Chapter 5 pt 2 Flashcards
(41 cards)
1
Q
What are the 5 sections that the 18 principles of the Corporate Governance Code in the UK are in
A
- board leadership and company purpose;
- division of responsibilities;
- composition, succession, and evaluation;
- audit, risk, and internal control;
- remuneration.
2
Q
Who should be on the audit and renumeration committees and nominations comittee?
A
- Audit and renumeration: populated solely by independent non-executive directors,
- Nominations: such directors should form a majority of the nominations committee (the chair should not lead this committee while it is seeking to appoint a successor)
3
Q
What other committees might companies have?
A
- Financial services: risk comitee made up of independent non-exec directors
- Sustainability
- Operational risk e.g. People comitttees
4
Q
What was published alongside Corporate Governance Code?
A
- Code guidance
- Includes sections with the 5 titles providing insights and questions to assist board members in considering whether they are being effective in their role
- Also provides questions board members can ask management to gain additional clarity over corporate culture
4, Almost half is about ‘board leadership and company purpose’
5
Q
What is Chapter Zero?
A
- a global grouping encompassing more than 70 countries,
- is a forum for directors to help build their skills on climate change matters and to promote the need for such skills in the boardroom
6
Q
What is the main focus of most corporate diversity initiatives?
A
Gender and racial diversity.
7
Q
Which country pioneered female board member quotas?
A
Norway
8
Q
What is the common target percentage for women on public company boards?
A
30%
9
Q
What was the goal of the UK Parker Review (2017)?
A
- To have at least one non-white director on all FTSE 100 boards by 2021 and FTSE 250 boards by 2024.
10
Q
What % of FTSE 100 & FTSE 250 have non-white director on the board?
A
- 96% 2022
- 60% 2023
11
Q
What is a good indicator of the quality of the board?
A
- Can gain insight from direct dialogue with the chair and other board members
- Quality of board overall
- Good directors don’t join boards that do nt allow them to contribute effectively - or leave quick if they do
- Weak boards tend to remain weak
12
Q
What are board appraisals?
A
- Board assessments
- Required by many corporate governance codes - bring problems to the surface
- Investors often cynical about these appraisals, as weak boards and weak chairs can relatively easily limit their impact without its being apparent to investors
- More chance of succeeding if it is an external process with an independent facilitator rather than simply an internal review.
- In some markets, both the delivery and the findings of board appraisals are expected to be disclosed, which can help investors gain insight into a company.
13
Q
Which of the skills are most represented by BHP board members?
A
- Risk (12)
- Financial Expertise (12)
- Strategy (11)
- Capital Allocation (11).
14
Q
How many had ESG expertise?
A
- 5
- Relevant public policy expertise
- Extensive experience specifically and explicitly focused on public policy or regulatory matters, including ESG (in particular, climate change) and community issues, social responsibility and transformation, and economic issues
15
Q
How does BHP ensure they have climate change expertise?
A
Support from Internal experts (like the VP of Sustainability and Climate Change) and external independent advisers.
16
Q
Describe diversity of BHP board
A
- 58% less than 3 years
- 41% australian, 33% Europe/UK, 25% North American
- 33% Female
17
Q
Who set out independence criteria for board members from an investor perspective?
A
- ICGN’s Global Governance Principles
18
Q
According to the ICGN’s Global Governance Principles, there will be questions about the independence of individuals who:
A
- had been an executive at the company or a subsidiary, or an adviser to the company, and there was not an appropriate gap between their employment and joining the board;
- receives, or has received, incentive pay from the company or receives fees additional to directors’ fees;
- has close family ties with any of the company’s advisers, directors, or senior management;
- holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
- is a significant shareholder in the company, or is an officer of, or otherwise associated with, a significant shareholder, or is a nominee or formal representative of a shareholder or the state; and
- has been a director of the company for a long enough period that their independence may have become compromised.
19
Q
Describe the maximum tenure for independent director in different countries
A
- 12-15 years: Belgium, lux, Port, Spain, Denmark France, Germany, Poland, Slovenia
- 8-10 year: Eastern Europe and south america
- 8-10 years (explanation needed which shareholders may accept): UK, South East Asia
- 5-7 years: China, Turkey, Hungary
20
Q
Why is there tension between shareholders and directors?
A
- Directors (Board members) have a legal duty to act in the best interests of their specific company. So, when hiring executives, they often want to offer high pay to attract or keep top talent.
- Shareholders, especially institutional investors, typically own shares in many companies. They’re more concerned with the bigger picture, like how rising pay across the entire market might affect long-term returns or cause inflation in executive compensation (a “ratcheting effect”)
21
Q
What are the 4 categories that executive pay structures fall under?
A
- fixed salary, usually increased annually;
- benefits, including pension (typically calculated as a percentage of the salary, often at a more generous rate than is enjoyed by the wider employee base);
- annual bonus;
- share-linked incentive (usually in the form of a long-term incentive plan, or LTIP).
22
Q
How are bonuses normally calculated?
