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BTF > Chapter 10 - UK Corporate governance code > Flashcards

Chapter 10 - UK Corporate governance code Flashcards

1
Q

What is the UK corporate government code?

A

Code of practice embodying a shareholder-led approach to corporate governance.

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2
Q

Who does the UK corporate government code apply to?

A

Applies to all premium listed companies. Smaller and unlisted companies can be more flexible about how they apply the code

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3
Q

Is the UK corporate government a legal requirement?

A

Compliance with the code is not a legal requirement.

But premium listed companies are expected to comply with the main principles

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4
Q

How can a company ‘depart’ from compliances?

A

A ‘comply or exchange’ approach is taken to the code

Companies are required to provide an explanation of any non-compliance in their annual report

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5
Q

What is the structure of the UK corporate governance code? (5)

A
  • Board leadership and company purpose
  • Division of responsibility
  • Composition succession and evaluation
  • Audit, risk and internal control
  • Remuneration
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6
Q

What are the responsibility of the board?

A
  • Consideration of what makes a successful company
  • The board should effectively engage with stakeholders, particularly shareholders and encourage participation from these groups
  • The board should set the purpose values and strategies and ensure the culture is in line with these.
  • Board should make sure the necessary resources are in place for the company to meet and measure performance against the objectives. As part of this risk assessment and mitigation should be carried out, and effective internal controls should be in place
  • The board should make sure the company values are supported by appropriate policies and procedures for the workforce, including the ability for the workforce to communicate any areas that concerns them
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7
Q

What is the chairs role in the dialogue between the shareholders?

A

Discuss governance and strategy with major shareholders and ensure that the views of shareholders are communicated to the board

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8
Q

What is the senior independent directors role in the dialogue between the shareholders?

A

Attend sufficient meetings with a range of major shareholders to develop a balanced understanding of their issues and concerns.

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9
Q

What is the role of the non-executive director?

A

Should be offered the opportunity to attend scheduled meetings with major shareholders or to attend meetings when requested by major shareholders

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10
Q

What are the four boards of directors?

A
  1. Chief executive
  2. Chair
  3. Executive director
  4. non-executive NEDs
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11
Q

What is the chair responsible for?

A

Leadership for the board and ensuring its effectiveness in all aspects of its role

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12
Q

What are the rules for a chair appointment

A
  • Independent on appointment
  • Chair and chief executive MUST be different individuals
  • The Chief executive should not go onto be the chair of the same company
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13
Q

What are the duties of the chair?

A
  • Setting the board’s agenda and ensuring that directors receive accurate, timely and clear information
  • Promoting a culture of openness and debate and constructive relations between all directors
  • Ensure effective communication with shareholders
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14
Q

What are non-executive directors

A

Should constructively challenge and help develop proposals on strategy

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15
Q

What are the responsibility of non-executive directors

A
  • Review the financial controls and risk management to help to ensure the integrity of financial information
  • Appoint, remove, and set remuneration of executive directors
  • Scrutinise management performance and monitor the reporting of performance
  • The Chair needs to hold meetings with NEDs without executive directors being present
  • The NEDs should meet without the chair present at least annually to appraise the chair’s performance
  • On resignation NEDs should submit a written statement of any such concerns to the board
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16
Q

What is the nomination committee?

A

They lead the process for board appointments and make recommendations to the board

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17
Q

Who should be on the nomination committee?

A
  • 50% members should be independent non-executive directors
  • NEDs should be appointed for specific terms subject to re-election
  • Ness serving longer than 6 years should be subjected to a rigorous review
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18
Q

Who can chair the committee?

A

The Chair or an NED

However the chair should not chair the committee when it is dealing with the appointments of their successor

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19
Q

How do we know who is involved in the nominations of new directors?

A

The annual report should identify the chair and members of the nomination committee

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20
Q

How often should the board evaluate their performance?

A

Annually

21
Q

How should the performance of a director be assessed?

A
  • Effectiveness of contribution and time commitment
  • The chair should ensure that directors continually update their skills
22
Q

What are the rules for executive directors in regards to their commitment?

A
  • Allocate sufficient time to the company
  • Should not take the role of Chair of a premium listed company
  • Should not take on more than one NED role in a premium listed company
23
Q

What are the rules for the chair and NEDS in regards to their commitment?

A
  • Allocate sufficient time to the company
  • A chair can chair more than one premium listed company
  • The chair and NED should disclose any other significant commitment to the board before appointment and inform them of any significant changes
  • For the chair, these should be disclosed in the annual report
24
Q

What should directors include in their annual reports?

