Governance in Practice Flashcards
(99 cards)
1
Q
According to the UK Corporate Governance Code, what are the governance responsibilities of a BOD?
A
Provide entrepreneurial leadership for the company within a framework of prudent and effective risk management;
Set the company’s strategic aims;
Make sure that the necessary financial and human resources are in place for the company to meet its objectives;
Review management performance;
Set the company’s values and standards; and
Make sure that the company’s obligations to its shareholders are understood and met.
2
Q
What additional governance responsibilities of the board are identified in the King IV Code?
A
Ethical conduct and sustainability of the business;
Compliance with laws, regulations and codes; and
Governing the relationships between the company and its stakeholders.
3
Q
According to the FRC Guidance “Improving Board Effectiveness”, what are the characteristics of an effective board?
A
An effective board is one that:
Provides direction for management;
Demonstrates ethical leadership, displaying (and promoting throughout the company) behaviour that is consistent with the culture and values it has defined for the organisation;
Creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction;
Makes well-informed and high-quality decisions based on a clear line of sight into the business;
Creates the right framework for helping directors meet their statutory duties under the CA2006, and other relevant statutory and regulatory regimes;
Is accountable, particularly to the providers of the company’s capital (shareholders); and
Thinks carefully about its governance arrangements and embraces evaluation of their effectiveness.
4
Q
List 10 matters that should be reserved for decision-making by the BOD?
A
- Approval of overall strategy and strategic objectives;
- Approval of annual operating and capital expenditure budgets;
- Oversight of operations;
- Compliance with legal and regulatory requirements;
- Management/operational performance review;
- Changes in corporate or capital structure;
- Approving the risk appetite of the company;
- Approving the annual report and accounts;
- Declaring an interim dividend and recommending a final dividend; and
- Approval of formal communication with shareholders.
5
Q
In the UK, what does the board of a large company commonly consist of?
A
A chairman; Possibly a deputy chairman; A CEO; A senior independent director (SID) (who may also be deputy chairman); Executive directors; and NEDs.
6
Q
What would be the disadvantages of a large listed company in the UK restricting the total size of its board to 6 members?
A
At least half the board, excluding the chairman, should be independent NEDs which would leave room for the CEO and one other exec position (CFO). If any of the independent NEDs may be unable to attend a meeting or resign then the composition of the board would not be disrupted.
UK Code “the board should be of sufficient size that the requirements of the business can be met and that changes to the board’s composition and that of its committees can be managed without undue disruption, and should not be so large as to be unwieldy.”
Committees would constitute of the same members as on the other committees and the board which would compromise its independence. Remuneration and Audit Committees should consist of at least 3 independent NEDs and the Nomination Committee should consist of a majority independent NEDs.
UK Code “the value of ensuring that the committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees.”
7
Q
What are the provisions in the UK Code for the size and composition of the BOD of a listed company in the FTSE 350?
A
PROVISION 11 - at least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent.
8
Q
CASE STUDY: Dorchester Finance Co. Ltd v Stebbing [1989]
A
UK Legal Case.
Company brought action against 3 directors (1 Exec and 2 NEDs) for alleged negligence and misappropriation of the company’s property.
Stebbing - exec, qualified accountant and only one involved full time.
2 NEDs - only made rare appearances, one qualified accountant and other with significant accountancy experience.
There were no board meetings.
Stebbing, the exec, arranged for the company to make some loans to clients and as part of this persuaded the NEDs to sign blank cheques for these.
Loans did not comply with the Moneylenders Act and they were inadequately secured.
When the loans turned out to be irrevocable, the company brought action against the directors. It was held that all 3 directors were liable to damages. Stebbing was held grossly negligent and the 2 NEDs were held to have failed to show the necessary level of skill and care in performing their duties as NEDs, even though they had acted in good faith at all times.
9
Q
CASE STUDY: Re Barings Plc and Others (1998)
A
Andrew Tuckey, former deputy chairman of Barings Bank, was responsible for the supervision of Nick Leeson, the derivatives trader whole unauthorised speculative trading brought the bank to collapse in 1995.
It was alleged that he had failed to exercise his duty of care to the company. The case was summarised as:
Directors, individually and collectively, have a duty to acquire and maintain sufficient understanding of the company’s business to enable them to discharge their duties properly.
Subject to the AOA, directors are allowed to delegate particular functions to individuals beneath them in the management chain. Within reason, they are also entitled to have trust in the competence and integrity of these individuals. However, delegation of authority does not remove from the director’s duty to supervise the exercise of that delegated authority by the subordinate.
There is no universal rule for establishing whether a director is in breach of his duty to supervise the discharge of delegated functions by subordinates. The extent of the duty, and whether it has been properly discharged, should be decided on the facts in each case.
When there is a question about the extent of the director’s duties and responsibilities, a significant factor may be the level of reward received from the company (higher the reward = greater responsibility expected).
Tuckey had failed in his duties because he did not have sufficient knowledge and understanding of the nature of the derivatives markets and risks involved. He was therefore unable to consider properly matters referred to the committee of which he was chairman.
10
Q
What is a fiduciary duty of a director?
A
Directors have a fiduciary duty to the company.
Fiduciary = given in trust.
They make contracts on behalf of the company and also control the company’s property.
11
Q
What are the 7 statutory duties of directors under the provisions of the UK CA2006?
A
- Act within powers;
- Promote the success of the company;
- Exercise independent judgement of the company;
- Exercise reasonable care, skill and diligence;
- Avoid conflicts of interest;
- Not accept benefits from third parties; and
- Declare any interest in a proposed transaction or arrangement.
12
Q
In what circumstances is it acceptable for a director to have an interest in a third party transaction with the company?
A
A director must declare the interest and its nature with the rest of the board and receive their approval for it to be legal.
E.g. a director may own a building that the company wants to rent.
13
Q
What is a derivative action for breach of a statutory duty by a director of a UK company?
A
Director owes their duties to the company, therefore only the company can bring a legal claim against a director.
The UK CA2006 also introduces a procedure whereby individual members of the company can bring a legal action for a derivative claim against a director.
A derivative action may be brought in respect of “an actual or proposed act or mission involving negligence, default, breach of duty or breach of trust by a director of the company”.
A shareholder would have to bring the action against a director in the name of the company. If successful, the company would benefit and not the shareholder.
14
Q
What are the provisions of the UK DTR for listed companies with regard to related party transactions with the company?
A
For most related party transactions above minimum size, a listed company is required to:
Make an announcement to the stock market giving details of the transaction;
Send a circular to shareholders giving more details;
Obtain the prior approval of the shareholders for the transaction; and
Ensure that the related party’s associates do not vote on the relevant resolution.
