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hayley k - corporate governance november 2022 > Chapter 2 - Corporate Governance in the UK > Flashcards

Chapter 2 - Corporate Governance in the UK Flashcards

1
Q

What year was Cadbury published?

A

1992

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2
Q

What were the main recommendations of the Cadbury Report?

A

The Board
- Balance of power between directors and sharheolders
- No domination of single individual - board should act collectively
- Seperate Chair and CEO with clearly defined roles
- Regular board meetings
- Monitoring the performance of exec management
- Ability to seek professional advice at the company’s expense (recognises risk of lack of knowledge/experience)

NEDs
- Independent NEDs to bring judgement
- Enough NEDs that their views should carry weight
- Most should be independent
- Selected by formal process overseen by NomCom
- Fixed term appointments by the board formally
- No automatic reappointment
- Implications that NEDs become less independent over time

Executive Directors
- Limits on service contracts (reduction of reward for failure) - 3 years recommended
- Remunation should be decided by RemCo - consisting wholly/mainly of NEDs

Audit Committees/Going Concern statement
- All S.385 CA2006 companies should establish an audit committee (at least 3 NEDs)
- AC review interim/annual FS’ before they are submitted to board for approval
- AC to hold main relationship with the external auditor (previously executive management)
- ‘Going Concern’ statement introduced
- GCS: each director under personal responsibility to consider/reasssure themselves company is a going concern

Interal Financial Controls
- Should be reported on to shareholders by directors

Introductions for FTSE350 Companies
- Requiremewnt for NEDs
- Requirement for independent directors
- AC/NomCom/RemCom
- Evaluation of performance
- Reports on internal controls of the company

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3
Q

What were the issues covered by Greenbury Report (1995)?

A

Directors’ remuneration

  • Role / composition of Remuneration Committee
  • Chair of RemCo should attend AGM to provide accountability to shareholders
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4
Q

What are the main features of the UK Corporate Governance Code 2018?

A
  • To be followed by all UK premium listed companies (accounting periods starting on or after 1 January 2019)
  • Operates on ‘comply or explain’ basis
  • Company must detail CG detailed in AR explaining how it has applied spirit of the principles
  • Shareholders enforce requirements via dialogue with company and voting at AGMs.
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5
Q

What do the good practices set out in the UKCGC enable boards to do?

A
  • Establish purpose/strategy/values – satisfy aligned to company’s culture/aimed at achieving long-term success for the company
  • Consider practices/processes to ensure effective interaction with employees/customers/suppliers and wider stakeholders
  • Effective policies developed – diversity on board/management team/management pipeline
  • Ensure appointments on merit / objective criteria – avoidance of groupthink
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6
Q

What are the main contents of the UK Corporate Governance Code 2018?

A

5 parts, 10 Principles, 41 Provisions (BADCR)

1) Board leadership and company purpose
2) Audit, risk and internal controls#
3) Division of responsibilities
4) Composuition, succession and evaluation
5) Remuneration

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7
Q

What new requirements are included in the 2018 UK Corporate Governance Code?

A

Boards now need to consider:
- Consider views and needs of a wider range of stakeholders
- Diversity
- Integrity and corporate culture
- How corporate governance can contribute to the company’s long-term success

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8
Q

What is the difference between principles and provisions in the UKCGC?

OP-

A
  • Principles should be ‘aspired’ to.
  • Provisions provide guidance on applying the principles.<br></br>

Companies should show in a statement in annual report/accounts how they have adhered to spirit of principles using provisions and guidance to do so, or if not, explain why not [time period etc.]

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9
Q

Whare are the two key aims of the Stewardship Code?

A

Institutional shareholders (as they hold/invest funds on behalf of others) should:

  • …take a more active role in the governance of those companies in which they invest
  • …have a dialogue with the companies in which they invested and to make their views known
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10
Q

What key regulations were introduced/are now covered by CA2006?

A
  • Shareholder rights
  • General Meetings
  • Disclosure to shareholders (ex. remunation, information requested in AR & accs such as the strategic report)
  • Directors’ powers/duties
  • Preparation and audit of financial statements
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11
Q

Which legislation introduced new requirements for the reporting on directors’ reumuneration?

A

The Large & Medium Sized Companies and Group (Accounts and Report) (Ammendment) Regulations 2013.

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12
Q

What were the main factors introduced by The Companies (Misc Reporting) Regulations 2018?

A
  • Cover executive pay
  • Guidance on s.172 statement/reporting
  • CG arrangements for large, privately held businesses
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13
Q

What were the main features of the Corporate Insolvency & Governance Act 2020?