A
  • Confirm their responsibility for preparing the annual report and accounts
  • State that they consider these to present a true and fair view of the company
  • Confirm whether the going concern basis of accounting has been adopted
  • Report any material uncertainties regarding going concern
  • Confirm that they have carried out a robust assessment of principle risks.
25
Q

How often should the board review the effectiveness sound risk managements, and internal controls?

A

Annually

26
Q

What is the audit committee?

A

The board establishes formal and transparent for maintaining an appropriate relationship with the company’s auditors

27
Q

Who should be on the audit committee?

A
  • Three independent NEDS for premium listed companies
  • At least two independent NEDS for smaller listed companies
  • At least one member of the audit committee should have recent and relevant financial experience
  • In smaller companies the board chair may be a member in additions to the NEDs
28
Q

Who can chair the committee?

A

The committee must be chaired by an NED
The chair should not chair this commitee

29
Q

How do we know who is involved with the audit committee?

A

The annual report should identify the chair and members of the audit committee

30
Q

What are the four responsibilities of the audit committee?

A
  • Financial statements
  • Financial controls
  • External auditor
  • Whistle-blowing
31
Q

What responsibility does the audit committee on financial statements?

A
  • Review the integrity of the financial statements and any formal announcements of financial performance
  • When requested by board they should report on whether the financial statements are fair, balanced and understandable.
32
Q

What responsibility does the audit committee have on financial controls?

A
  • Review the company’s internal financial control and effectiveness of the company’s internal audit function
  • If an internal audit function does not exist then audit committee should consider whether one is needed
33
Q

What responsibility do external auditors have?

A
  • Make recommendation regarding the appointment, re-appointment and removal of external auditors
  • They should approve the remuneration of the external auditors and monitor independence and provision of non-audit services
34
Q

What responsibility does the audit committee have on whistle-borrowing

A
  • Review arrangements by which the staff of the company may, in confidence, raise concerns.
  • Arrangements should be in place with regards to the process of investigating and following up these concerns.
35
Q

Who should set the remuneration for executive directors and non executive directors?

A

Executive directors
- Remuneration committee should determine the remuneration of all executive directors

non-executive directors
- The board (or required by the company’s articles) should determine the remuneration of the non-executive directors

36
Q

How should the remuneration be set for executive directors and non executive directors

A

Executive:
- Designed to promote long-term success of the company. Performance-related elements should be transparent and rigorously applied

Non-executive directors:
- Remuneration should reflect the time commitment and responsibility of the role
- Remuneration should not include performance-related elements or share options

37
Q

When is the shareholder approval needed for the remuneration for executive directors and non-executive directors

A

Executive:
- Shareholders should be invited specifically to approve all new long-term incentive schemes or changes to existing schemes

Non-executive directors
- If any share options are granted then shareholders approval should be sought in advance and any shares exercised should be held until at least one year after the NED leaves the board

38
Q

Can a director decide their own remuneration?

A

no

39
Q

Who should be on the remuneration committee?

A
  • At least 3 independent NEDs for premium listed companies
  • Two independent NEDs for smaller listed companies (i.e. sub FTSE 350).

The board chair may be member

40
Q

Who can chair the remuneration committee

A
  • The committee must be chaired by an NED
  • The chair should not chair this committee
41
Q

How do we know who is involved with the remuneration committee

A

The annual report should identify the chair and members of remuneration committee

42
Q

Who is responsible for corporate governance?

A

The board of directors have overall responsibility for ensuring that the company is governed appropriately

43
Q

Other than board of directors who else is involved with the corporate governance and how?

A
  • Institutional shareholders: Should engage with companies to help improve long-term returns and the efficient exercise of governance responsibilities.
  • External Auditors: For listed companies external auditors should report on the company’s compliance with the UK corporate Governance code and the director’s remuneration report
  • Internal auditors: Department helps to promote good governance by reviewing and reporting on the internal control and risk assessment systems.
44
Q

What is external audit?

A

Financial statements of larger companies are subject to external audit by an auditor carrying an independent and objective investigation

45
Q

What is the purpose of an external audit?

A

Issue an opinion in an audit report on whether the financial statements produced by the directors give a “true and fair view” of the financial performance and financial position of the company.

46
Q

How do external auditors assist corporate governance?

A

The external auditor reports an independent an expert opinion on how the company is complying with the UK corporate governance code. The overall responsibility still remains with the directors and shareholders.

47
Q

What is an internal audit?

A

Independent part of the company which monitors the effective operation of its internal control and risk management systems

48
Q

What is the responsibility of an internal auditor

A
  • Assess how risks are identified, analysed and managed
  • Advising management on risk management process and improvement to internal controls
  • Ensure that the company’s assets are safeguard and that operations are conducted effectively
  • Ensure the laws and regulation are complied with and that the records and reports are reliable and accurate
  • Helping management to detect or deter fraud and to identify saving and opportunities.

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