explain” - trademark of corporate governance in the UK.
Listed companies have to state that they have complied with the code or else they explain to shareholders why they haven’t. this allows some flexibility and non-compliance may be acceptable in some cases.
Board leadership and company purpose
Every company should be headed by an effective board, collectively responsible for long term success
Directors must act with integrity, lead by example and promote the desired culture.
Division of Responsibilities
Who leads the board?
What do NEDs do?
Clear division between the running of the board and the executive responsibility for the running of the company’s business. No one individual should dominate decision making. This means that the roles of CEO and chairman should not be performed by one person as that concentrates too much power in one person.
The chairman is responsible for leadership of the board.
NEDs must be appointed to the board and they should constructively challenge and help develop proposals on strategy. NEDs sit in at board meetings and have full voting rights, but do not have day to day executive or managerial responsibility. Their function is to monitor, advise and warn the executive directors.
Composition, Success and Evaluation
What is the appointment process?
What skills should they have?
How long can the position of chairman be held?
How often are the board assessed on performance and how often are re-elections for members of the board?
Appointments to the board should be subject to a formal, rigorous and transparent procedure led by a nomination committee. A majority of the committee should be independent NEDs .
The board and its committees should have a combination of skills, experience and knowledge. The length of service of the board as a whole should be considered and membership regularly refreshed. The post of chairman should not be held beyond nine years.
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
All directors should be submitted for re-election annually.
Audit, Risk and Internal Control
What policies? What should they ensure?
What assessment of the company?
What should financial statements state?
What should be done to achieve long-term strategic objectives?
Board should establish formal and transparent policies and procedures, ensure the independence and effectiveness of internal and external audit and the integrity of financial statements.
Board should present a fair, balanced and understandable assessment of the company’s position and prospects. The financial statements should state whether the board considered the appropriateness of the going concern basis of accounting and identify any material uncertainties for at least 12 months from the date of approval of the financial statements.
The board should establish procedures to manage risk, oversee internal controls and determine the nature and extent of the principal risks the company is willing to take to achieve its long-term strategic objectives.
Remuneration - What is encouraged?
What should be the procedure for developing policy on remuneration?
Sufficient to attract, retain and motivate directors of sufficient quality… but avoid paying more than is necessary.
A significant proportion of executive directors’ remuneration may be structured to link rewards to corporate and individual performance. Profit related pay is encouraged. Directors should not receive high pay irrespective of company performance.
Formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. Remuneration committee (NEDs) should be formed to fix directors’ remuneration.
Main roles/responsibilities of AC
Monitoring and reviewing the effectiveness of internal audit.
Monitoring the integrity of the financial statements and reviewing significant financial reporting judgements.
Review the internal financial controls and risk management systems
Recommendations to the board about the appointment, reappointment and removal of the external auditors and agreeing the terms of the engagement.
Assessing the independence, objectivity and effectiveness the external auditors including confirming that there are no self-interest or familiarity issues and that partners and staff are rotated properly.
Forum to link directors and auditors. Auditors will typically write to the audit committee about any problems they may be having on the audit or obtaining all of the information they require. If the auditors are worried in some way about the financial statements they will raise those concerns with the AC.
Develop and implement policy on engagement of the external auditor to supply non-audit services, ensuring any threats to independence and objectivity are reduced to acceptable levels and monitoring the fees for those services and the total fee for all services provided for by the external auditor.