A
- typically calculated on the basis of annual performance against metrics (often called key performance indicators, or KPIs) set at the start of a year
- they are paid in cash at the end of the year—though increasingly some of the bonus is deferred for a further two or three years, often into shares that are released only at the end of the deferral period.
- The KPIs for bonuses will predominantly be financial metrics (usually profit-related), but often around 20% of the KPIs concern personal performance or non-financial measures, including ESG factors.
23
Q
What are longer-term equity rewards?
A
- usually measure performance over at least three years and are typically paid out in shares that must be held for a further period (currently the expected minimum overall period, including the performance period and lock-up thereafter, is five or more years).
- Performance for these schemes is usually measured by broad-brush financial metrics, typically a combination of total shareholder return (TSR) and earnings per share (EPS).
24
Q
What role do pay ratios play in the debate about executive compensation?
A
- Pay ratios (CEO vs. average worker) reveal significant disparities, raising concerns about fairness, especially in light of growing income and wealth inequality.
- While investors will often have sympathy for companies that are keen to have the best leadership, the growing tensions about income and wealth disparity make the question of fairness hard to ignore
25
What does Principle N of the UK Corporate Governance Code state?
The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
26
What is APMs?
1. Alternative Performance Metric
2. A way to mask weak performance
3. These measures are adjusted forms of the accounting standard–approved measures of performance, often referred to as “adjusted” or “underlying.”
4. sometimes indicates a management that is keen to flatter performance rather than admit a failure to generate better performance, as the omission of elements through these adjustments may be difficult to justify objectively.
5. Worry for investors if APM calculations vary from one reporting period to another
27
Apart from APMs what is another indicator that management are obscuring the facts?
If the story the company tells in the front of the report doesn’t match up with the actual numbers in the back, it could be a sign that the company is trying to make something look better than it really is.
28
Which were the first countries to mandate that all large public companies must report according to the TCFD standards
UK and NZ
29
What is IOSCO?
1. International Organization of Securities Commissions
2. the international body that brings together the world’s securities regulators, is recognized as the global standard setter for the securities sector;
30
What did IOSCO and IFRS Foundation announce at COP26?
the formation of a new International Sustainability Standards Board (ISSB)
31
What did the ISSB consolidate into the IFRS Foundation?
1. Climate Disclosure Standards Board (CDSB, an initiative of CDP)
2. the Value Reporting Foundation (VRF, which houses the Integrated Reporting Framework and the SASB Standards)
32
What were the European and Markets Authority (ESMA) guidelines on use of APMs?
1. These guidelines require consistency, with the APMs not to be disclosed more prominently than the official measures and with a full reconciliation between the two.
2. Unfortunately, enforcement of these standards is variable.
33
What was the finalised standard published by the ISSB
1. IFRS 18 - Presentation and Disclosure in Financial Statements
2. intended to take effect for annual reporting periods starting on or after January 2027.
3. This would allow the disclosure of a management-preferred measure of performance on the face of the income statement—but only alongside the permitted standard measures and with a full reconciliation between them.
4. The standard will also require disclosure of operating profit and profit before financing and income tax on the face of the income statement.
34
What is usually the key concern of active shareholders?
1. Capital allocation - how a company applies its financial resources to generate the most value over the long term
2. As much about what a company will NOT do as about what it will
35
What is a key question when considering capital allocation?
1. how much of its cash flow does it distribute to shareholders
2. how much does it reinvest in existing or new business activities
36
What is the debate surrounding Capital structure?
1. No debt is seen as inefficient and limits returns on equity
2. Excessive debt increases the risk of insolvency especially during downturns or rising interest rates
3. A sustainable structure balances short-term return with long-term resilience, typically involving some level of debt unless the business is highly volatile.
37
What are dividends?
1. Dividends are payments made by a company to its shareholders, usually in the form of cash or additional shares.
2. They are a way for a company to share its profits with the people who own its stock.
3. Boards and shareholders must ensure dividends are sustainable—paying beyond cash flow raises concerns, while low payouts can frustrate investors, especially if the company holds excess cash.
4. This issue has caused disputes in some Japanese firms.
38
What are the shareholder considerations:
1. Share buybacks
2. Issuance of shares
3. Dividend payments
39
What Acts have extraterritorial effects?
1. USA’s Foreign Corrupt Practices Act
2. the UK’s Bribery Act
40
What issues will an ethical approach to business encompass?
1. corporate culture and having a set of expected behavioral standards for all staff,
2. treating employees fairly by upholding high standards in health and safety, human rights, and avoiding modern slavery;
3. offering value to customers and avoiding discriminatory or other exploitative behavior, including avoiding collusion with rivals or other anti-competitive activity;
4. avoiding bribery, corruption, and fraudulent behavior;
5. paying suppliers appropriately and promptly and not seeking unfair benefit from any dominant negotiating position;
6. developing appropriate relationships with local communities
7. approaching any regulatory or political lobbying activity honestly without seeking unfair advantage;
8. seeking to pay a fair and appropriate level of tax
9. acknowledging that a company’s reputation is a valuable asset.
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