15
Q
CASE STUDY: M+S (Chairman/CEO Roles)
A
Feb 2000: Luc Vandevelde appointed as chairman and CEO of M+S when its share price was falling sharply. Appointment attracted criticism but appeared to be a successful short-term measure.
2002: M+S’s fortunes had improved to the point where he relinquished the position of CEO and announced his intention of becoming part-time chairman.
2008: M+S’s CEO, Sir Stuart Rose, was also appointed as company chairman for a limited period until a successor of the CEO role could be identified/appointed. This attracted strong criticism from institutional investors. L+G publicly crtisised this saying it would make it difficult to a successor as CEO.
Shareholders could not prevent the appointment of the new chairman because this was a board decision.
Shareholders were able to vote on the re-election of Sir Stuart Rose as director at the AGM in 2008 whereby 22% opposed his re-election or abstained in the vote.
16
Q
CASE STUDY: Association of British Insurers (ABI)
A
2007: ABI stated that it would issue an ‘amber top’ warning to its members over plans by pharmaceuticals company Shire to appoint its CEO as non-exec chairman.
Shire also proposed to replace the CEO with company’s long-standing finance director.
ABI’s director of investment affairs said “The chairman is supposed to oversee strategy and makes sure the board tests it and decision-making is robust. If the chairman was the chief executive who developed the strategy, he is supervising himself. There are risks in that.”.
17
Q
CASE STUDY: Polly Peck International
A
FTSE 100 company in the 80’s, run by Asil Nadir as executive chairman.
Company collapsed in October 1990. During its administration process, the system of internal controls at the company’s London head office was found to be virtually non-existent.
As a result, Nadir was able to transfer large amounts of money from the company’s UK bank accounts to personal accounts with a bank in Northern Cyprus without any questions being asked.
After the company’s collapse, Nadir fled to Cyprus before returning to London in 2010 to face trial. He was found guilty of 10 counts of theft totaling £29M and in 2012 he was sentenced to 10 years in prison.
18
Q
What is the role of a company chairman? Why should this role not be combined with that of the CEO?
A
Relate primarily to managing the BOD and ensuring the board functions effectively. Key roles are:
Set an appropriate agenda for board meetings;
Ensure that relevant information is provided to the directors, in advance of the meeting;
Encourage open discussions to board meetings, with constructive debate and discussion; and
Encourage all directors to contribute to discussions and decision making.
CEO and chairman roles are the most powerful positions on the BOD. If the same person holds these roles then they could become a dominant influence in decision-making in the company. May be reluctant to encourage challenges from NEDs about the company performance or to question management proposals re the future business strategy. Board becomes ineffective. Ability to act in own self-interests.
The UK Code states: “There should be a clear division of responsibilities at the head of the company between the running of the board and the exec responsibility for running the company’s business. No one individual should have unfettered powers of decision.”
19
Q
What are the requirements of the UK Code with regard to the independence of the chairman?
A
PROVISION 9 - the chair should be independent on appointment. The role of the CEO and chair should not be exercised by the same individual. A CEO should not become chair of the same company.
PROVISION 19 - the chair should not remain in the post beyond 9 years from the date of first appointment to the board. This period can be extended for a limited period of time to facilitate effective succession planning and development of a diverse board.
Independence is challenged if the chair:
Has been an employee of company/group in last 5 years;
Has had a material business relationship with company in the last 3 years;
Has received/receives additional remuneration from the company (apart from a director’s fee), participates in the company’s share option or performance-related pay scheme or is a member of the company’s pay scheme;
Has close family ties with company’s advisers, directors, senior employees;
Holds cross-directorships or has significant links with other directors through involvement in other companies/bodies;
Represents a significant shareholder; or
Has served on the board for more than 9 years from the date of their first election.
20
Q
In what circumstances is it acceptable for an individual to be the chairman of more than one FTSE 100 company at the same time?
A
Chairmen need to demonstrate that they have sufficient time to perform their role to the standards expected.
The nomination committee should prepare a job description which should:
Include an assessment of the amount of time commitment that should be expected; and
Recognise the need for the chairman to make himself or herself available in a time of crises.
Other commitments should be disclosed to the board before his or her appointment and included in the next annual report + accounts. Any changes to these should be disclosed to the board and included in the next annual report + accounts.
21
Q
According to the UK Code, what are the roles of NEDs?
A
PRINCIPLE H - NEDs should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.
PROVISION 12 - The board should appoint one independent NED to be the SID to provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders. Led by the SID, the NEDs should met without the chair present at least annually to appraise the chair’s performance, and on other occasions as necessary.
PROVISION 13 - NEDs have a prime role in appointing and removing executive directors. NEDs should scrutinise and hold to account the performance of management and individual executive directors again agreed performance objectives. The chair should hold meetings with the NEDs without the executive directors present.
22
Q
According to Higgs, what are the 4 broad roles of NEDs?
A
- STRATEGY - constructively challenge and contribute to the development of strategy;
- PERFORMANCE - scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
- RISK - satisfy themselves that financial info is accurate and that financial controls and systems of risk management are robust and defensible;
- PEOPLE - responsible for determining appropriate levels of remuneration of exec directors and have a prime role in appointing/removing senior management and in succession planning.
23
Q
List 6 circumstances in which a NED would not normally be considered independent.
A
- Has been an employee of the company within the last 5 years;
- Has a material business relationship with the company;
- Receives additional remuneration from the company (other than a director’s fee);
- Has close family ties with any of the company’s advisers, directors or senior employees;
- Represents a significant shareholder; and
- Has served on the board for more than 9 years since date of first election.
24
Q
To comply with UK corporate governance requirements, what measures should be taken if a company appoints a NED who is not considered independent?
A
Board should state its reasons if it determines a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination.
25
What are the 3 committees recommended by the UK Code and what is their composition?
1. Nomination Committee - MAJORITY INDEPENDENT NEDS. Chairman should be board chairman or an independent NED.
2. Audit Committee - (statutory requirement). ALL INDEPENDENT NEDS, large CO’s min 3, small co’s min 2. Small CO’s board chairman may be a member but not chair in addition to the independent NEDs but only if independent on appointment as chairman. At least 1 member should have recent and relevant financial experience.
3. Remuneration Committee - ALL INDEPENDENT NEDS, large CO’s min 3, small co’s min 2. Board chairman may be a member but not chair but only if considered independent on appointment as chairman.
26
Criticisms of the effectiveness of NEDs?
1. A lack of knowledge about the business and operations of the company;
2. Insufficient time spent with the company;
3. The weight of opinion of the executive directors of the board; and
4. Delays in decision-making.
27
What are the respective roles of a management board and a supervisory board in a two-tier board structure in Germany?
MANAGEMENT - responsible for managing the company. Led by the chairman of the managing board (who is the CEO), its members are appointed by the supervisory board. Develops company strategy, in co-op with the supervisory board and is responsible for its implementation. Responsibility for risk management and the preparation of the annual financial statements.
