Corporate governance
the framework of rules and practices by which a BOD ensures accountability, fairness, and transparency in a companys relationship with its stakeholders
Listed companies must include a corporate governance report in their annual report. It should describe how the company applies the principles in the code and whether or not the company complies with the provisions of the code.
True
Board leadership and company purpose Principles
A successful company is led by a board whose role is to promote the long term sustainable success of the company. It should establish company values and strategy and should ensure the company has the resources needed to meet its objectives. Q: Is the leadership structure clear ? Is power concentrated in one person?
Division of responsibilities Principles
The chair leads the board. They facilitate constructive board relations and the contribution of all non exec directors and ensure that directors receive timely and clear information. There should be a clear distinction between who runs the board (chair) and who runs the business (CEO). Non execs should make time to meet their board responsibilities. They should provide strategic guidance and specialist advice and hold management to account.
Composition, Succession and Evaluation
Appointments to the board should be subject to a formal and transparent procedure.
An effective succession plan should be maintained for board and senior management. Appointments and succession plans should be based on merit and objective criteria. The board must have the right balance of skills, expertise and independece. Q: Are directors capable and independent ? Is recruitment transparent and based on merit?
Audit Risk and Internal Control Principles
The board is responsible for determining the company’s risk appetite and maintaining internal controls - Should present a fair, balanced and understandable assessment of the company’s position. Q: Are there strong internal controls? Is risk managed and reported properly? Companies must establish formal and transparent policies to maintain independence and integrity in financial reporting - A strong audit committee (made of independent non exec directors )should oversee the process Q: Is there a proper audit committee ? Are auditors independent and objective?
Advantage of audit commitee
- Increased confidence in the credibility and objectivity of financial reports
- Provides an independent point of reference for external auditors
- Provides an impartial body for internal auditors to report increasing their independence
- Allows exec directors to devote their attention to management and committee can focus on the problems in financial reporting
Remuneration
Executive pay should align with the company’s long term success. No director should be involved in deciding their own pay. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. Q: Are bonuses and salaries fair? Is excessive or unjustified pay controlled?
Relations with shareholders
Ongoing dialogue with shareholders should be encouraged. The boars should understand the views of shareholders and respond appropriately Q: Is shareholder engagement active and transparent? Are concerns addressed?
Audit commitee
a sub commitee of the BOD containing a number of independent non exec directors
Role of audit committee
- Review FS
- Review internal control and risk management systems
- Monitor and review effectiveness of internal audit dept
- Recommend appointment, reappointment and removal of external auditor
- Review and monitor independence and objectivity of external auditor
- Implement policy on supply of non audit services by external auditor
- Monitor arrangements safeguarding the privacy of whistle blowers
- Where there is no internal audit function consider annually whether there is need for one
Disadvantages of audit committee
Costs may be increased
Difficulty in selecting non exec directors with the necessary competence in audit so the committee can be effective
The establishment of such a formalised reporting procedure may dissuade auditors from raising matters of judgment and limit them to reporting matters of fact
Internal audit function
a function of an entity that performs assurance & consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management and internal control processes
Should the chair be independent when they are appointed and subject to the same independence criteria as non executive directors
Yes
Is there a time limit on how long the chair can remain in post ?
Yes they cannot remain belong nine years and should not be a former chief executive of the same company except in exceptional circumstances
Who is responsible for monitoring the effectiveness of systems and controls ?
Internal auditors have an important role in this area but remember it is the directors that are responsible for
Who are non executive directors ?
Directors who do not have day to day operational responsibility for the company. They are not employees and are not affiliated with the company in any way
An appropriate combination of independent executive directors and non executive directors should sit on the board. What is this combination ?
At least half the board should comprise of non execs whom the board considers to be independent
Can executive directors sit on the remuneration committee ?
No and the remuneration committee should be made up of at least three independent non execs and the chair of the board cannot chair the remuneration committee