A
  • Number of filing extensions for Companies House
  • Relaxation of some rules pertaining to shareholder meetings
  • Changes to insolvency laws: ie. leave directors in office where chance to restructure business: opportunity of moratorium/stays of creditor & counterparty rights.
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14
Q

Who do the Listing Rules apply to?

A

ALL (UK & non-UK) companies with a premium listing on the LSE.

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15
Q

What are the requirements for AIM listed companies?

A
  • Do not need to comply with UK CGC
  • s.385 CA2006 - must adopt some form of CG code
  • For small/mid-sized Quoted companies this will commonly be QCA (Quoted Company Alliance Code)
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16
Q

What is the main purpose of guidance from investors (ex. PLSA/NAPF/IA)?

A

To provide a series of guidelines for members on corporate governance issues such as:
- Directors’ pay
- Stakeholder engagement

For listed companies

17
Q

What are the 6 Wates Principles for Large Private Companies (2018)?

A

1) Purpose & Leadership

2) Board Composition

3) Director Responsibilities

4) Opportunity & Risk

5) Remuneration

6) Stakeholder Engagement & Relationships

18
Q

What is another common CG code used by large Unlisted Companies?

A

IOD CG Guidance & Principles for Unlisted Companies 2010
14 Principles - ensure long-term survival and sustainability of the company as it develops and matures

19
Q

What is the legal definition of a ‘large’ company?

A

As set out by Companies (Miscellaneous Reporting) Regulations 2018 - meet one or both of following conditions:

  • Over 2,000 employees
  • Turnover >£200m and balance sheet >£2bn
20
Q

What must large private companies disclose regarding corporate governance?

A

In a statement in the directors’ report

  • Which Corporate Governance code it has applied and how
  • Where it has deviated - why
  • If no code has been adopted, why not and what arrangements have been put in place instead for corporate governance?
21
Q

Should large private companies include a s.172 statement?

A

Yes - in the Strategic Report

22
Q

Why is is important to understand the historical development of CG if advising on today’s governance processes?

A

By knowing why practices developed a company can decide whether to comply or explain, what policies/procedures/structures to adopt to achieve spirit of the practice.

  • Ex. Separation of Chair & CEO- comes in response to overly dominant individuals who operate in their OWN interest not the company’s.
  • Companies can avoid this by separating positions and give both clearly defined roles. If companies combine role there should be additional checks and balances to ensure one individual does not dominate- for example, by appointing a SID.
23
Q

What are the arguments for and against the application of CG Codes of best practice (ex. Wates) to large private companies?

A

AGAINST

  • Owners of prviate companies are often also the managers - issue of protecting the investor does not exist <br></br>
  • CG in UK was aimed at creating/protecting shareholder value where a separation of ownership and control existed. One can argue that this is therefore not appropriate for private companies, where the separation does not exist.

<br></br>

FOR

  • Recent high-profile scandals (ex. BHS) - raised issue of needing to protect a wider stakeholder group for example past employees, customers and company suppliers <br></br>
  • Enlightened shareholder value approach to corporate governance has started arguement that the largest non-listed private companies should therefore be required to follow some form of Corporate Governance requirements to protect these wider stakeholder groups.
24
Q

Main DTRs (2-7)

A
  • DTR.2 - disclosure & control of II (to be read in conjuncition with Pt.7 FSA, Part V CJA, MAR & Takeover Code)
  • DTR.3 - PDMRs & PCAs
  • DTR.4 - Period financial reporting
  • DTR.5 - Vote-holder / issuer notification rules (threshold rules and interest(s) disclosure obligations)
  • DTR.6 - Continuing obligations & access to info (equality within share class, electronic comms, info re divis/meetings/changes in share captial)
  • DTR.7 - Corp Governance (Audit Committees/CG statement in directors’ report/RPTs)
25
Q

What is the difference between principles and provisions in the UKCGC?

OP-

A
  • Principles should be ‘aspired’ to.
  • Provisions provide guidance on applying the principles.Companies should show in a statement in annual report/accounts how they have adhered to spirit of principles using provisions and guidance to do so, or if not, explain why not (time period to comply etc.)
26
Q

What do the good practices set out in the UKCGC enable boards to do?

A
  • Establish purpose/strategy/values – satisfy aligned to company’s culture/aimed at achieving long-term success for the company
  • Consider practices/processes to ensure effective interaction with employees/customers/suppliers and wider stakeholders
  • Effective policies developed – diversity on board/management team/management pipeline
  • Ensure appointments on merit / objective criteria – avoidance of groupthink

hayley k - corporate governance november 2022 (19 decks)

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