SUPERVISORY - responsible for the general oversight of the company and of the management board. Members elected by shareholders (except in public companies with over 500 employees) then min proportion of the board must consist of representatives of employees. Led by company chairman. Advises management board and must be involved in decision-making on all fundamental matters affecting the company. Audit committee entirely consists of supervisory board members.
28
What are the criticisms of the two-tier board structure?
Boards too big (up to 20 members). Can result in inefficient meetings.
Common that former managers appointed to supervisory board, may be tempted to retain influence over the actions and operational decisions of their successors (against the purpose of the supervisory board).
Companies with more than 500 employees are required to have workers’ representatives or trade union reps on the supervisory board. Over 2000 employees required to have even greater percentage of reps on the board. Requirement under German law.
These reps often lack competence to consider strategic issues or are not independent from the company.
Concerns of information leaks can damage communications between the boards.
29
In the UK, what are the responsibilities or rights regarding new appointments to the board of the nominations committee, the BOD and the company’s shareholders?
Nomination committee should search for the new director(s) and make recommendations to the board.
The board should consider the recommendations of the committee and in normal circumstances should be expected to accept the recommendation.
Chairman should work closely with the nominations committee through this process.
PRINCIPLE J - Appointments to the board should be subject to a formal, rigorous and transparent procedure and an effective succession plan should be maintained for the board. Both appointments and succession plans should be based on merit and objective criteria and should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
PROVISION 17 - the board should establish a NC to lead the process for appointments, ensure plans are in place for orderly succession to the board and oversee the development of a diverse pipeline for succession.
PROVISION 20 - Open advertising and/or an external search consultancy should generally be used for the appointment of the Chair and NEDs.
30
What are the responsibilities of a nomination committee?
Regularly review the structure, size and composition of the board and make recommendations to changes;
Succession planning for directors and other senior executives;
Review the leadership needs of the organisation (exec + non-exec), ensuring continued ability for it to remain competitive;
Up to date/fully informed re strategic issues and commercial changes affecting the company and its market;
Identifying/nominating candidates to fill board vacancies. Evaluate balance of skills, knowledge, experience and diversity of the board. Prepare description of the role and capabilities required;
Appointment of chairman - committee should prepare JD inc. time commitment expected;
Prior to appointment, appointee should be required to disclose any other business interests that may result in a conflict of interest + report on any future business interests that could result in a conflict;
NEDs - ensure they receive formal appointment letter setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside board meetings;
Review results of board evaluation process that relate to its composition;
Annually review time required from NEDs. Performance evaluation should be used to assess whether the NEDs are spending enough time to fulfill their duties; and
Work/liaise with all other board committees.
31
According to the UK Code, what should be the composition of a nominations committee in a FTSE 350 company and who may be its chairman?
Majority independent NEDs.
Board chairman or independent NED may chair. Board chairman should not chair when dealing with the appointment of its successor.
32
What were the recommendations of The Davies Report (2011)?
FTSE 100 companies should aim to have a minimum of 25% female representation on the board by 2015;
Quoted companies should be required to disclose each year the proportion of women on their board, in senior positions and in the whole organisation. The UK Code should require listed companies to establish a policy for boardroom diversity, including measurable policy objectives. They should also disclose each year a summary of this policy and report on the progress towards achieving the policy objectives;
The UK Code requires the nominations committee to report on its work in the annual report. In line with this requirement, companies should disclose meaningful info about their appointment process and how they address the issue of diversity;
When searching for a new board appointee, companies should occasionally advertise the position, because this may result in greater diversity among applicants;
Executive search consultants should draw up a voluntary code of conduct for their industry which addresses gender diversity and best practice, with regard to search criteria and nomination processes for appointments to the boards of FTSE 350 companies.
33
What are the provisions of the UK Code relating to nominations and appointments to the board?
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
Search for candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board.
Satisfy itself that plans are in place for orderly succession for appointments to board/senior mgmt to maintain appropriate balance of skills and experience in the company/board and to ensure progressive refreshing of the board.
Should be a NC to lead the process for board appointments and make recommendations to the board. Majority of members should be independent NEDs.
NC should evaluate balance of skills, experience, independence and knowledge of the board and in light of this prepare a description of the role and capabilities required for a particular appointment.
34
What issues should an individual consider before accepting the offer of an appointment as independent NED of a listed company?
Can commit to the role in the time the company expects;
Will be able to make a positive contribution to the effectiveness of the board;
If company is not performing well, they have time, desire and capability to make an impact and help turn the company’s fortunes around;
There is no risk that the directors could be held liable for any breach of duty and that there is sufficient D+O liability insurance as protection against this risk;
Fee offered is adequate;
There will be a suitable induction programme; and
There will be sufficient support from the company secretary and secretariat.
35
How much time should NEDs be required to commit to the company, and should this be a contractual commitment?
Terms of engagement should be agreed in a formal letter of appointment.
This will include the expected time commitment.
Typically NEDs may be expected to commit between 15 and 30 days each year and more for a committee chairman.
36
Why is it desirable to plan for board succession?
PRINCIPLE J - Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
PROVISION 17 - board should establish a NC to lead the process for appointments, ensure plans are in place for orderly succession to both the board and management positions, and oversee the development of a diverse pipeline for succession.
PROVISION 23 - the annual report should describe the work of the NC, including the process used in relation to appointments, its approach to succession planning and how both support a diverse pipeline.
Avoids disruptions to the company’s decision-making processes or changes in policy or direction.
Newly appointed individuals have opportunity to learn about their role prior to the actual succession date.
Positions such as CEO, Chairman, CFO are all important positions and it is therefore undesirable to have these vacant for more than a short time.
37
What are the requirements of the UK Code regarding the re-election of directors?
PROVISION 17 - the board should establish a NC to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. The chair of the board should not chair the committee when it is dealing with the appointment of their successor.
PROVISION 18 - All directors should be subject to annual re-election. The board should set out in the papers accompanying the resolutions to elect each director the specific reasons why their contribution is, and continues to be, important to the company’s long-term success.
PROVISION 20 - Open advertising and/or an external search consultancy should generally be used for the appointment of the chair and NEDs. If an external search consultancy is engaged it should be identified in the annual report alongside a statement about any other connection it has with the company or individual directors.
38
What should the induction of a new director consist of?
Providing copies of minutes of previous meetings and copies of any current strategy docs approved by the board;
Visits to key company sites;
Product presentations;
Meetings with senior management and staff;
Meetings with external advisers of the company, such as the auditors or company’s solicitors; and
Meetings with major shareholders (should the shareholders want one). The UK Code states that as part of the induction process, directors should be offered the opportunity to meet with the company’s major shareholders.
