Week 2 - Seminar Notes

Question 1

What are the advantages of good corporate governance?

Answer 1

• Greater transparency
• Greater accountability
• Efficiency of operations
• Better able to respond to risks
• Less likely to be mismanaged

Question 2

How does good corporate governance affect auditors?

Answer 2

Good corporate governance results in:

• A stronger control environment
• Lower risk of misstatement in the financial statements
• Greater communication with audit committees
• The company taking more control of its actions
• A higher quality audit

Question 3

What does the UK Corporate Governance Code outline?

Answer 3

• Board Leadership & Company Purpose
• Division of Responsibilities
• Composition, Succession & Evaluation
• Remuneration
• Audit, Risk & Internal Controls

Question 4

What are the principles of ‘Board Leadership & Company Purpose’?

Answer 4

• Each company should have an effective board
• Board should ensure resources are in place to meet objectives
• Board should establish effective controls to allow risks to be assessed & managed
• Board should encourage input from shareholders and other stakeholders
• Workforce should be able to raise matters of concern

Question 5

What actions represent ‘Board Leadership & Company Purpose’?

Answer 5

• Board should describe how opportunities and risks have been considered & addressed in the annual report
• Board should assess and monitor culture
• Board should understand views of shareholders & other stakeholders
• Staff should be able to raise concerns anonymously
• Directors’ concerns about board leadership should be minute
• Non-executive director should provide a written statement to the chairman if they have concerns

Question 6

What are the principles of ‘Division of Responsibilities’?

Answer 6

• The chair leads the board and is responsible for overall effectiveness
• The chair should ensure effective contribution of all board members
• Board should be balanced
• Non-execute director should have enough time to meet their board responsibilities
• Board must ensure it has policies, processes, information, time & resources to function effectively

Question 7

What actions represent ‘Division of Responsibilities’?

Answer 7

• Chair should be independent
• Chair & Chief Executive should not be the same person
• At least half the board (including the chair) should be non-executive directors
• Board should identify the independent non-executive directors in the annual report
• One of the independent non-executive directors should be appointed as a senior independent director
• The non-executive directors and the senior independent director should meet annually to discuss performance of the chair
• Non-executive directors appoint, remove & scrutinise the performance of the executive directors

Question 8

What are the principles of ‘Composition, Succession & Evaluation’?

Answer 8

• Appointments to the board should be formal, rigorous, transparent and based on merit
• There should be an effective succession plan
• Appointments to the board should promote diversity
• Board should have skills, experience & knowledge
• There should be an annual evaluation of the board

Question 9

What actions represent ‘Composition, Succession & Evaluation’?

Answer 9

• A nomination committee should be established to appoint board members
• Chair should not be a member of the committee when dealing with the appointment of their successor
• All directors should be subject to annual re-election
• Chairs should not remain in post for more than 9 years
• Open advertising for non-executive directors
• There should be a formal and rigorous evaluation of board performance annually
• The annual report should describe: the work of the nomination committee in making appointments; how the board evaluation has been conducted; diversity & inclusion policy; gender balance in senior management

Question 10

What are the principles of ‘Remuneration’?

Answer 10

• Executive remuneration should be designed to promote long-term success
• Executive remuneration should be consistent with company purpose & values
• No director should be involved in determining their own pay
• Remuneration policy should be formal & transparent

Question 11

What actions represent ‘Remuneration’?

Answer 11

• Non-executive director remuneration should not include performance-related pay e.g. bonuses/share options
• Share awards should be released on a phased basis and be subject to a vesting and holding period of at least 5 years
• Only basic salary should be pensionable and be aligned with the workforce
• Notice period should be no more than a year
• Ensure directors’ pay is transparent, easy to understand, predictable and proportionate

Question 12

What are the principles of ‘Audit, Risk & Internal Control’?

Answer 12

• Board should establish policies & procedures to ensure internal & external audits are independent and effective
• Board should represent a fair, balanced & understandable assessment of the company’s financial position
• Board should establish procedures to manage risk & oversee the internal control framework
• Board should determine the nature and extent of the risks it’s willing to take on in order to achieve its long-term objectives

Question 13

What actions represent ‘Audit, Risk & Internal Control’?

Answer 13

• Board should state whether it considers it appropriate to adopt the going concern basis of accounting in its financial statement
• Identify any material uncertainties to the company’s ability to continue for at least 12 months after the approval of the financial statements
• Board should explain in the annual report how it has assessed the prospects of the company, over what period and why it considers it to be appropriate
• Board should establish an audit committee of independent non-executive directors with at least 3 members for large companies
• Chair should not be a member of the audit committee
• Committee must have sector competence
• Directors should explain in the annual report their responsibility for preparing the annual accounts
• Board should carry out a review at least annually to assess the effectiveness of internal controls system & the company’s risk management and report on this review in the annual report