39
What is the difference between induction and training?
INDUCTION - “leading someone in”. Involves providing info and assistance to the director to become familiar with requirements of their role.
TRAINING - ongoing requirement for all directors throughout their time on the board. Ensures directors remain up-to-date and fully informed about matters that are relevant to their role. May involve technical training, such as training in new financial accounting standards or tax rules for members of the audit committee and the finance director, or updating in the risks relating to cybercrime.
40
What are the requirements of the UK Code for the performance evaluation of the board, its committees and its individual directors?
PRINCIPLE L - Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.
PROVISION 21 - There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation. In FTSE 350 companies this should happen every 3 years. External facilitator should be ID’d in annual report and a statement made about any other connection it has with the company or individual directors.
PROVISION 23 - The annual report should describe the work of the NC, including how the board evaluation has been conducted, the mature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition.
NEDs, led by SID, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors.
41
What is the purpose of an annual performance evaluation of the board and its directors?
Valuable tool for the assessment of the effectiveness of the board.
Chairmen are encouraged to report personally in their annual statements how the principles relating to the role and effectiveness of the board have been applied.
Chairman may also consider the need for changes to the composition of committees and may ask for the resignation of a committee chairman. Improvements may be achieved by changing board procedures (frequency of meetings, dates of meetings to give mgmt more time to prepare info).
Evaluation should be shared with the whole board and fed back into the board’s work on composition and design of induction/development programmes.
Institutional investors have shown an interest in obtaining information regarding the evaluation process.
42
What factors should be considered when reviewing the performance of a NED?
How many board meetings have they attended/been absent?
How well prepared has the individual been for meetings?
Quality of contributions to board meetings?
Has the individual shown independence of character or followed general consensus?
How many board committee meetings have they attended/missed?
What has the individual contributed to committee meetings?
Has the time commitment of the director been sufficient?
Have they shown continued interest in and enthusiasm for the company?
Are there reasons why the director may no longer be considered independent?
Does the director communicate well with other directors/senior execs of the company?
43
What provisions would normally be included in a company’s rules on share dealings?
Directors must not deal in share of their company during as closed period;
A director must not deal at any time that they are privy to price-sensitive info;
A director must seek clearance from the chairman (or another designated director) prior to dealing in the company’s shares. Clearance must not be given during a closing period. Chairman must seek clearance to deal from the CEO and CEO must seek clearance from the chairman;
Exceptional circumstances, clearance to deal can be given during a closing period where a director has a pressing financial commitment and would suffer financial hardship if unable to deal; and
A director must ensure that none of his connected persons deals without clearance. Connected persons include spouse and infant children, and companies in which the directors control over 20% of the equity.
44
What are the requirements of the MAR in respect of director share dealings for listed companies in the UK?
MAR Article 10: PDMRs must notify details of dealings by themselves and connected persons in shares of the company, including details of the quantity of shares and price.
This applies to transactions once the total amount of EUR 5,000 has been reached in a calendar year.
The company is required to disseminate this info to the stock market through a regulated information service.
45
What are the potential problems for good corporate governance when the annual remuneration of senior execs rises at a very much higher percentage rate than the salaries of other employees over a period of several years?
Can create resentment amongst other employees who may consider this gap unfair;
Damaging to morale as well as employee motivation; and
Excessive payments against the interests of shareholders because they reduce profits.
46
For what reasons is the remuneration of senior execs considered a corporate governance issue in some countries?
Excessive remuneration clearly not linked to good performance can undermine confidence in the stock markets. Execs should not be rewarded for failure;
Arrangements where directors can decide their own remuneration cannot be good for governance. Company governed in interests of directors rather than shareholders;
Top execs are attracted and retained by the remuneration packages offered;
Remuneration incentives used to motivate execs to perform better and achieve better results in the company;
Remuneration incentives to align interests of shareholders and execs as much as poss in short and long-term;
If senior execs are seen to be paid excessive amounts in comparison to other employees, this may cause unrest and antagonise other employees;
Institutional investors have demanded greater transparency about senior execs remuneration and several countries (UK) now have laws that require this disclosure in the annual report and accounts; and
Shareholders may object to having little or no influence of the remuneration of senior execs as high remuneration can seriously affect profits.
47
CASE STUDY: Vodafone - CEO
Company consulted widely with institutional investors about a new remuneration package for the CEO, Sir Christopher Gent, and obtained their approval for the principles of the package.
When the company applied the principles to devise a detailed package, many shareholders were dissatisfied. 3 particular controversies reported on the run up to the 2002 AGM.
Sir Christopher awarded a special payment of £10M for his role in the acquisition of the German company Mannesmann. Problem with payments based on successful takeovers is that it takes time to know whether it has really been successful or not.
Sir Christopher received large bonus payments for the year to 31 March 2002 when the company reported a loss of £13.5BN (largest in UK history).
Announcement of new remuneration policy, in response to investor criticisms of the old policy.
Company consulted with City institutions when formulating new policy in order to win them over however they may be supportive if the principles and disagree with the details (i.e. happy with performance measures but unhappy with the performance targets).
At the AGM in July 2002, the package was approved but there was a fairly large vote against.
48
What are the main component elements of the remuneration package of a senior executive director?
A basic salary;
A payment by the company into a pension scheme arrangement for the individual;
An annual bonus, tied perhaps to the annual financial performance of the company; and
Long-term incentives, usually in the form of share options or fully paid company shares.
49
What does the UK Code state about the general level of senior exec remuneration?
Exec directors’ remuneration should be designed to promote the long-term success of the company.
The RC should judge where to position the company relative to others.
The RC should have delegated authority for setting the remuneration for all executive directors and the chairman. RC should recommend and monitor the level and structure fo remuneration for senior management.
50
What company performance targets might be used as a basis for fixing annual bonus payments to a CEO?
Short-term incentives - (cash bonuses in the form of grants of company shares). Based on annual performance targets. FINANCIAL - Annual profit after tax, annual PBIT, annual EBITDA, annual increase in profit from previous year.
Long-term incentives - (share options or share grants) may be awarded each year but linked to longer-term performance.
51
What are the problems with linking rewards to performance for senior executives?
Disagreement about what performance targets should be and at what level they should be set (e.g. should short term targets be based on one or more financial targets, or should there be rewards for non-financial targets?);
Short-term profit-based incentives are often set without any consideration to the long-term consequences;
Develop expectation that they should receive annual rewards regardless of the actual performance of the company;
New execs may benefit from a ‘legacy effect’ from predecessor. Bonus to new director arisen through the work of the previous exec;
Rewards paid to incentivise directors in doing something that should be part of their normal responsibilities.
52
What are the advantages and problems with the remuneration committee using the services of remuneration consultants?
Competitive pay data used to recommend a basic package for senior execs to be in line with the market norm.
Independent objective advice (depending on if they have any connections).
Over-reliance on competitive pay data is likely to result in a sharp upward spiral in exec remuneration.
Conflict of interest between remuneration committee and self-interest of company’s execs. Consultant may take the side of the execs and therefore not be acting in the best interests of the company.
Consultants may be inclined to recommend complex remuneration schemes in order to make it difficult for the remuneration committee to dispense of their services;
Consultants may persuade the committee to take their advice but the responsibility should remain with the committee not its advisers. Consultant’s advice should be objective and should be transparent to the committee and execs concerned.
53
What performance targets might be used as a basis for deciding how many shares should be granted to a senior exec as a long-term incentive arrangement?
Achievement of certain financial targets -
(e.g. company achieves targets for total shareholder return over a 3 year period relative to comparator companies. Individual may receive 30% of the available shares if the company matches the TSR of comparator companies and 100% of the available shares if the company’s TSR is comparable with the top 25% of comparator companies.
When the recipient of the shares acquires the ownership, the shares are said to vest.
54
What are the drawbacks to using share options for long-term in creative schemes?
Excessive use of options can result in a serious misalignment of interests between shareholders and execs.
Shareholder benefit from an increase in share price however may prefer higher dividends whereas an exec holding share options may prefer low dividends and an increase in share price and company growth through reinvesting the profits.
Share prices are unpredictable over the short to medium term. When markets are on a bull run share prices tend to increase no matter what the long-term strength of the business. When markets are in a bear phase options lose value and might even become worthless.
Share options lose all value when their exercise price falls below their current market value. The options then lose their ability to act as incentives to execs. Remuneration committee may then decide to re-price or re-issue the options at a lower exercise price. The problem with this is although the execs are protected from the downside risk, the shareholders have no such protection. The option scheme therefore fails to align the interests of execs and shareholders.
Execs may prefer a long-term incentive involving the grant of shares instead to ensure they have some market value once vested.
55
What are the general principles/provisions in the UK Code on the design of remuneration packages?
PRINCIPLE P - remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
PROVISION 36 - remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests. Share awards granted for this purpose should be released for sale on a phased basis and be subject to a total vesting and holding period of 5 years or more.
PROVISION 37 - remuneration schemes and packages should enable the use of discretion to override formulaic outcomes. They should also include provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so.
PROVISION 38 - only basic salary should be pensionable. The pensions contribution rates for execs should be aligned with those available to the workforce.
PROVISION 39 - The RC should ensure compensation commitments in directors’ terms of appointment do not reward poor performance. They should be robust in reducing compensation to reflect departing directors’ obligations to mitigate loss.
```
PROVISION 40 - When determining exec remuneration policy and practices, the RC should address the following:
CLARITY
SIMPLICITY
RISK
PREDICTABILITY
PROPORTIONALITY
ALIGNMENT TO CULTURE
```
56
What are the provisions in the UK Code on short-term and long-term incentive schemes?
SHORT-TERM - schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum and specify the circumstances in which it would be appropriate to do so (a Clawback).
A Clawback is achieves in 1 of 2 ways:
1. Clause in the contract that provides for a Clawback in the event of over-payment;
2. Chairman to speak to individual to repay voluntarily some or all of excess bonus. If individual refuses they run the risk of a shareholder vote against their re-election at AGM.
LONG-TERM - RC should consider whether the directors should be eligible for benefits under long-term incentive schemes.
Traditional share option schemes should be weighed against other kinds of long-term incentive scheme.
Exec share options should not be offered at a discount to the current market price of the shares.
Any proposed new long-term incentive scheme should be approved by the shareholders.
The total rewards available in any long-term incentive scheme should not be excessive.
57
Why, in the interests of good corporate governance, should NEDs be paid a basic annual fee and no incentive?
NEDs are not company employees. Fixed annual fee for services reflecting the time commitment and responsibilities of the role.
Put their independence at risk.
Consultancy Fee Agmt:
If NED creates trouble for execs at board/committee meetings, there is a chance their consultancy agmt will be axed, if they are supportive their fee may be raised.
Encourages NED to have a close working relationship with execs and dampens the independence of their perspective.
Performance-related Rewards:
UK Code: General rule, NEDs should not be given share options or any performance-related reward as this will compromise independence.
58
CASE STUDY: Coca-Cola (NEDs Remuneration)
April 2006 - Coca-Cola announces change in remuneration structure of its NEDs from:
1. a fixed annual fee of $125k ($50k cash $150k stock); to
2. ‘all-or-nothing’ arrangement whereby they would receive no remuneration unless EPS grew by >8% compound over 3 years.
Aim was to align interests of shareholders and NEDs.
Linking NED pay to company performance could threaten independence from exec management, rather than align interests. Delaying the payment of NEDs would make it more difficult to recruit directors from less affluent socio-economic backgrounds (potentially the desirable objective).
59
What are the principles/provisions of the UK Code with regard to severance payments for senior executives?
1. RC to carefully consider compensation commitments their directors terms of appointment would have in event of early termination. Aim to avoid rewarding poor performance. Should take a ROBUST LINE on reducing compensation to reflect departing directors’ obligations to mitigate loss;
2. Notice/contract periods should be set at 1 year. If it is necessary for them to be longer to recruit new directors, these should be reduced to 1 year following the initial period.
60
What principles on severance pay were recommended in the joint ABI/PLSA statement?
1. Employment contracts for senior execs should not provide for additional financial protection for any director in the event that the company performs badly;
2. Severance payments arising from poor corporate performance should not extend beyond basic salary; and
3. Companies should provide full disclosure in their remuneration report of the constituate elements in a severance payment and should justify the total amount and each of the elements paid.
61
What are the rules in the UK for the disclosure of details of directors’ remuneration by listed companies?
Required by CA2006 to include a directors’ remuneration report for each financial year. Must be approved and signed on its behalf. Copy must be circulated to shareholders.
Remuneration report should include:
1. Statement of the chairman of the RC;
2. Company’s policy on directors’ remuneration;
3. Implementation report (over the financial year).
Shareholders have binding vote on the remuneration policy and advisory vote on rest of the report. Must be voted on at least every 3 years.
If the policy is rejected the directors may present a revised policy at the next AGM or continue with the current policy.
Shareholders vote on implementation report every year at AGM.
62
Why might it be appropriate for shareholders to be allowed to vote on remuneration policy for directors, but not on the remuneration package of individual directors?
The RC of NEDs can be given the responsibility for exec remuneration decisions which gives comfort to shareholders.
The remuneration packages are very bespoke to each individual and have elements of a basic salary as well as performance-related pay. The shareholders may not see the day-to-day performance of each director and therefore cannot know if they are performing up to the standards reflected within the remuneration package itself.
More efficient to agree the remuneration policy that sets out the limitations of the pay of each director as comfort for the shareholders.
63
What measures should be taken by the RC and the board to introduce incentive schemes for senior execs?
Short-term vs Long-term.
A CEO might have 2 or more annual cash bonus schemes (1 linked to short-term financial results, 1 linked to longer-term strategic objectives).
Excessive use of share options can result in a serious misalignment of interests between shareholders and senior execs.
Ensure clawbacks are included as senior execs may be tempted to window-dress accounts to show higher profits and increase their bonuses.
Long-term incentives schemes should be approved by the shareholders.
Total rewards available in a long-term incentive scheme should not be excessive.
RC should determine and agree with the main board the remuneration policy for the CEO, the board chairman and any other designated exec managers. Policy should provide for exec managers to be given appropriate incentives for enhanced performance.
RC needs to be aware of the remuneration arrangements/levels of similar companies. External remuneration consultants may be able to assist.
64
CASE STUDY: Enron
Enron used accounting and financial transactions to increase reported income and asset values, and take liabilities of its balance sheet.
Recorded $200M costs of projects as assets even though the projects had been cancelled. Justified on the grounds that the projects had not been officially cancelled. Capitalising expenses meant that the costs were not charged against the reported profits. SPVs set up to remove liabilities/losses from its balance sheet.
2001 whistleblower expressed concerns of the accounting practices adopted to chairman/CEO, and the allegations were rejected.
Company was obliged to re-state its FS for the previous 4 years, resulting in an over 10% ($1.2BN) reduction of equity.
Investors complained that Enron FS lacked transparency and were too complex to understand.
Enron’s auditors were Arthur Andersen (1 of top 5 audit firms globally). It’s Houston office relied on Enron for much of its income in both audit and non-audit work.
In 2000 AA’s Houston office earned $25M from the audit and $27M from non-audit work from Enron (>25% of its total annual income). It appears they went long with fraudulent accounting practices in order to retain the work and their independence was therefore compromised.
SEC announced investigation into Enron following its collapse in late 2001. AA tried to cover up all evidence of inadequate audit work by shredding several tons of documents and deleting >30K emails and files.
65
CASE STUDY: Lehman Brothers
Report published in the US in March 2010 into collapse of Lehman Brothers in September 2008 as the biggest bankruptcy in US history.
2007/2008 LB used sale and repurchase transactions at the end of each quarter to reduce the leverage in its reported balance sheet.
Normally repos are accounted for as short-term loans and the liability is included in debts in the balance sheet.
The transactions used by LB known to the bank as repo 105 transactions were treated as sales of securities. Cash received from these sales was used to pay off other debts. This showed fewer assets and fewer liabilities than was the actual case.
After the quarter end LB had to borrow more money to pay back the cash received from repos, with interest. LB didn’t disclose these transactions or its methods for accounting for them in its published accounts.
Critics argued that LB had deliberately manipulated its FS to mislead investors about its actual financial condition. LB’s lawyers argued that the financial reporting was within the rules. It’s auditors, EY, saw no problem with the way LB was reporting and said its methods were consistent with GAAP.
LB obtained a letter from UK law firm Linklaters stating its scheme was legal under British law.
Critics then argued that the accounting practices of the bank were intended to deceive investors and that the directors of the bank and the bank’s auditors were culpable. Counter-argument was that everything the bank did was within the rules so no one should be made liable.
66
CASE STUDY: WorldCom
June 2002 - WorldCom announced a $3.8BN accounting fraud.
Justice Department launched a criminal investigation.
WorldCom had incurred running costs of $3.8BN that had been accounted for as CAPEX. Instead of charging the expenses against against the profit, the cost had been capitalised and reported as assets in the balance sheet, even though no assets existed.
Consequently WorldCom’s reported cash flows looked much better than they actually were.
Investment analysts judged the strength of the cash flows of telecommunications companies according to the cash generated by their business operations, and disregarded cash spent on CAPEX which was seen as necessary for growing capital-incentive businesses such as WorldCom.
By reporting running costs as CAPEX, it therefore improved the look of its cash flows by $3.8BN.
When WorldCom announced its accounting fraud, its auditors AA tried to lay the blame on the company’s CFO who they claim withheld important info from them preventing AA from being able to carry out its audit properly.
The fraud had been discovered by an internal auditor of the company in a frontline audit check and not by a member of the external audit team.
Questions were then raised about the quality of the external audit as for a transaction of that size, it should be expected that auditors would want to know what it was for and satisfy themselves that it had been accounted for properly.
67
In what ways might FS be misleading to shareholders and other investors?
Fraudulent misinterpretation of the affairs of the company, where the mgmt deliberately presents a false picture of its financial position and performance;
Might be using accounting policies whereby it presents its reported position and profits more favorably than would be the case if more conservative accounting policies were used;
FS could be complex and difficult for investors to understand.
68
What does ‘business model’ mean?
The basis on which the company generates or preserves value over the longer term.
69
What is a going concern statement?
Statement that in the opinion of the directors the company will continue to trade for the foreseeable future (>12 months).
70
What is the purpose of the external audit?
Gives the users of the FS some reassurance that the info within them is believable and that the FS present a true and fair view of the company’s financial position and performance.
71
Who is responsible for detecting fraud or errors in financial statements?
The responsibility of the board for the prevention and detection of fraud and error is a core principle of corporate governance.
Company’s internal control system should be designed to limit the risk of fraud and error. BOD is responsible for monitoring the effectiveness of this system.
Directors fully accountable to the shareholders and therefore fully responsible for the info presented in the annual report and accounts.
72
Who is responsible for detecting fraudulent activity within the company, by some of its employees or others?
BOD responsible for monitoring the effectiveness of their internal control systems, designed to limited the risk of fraud and error.
If external auditors discover fraud during the course of their audit work, it would be their responsibility to report the matters to directors (unless fraud carried out by directors themselves).
73
What are the responsibilities of the external auditors with regard to the FS of a company?
Assess the risk and possibility that fraud or error might have caused the FS to be materially misleading.
Design audit procedures that will provide reasonable reassurance that material fraud or error has not occurred and that its FS give a true and fair view of the company’s financial position and performance.
Duty of legal care to the company and its shareholders.
74
What types of audit opinion might be given in an audit report? What is the significance of a modified report?
Un-Modified and Modified.
Modified - very unusual for auditors to present a modified audit opinion.
Potentially a serious problem with the FS and by implication, with the financial condition of the company.
Means that the auditors have been unable to agree with the directors about what info the FS should contain.
3 types of modified audit opinion:
1. QUALIFIED - would give true and fair picture except for a particular matter (explained).
2. ADVERSE - material mis-statements in the accounts trust are pervasive; and
3. DISCLAIMER OF OPINION - unable to obtain the info needed to give an opinion. Lack of info means that auditor is unable to state that the FS give a true and fair view and that there may be serious mis-statement that they have been unable to check.
75
Give examples of non-audit work for a company by a firm of auditors.
Consultancy on tax issues;
Investigating targets for a takeover bid;
Helping a company to construct a bid for a major government contract;
Providing advice and expert assistance on IT systems;
Internal audit services;
Valuation and actuarial services;
Services relating to litigation;
Services relating to recruitment and remuneration.
76
What are 5 categories of threats to auditor independence?
1. SELF-INTEREST THREAT - earning such a large fee income therefore judgement affected to protect income. (E.g. Arthur Andersen + Enron)
2. SELF-REVIEW THREAT - audit firm carries out non-audit services for company and is reviewing its own work as part of the annual audit. May not be as critical of its own work or prepared to challenge it and raise questions about its competence.
3. ADVOCACY THREAT - if audit firm is asked to give its formal support to the company by providing public statements on particular issues or supporting the company in a legal case. Acting as advocate means taking sides which implies the loss of independence. Audit firms should not take on any non-audit work in which they may be asked to act as advocate for the client.
4. FAMILIARITY THREAT - auditor is familiar with company or its directors/senior managers or becomes familiar through a working association over time. Believe what they say without carrying out an investigation into its accuracy or honesty.
5. INTIMIDATION THREAT - feel threatened by directors/senior management. CEO/CFO may act aggressively to the audit staff and accept what they are telling them. Can be real and/or imagined threats that affect independence. May threaten to take away the the audit or stop giving them non-audit work unless they accept the company’s opinion.
77
What is the difference between audit firm rotation and audit partner rotation?
AUDIT FIRM ROTATION - firm required to give up the audit for a company after a maximum amount of years and company must appoint a new audit firm. Less likely to go along with opinions if it is losing the work soon anyway and work will be subject to review from the newly appointed auditors. Disadvantage is the new firm may require a couple of years to get to know the firm properly.
AUDIT PARTNER ROTATION - in respect of major accountancy firms, individual partner and key individuals involved with the audit should be rotated. Regulations in most countries favour this option and require rotation after 5 (UK) or 7 years.
78
Who should be the members of the audit committee?
All members should be independent NEDs.
At least 3 members FTSE 350. At least 2 for companies outside the FTSE 350.
Chairman should not be a member of the RC in FTSE 350 companies.
Chairman may be a member of the RC (but not chair it) in companies outside the FTSE 350 as long as he was considered independent on appointment.
Appointments to the RC should be made by the board on the recommendation of the NC in consultation with the RC chairman.
At least one member should have recent and relevant financial experience (ideally have a professional qualification from one of the accountancy bodies).
79
According to the FRC Guidance on Audit Committees, what should be the responsibilities of an audit committee in connection with:
1. audit committee meetings;
2. financial reporting;
3. the provision of non-audit services by the firm of external auditors; and
4. review of the annual audit?
1. AC chairman should decide the timing and frequency of committee meetings in consultation with the company secretary.
Should be no fewer than 3 committee meetings each year, timed to coincide with key dates in the financial reporting and audit calendar.
Sufficient time should be allowed between AC meetings and meetings of the main board to allow any work arising out of the committee meeting to be carried out and reported to the board as appropriate.
Only AC members/chairman are entitled to attend AC meetings. It is for the AC to decide whether other individuals should attend for a particular reason. Company’s CFO and the audit lead partner are likely to attend frequently.
At least once a year the AC should meet the external and internal auditors, without management being present, to discuss matters relating to its responsibilities and issues arising from the audit.
2. AC should review the significant financial reporting issues and judgements that are made in connection with these statements, having regard to any matters communicated to the AC by the auditors.
Consider significant accounting policies used to prepare the statements, any changes to them, and any significant estimates or judgements on which the statements have been based.
Management should inform the AC about the methods used to account for significant/unusual transactions, where the accounting treatment is open to different approaches.
Taking the external auditors views into consideration, AC should consider whether the company has adopted appropriate accounting policies and made appropriate estimates and judgements.
Consider the clarity and completeness of the disclosures in the FS.
If the AC is not satisfied with any expect of the proposed financial reporting, it should report its views to the board.
3. AC is responsible for approving non-audit services and should ensure that the provision of non-audit services by the company’s auditor would not impair its objectivity and independence.
Do its skills and experience make it a suitable supplier of the non-audit services.
Are there safeguards in place for ensuring that there would be no threat to the objectivity and independence of the auditors arising from the provision of these services.
Nature of the non-audit services and the fees for these services.
Level of fee for individual non-audit services and fees in aggregate for these services relative to the size of the audit fee.
Criteria governing the compensation of the individuals who perform the audit.
AC should set and apply a formal policy for the types of non-audit services for which the use of the external auditor is pre-approved.
4. At the end of the audit cycle, the AC should reassess the effectiveness of the audit process. As part of this it should:
Review whether the auditors have met the agreed audit plan and consider the reasons for any changes;
Consider the robustness and perceptiveness of the auditors in their handling of key accounting and audit judgements and in their commentary on the appropriateness of the company’s internal controls;
Obtain feedback about the conduct of the auditors from key people within the company (CFO, head of internal audit);
Review the auditors’ management letter (is it based on a good understanding of the business? Have auditors’ recommendations been acted on?);
Report to the board on the effectiveness of the external audit process.
80
What are the provisions of the UK Code with regard to the appointment, reappointment or removal of the external auditors?
AC is the body responsible for maintaining the company’s relations with its external auditors.
AC should have primary responsibility for making a recommendation to the board on the appointment, reappointment or removal of the external auditors.
If the board does not accept the recommendation, it should:
Include in the annual report, and in any papers recommending the appointment or re-appointment of the auditors, a statement from the AC explaining its recommendation; and
Give reasons why the board has taken a different position.
81
What is the legal requirement for audit committees in the UK?
UK listed companies are require to have an AC under the EU Statutory Audit Directive.
82
What induction or training might be provided for members of an AC?
Must be given suitable induction and training.
Ongoing training should include keeping the committee members up to date on developments in financial reporting and related company law.
May include understanding financial statements, application of particular accounting standards, regulatory framework for the company’s business, the role of internal and external auditing and risk management.
83
What does the FRC Guidance say about the frequency of AC meetings?
AC chairman should decide the timing and frequency of committee meetings in consultation with the company secretary.
Should be no fewer than 3 committee meetings each year, timed to coincide with key dates in the financial reporting and audit calendar.
Sufficient time should be allowed between AC meetings and meetings of the main board to allow any work arising out of the committee meeting to be carried out and reported to the board as appropriate.
Only AC members/chairman are entitled to attend AC meetings. It is for the AC to decide whether other individuals should attend for a particular reason. Company’s CFO and the audit lead partner are likely to attend frequently.
At least once a year the AC should meet the external and internal auditors, without management being present, to discuss matters relating to its responsibilities and issues arising from the audit.
84
What measures might an AC take to monitor the independence of the external auditors on a regular basis?
Consider the annual disclosure from the statutory auditor and discuss the threats to their independence and the safeguards applied to mitigate those threats.
Monitor the audit firm’s compliance with the Ethical Standard, level of fees that the company pays in proportion to the auditor’s overall income (or relevant part of it), and other regulatory requirements.
Seek annually info about policies and processes for maintaining independence and monitoring compliance with relevant requirements (rotation of audit partners/staff).
Agree with the board the company’s policy on the employment of former employees of the external auditor.
85
In UK law, which companies must publish an annual strategic report?
The CA2006 (Strategic Report and Directors’ Report) Regulations 2013
All companies (excl. small co’s) required to include a strategic report in their annual report and accounts.
86
What should be the contents of a strategic report for a quoted company?
1. A fair review of the company’s business -
Analysis using KPIs (incl. non-financial KPIs - not required for medium-sized co’s).
Info relating to environmental matters and employee matters.
Main trends and factors likely to affect the future development, performance and position of the company’s business.
Info on social, community and human rights issues.
Description of company’s strategy.
Description of company’s business model.
A gender breakdown; and
A description of the principal risks and uncertainties facing the company.
87
According to the UK Code, in what ways should a listed company try to improve relations with its shareholders?
1. Through dialogue with shareholders; and
| 2. Through constructive use of the AGM and other general meetings of the company.
88
What rights do shareholders have in UK law to approve remuneration arrangement or schemes for executives?
Shareholders have pre-emption rights on new shares issued by the company. May wish to waive these rights in order to allow a share option scheme to be implemented for execs.
Shareholders may be given the right to approve any new or amended long-terms incentive scheme for the company.
Quoted companies: right to a binding vote at least every 3 years on company’s remuneration policy (set out in the directors’ remuneration report).
Also entitled to an advisory vote on an annual implementation report.
Votes give shareholders an influence over the remuneration of directors which has a knock-on effect over the influence of the senior execs generally.
89
What issues do shareholders have a right to vote on at general meetings of the company?
Approve any new or amended long-term incentive scheme for the company.
Re-election of directors.
Approve/reject the appointment of the auditors each year.
Binding vote on company’s remuneration policy at least every 3 years.
Advisory vote on annual implementation report.
Call for a vote on a resolution they put into the meeting.
Propose for a resolution to be voted on at the AGM.
CA2006: Right to remove a director, if dissatisfied with them, by ordinary resolution.
Major transactions or transactions to related parties.
90
In the UK, how soon after appointment and how frequently may shareholders of a listed company vote to elect or re-elect the company chairman?
First AGM after initial appointment, then annually for FTSE 350 companies (UK Code provision).
All other companies, should be at AGM after initial appointment and then at least every 3 years after that. NEDs who have been there longer than 9 years should be put forward for annual re-election.
91
In the UK, how could shareholders dismiss the chairman or chief executive of their company?
S.160 CA2006: Right to remove a director by ordinary resolution at a general meeting before the end of their term of office.
Shareholders with over 5% shareholding have a right to include a matter in the business of the AGM.
92
In UK law what is the minimum percentage of voting shares that must be held by a group of shareholders to requisition an EGM?
CA2006 S.303: The members of a company may require the directors to hold a general meeting once the board has received requests to do so from 5% of the voting rights of the members.
93
In UK law, what is the minimum percentage of voting shares that must be held by a group of shareholders to add a resolution to the agenda for the AGM?
CA2006 S.303: Members who represent at least 5% of the voting shares have the right to include a matter in the business of the AGM.
The request to include the item in the AGM must be received no later than 6 weeks before the meeting.
94
According to the UK Code, what practical requirements are needed for a board of directors to maintain a dialogue with major shareholders?
PROVISION 3 - in addition to general meetings, the chair should seek regular engagement with major shareholders in order to understand their views on governance and performance against the strategy. Committee chairs should seek engagement with shareholders on significant matters related to their areas of responsibility. The chair should ensure that the board as a whole has a clear understanding of the views of the shareholders.
Chairman should discuss governance/strategy with major shareholders.
NEDs offered opportunity to attend scheduled meetings with major shareholders and expected to attend when requested by major shareholders.
SID should attend sufficient meetings with range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues/concerns of major shareholders.
95
What are the provisions in the UK Code for making constructive use of the AGM?
Propose separate resolution on each substantially separate issue (in particular a resolution on report and accounts). Proxy appointment forms to provide shareholders with option to vote for, against or withhold vote, noting clearly that a vote withheld is not a vote against and will not be counted in the calc of proportion of votes for resolution.
Ensure all valid proxy appointments for GMs are properly recorded and counted. Where a vote has been taken on a show of hands, company should ensure the following info is given at the meetings and made available as soon as reasonably practical on a website maintained by or on behalf of company:
No. shares in respect of which proxy appointments have been validly made;
No. votes for;
No. votes against;
No. shares in respect of which votes withheld.
If significant proportion of votes against, company should explain when announcing results what actions it plans to take to understand the reasons behind them.
Chairman should arrange for chairmen of AC, RC and NC to be available to answer Qs at AGM and for all directors to attend.
Company to arrange for notice of AGM and related papers to be sent to shareholders >20 working days before meeting.
96
What are the benefits of electronic communication between a company and its shareholders?
Cheaper than hard copy to produce;
Environment benefits for large companies with many shareholders (less wastage of natural resources);
Faster and more reliable communication (especially to foreign shareholders);
Companies can provide more info (such as results of polls at GMs) on website. Shareholders better informed as a result;
Key decisions makers within large institutional investors more likely to see electronic copies of docs than hard copies (more likely dealt with by juniors);
Ability to appoint proxies electronically (or vote electronically) encourages shareholder participation for decision-making matters.
97
What are the 7 principles of the UK Stewardship Code?
Publicly disclose their policy on how they will discharge their stewardship responsibilities.
Robust policy on managing conflicts of interest in relation to stewardship, which should be publicly disclosed.
Monitor their investee companies.
Establish clear guidelines on when and how they will escalate their stewardship activities (escalating shareholder activism).
Willing to act collectively with other investors where appropriate.
Clear policy on voting and disclosure of voting activity.
Report periodically on their stewardship and voting activities.
98
What is responsible voting? Why is responsible voting recommended by associations of institutions investors (such as the PLSA) to their members?
???
99
For what reasons might the PLSA recommend to its members that they should vote against the re-election of the company chairman as a director of the company?
Shortcomings in the annual performance evaluation process for the board and its directors.
Newly appointed chairman was previously the CEO.
