Test your knowledge - Part 3

Question 1

1. Why is financial and non-financial reporting important?

Answer 1

Reporting is one of the main methods of addressing the corporate governance principles of accountability and transparency.

As well as the report and accounts being the means by which directors are made accountable to shareholders, they provide a channel of communication. Reporting enables shareholders and other stakeholders to assess the performance of the company and how well it has been governed and managed.

Question 2

2. List 3 legal duties of directors for financial reporting?

Answer 2

• Companies must prepare annual report and accounts which need to be approved by the board and signed by a director
• Directors must file annual report and accounts at Companies House
• Directors must prepare a Directors’ Report, which must (unless the company is subject to the small company regime) include a Strategic Report
• Accounts of a public company must be laid before shareholders in a general meting

• Listed companies must prepare a Directors’ Remuneration Report
(Source: Companies Act 2006)

Question 3

3. Name 6 different reports/statements that may form part of a listed company’s annual report.

Answer 3

1. Directors’ Report/Strategic Report
2. Chairman’s Statement
3. CEO Report
4. CFO Report
5. Directors’ Remuneration Report
6. Auditors’ Report
7. Corporate Governance Report
8. Corporate Social Responsibility/Environmental/Sustainability Report

(Above as prescribed by the Companies Act 2006; Listing Rules; and/or DTR)

Question 4

4. What is a going concern statement?

Answer 4

It is based on the going concern concept which is the view that a company will continue to trade and be able to meet its liabilities as they fall due for at least the next 12 months. The directors are required to make such a statement in the annual report and confirm that the financial statements have been prepared on this basis.

(Board should make a going concern statement (if appropriate) per Provision 30 of the UK CG Code)

Question 5

5. Under the UK Corporate Governance Code, how should the Audit Committee be composed?

Answer 5

Provision 24 states that it should be composed of all independent non-executive directors and should consists of at least three members (2 if a smaller company).

The chair of the board should not be a member. At least one member of the audit committee should have recent and relevant financial experience.

The committee as a whole shall have competence relevant to the sector in which the company operates.

Question 6

List four duties of the Audit Committee.

Answer 6

Four duties of the audit committee are:

1. Monitor the integrity of the financial
2. Review the company’s internal controls
3. Monitor the effectiveness of the internal audit function if there is one; where there is no function consider annually whether there is a need for one (and if so make a recommendation to the board)
4. Manage the relationship with and liaise with the external auditor, including their terms of engagement, remuneration, independence, effectiveness

(There are many others! – See Provision 25 of the UK CG Code)

Question 7

6. Which factors may impact on the independence of the external auditor? How can these be managed?

Answer 7

Factors which may impact on independence (partly as identified by the International Federation of Accountants’ Code of Ethics for Professional Accountants 2006):

• Long serving auditor and/or audit partner
• Auditor undertakes a significant amount of non-audit work/performs any management functions or takes any management decisions
• Relying on one single client for its fee income
• When anyone in audit firm (such as audit partner) or anyone closely associated with it has mutual business interests with the company or its directors
• Partner of audit firm holds a significant number of shares in the company

These factors can be managed through audit firm rotation, the requirements for audit partner rotation (issued by the Auditing Practices Board) and the various EU regulations that are in place regarding limiting the amount of non-audit work (to no more than 70% of the average fees for audit work over the last three financial periods), putting audit out to tender at least every 10 years and the mandatory requirement to change auditors after 20 years.

Question 8

7. What elements must a Strategic Report contain?

Answer 8

Under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 a Strategic Report must contain:

• a fair review of the company’s business; and
• a description of the principal risks and uncertainties facing the company

In addition, for a listed company (under Listing Rules/DTR) it must contain:

• the main trends and factors likely to affect the future development, performance and position of the company’s business
• information including that about the company’s policies and the effectiveness of those policies on:

o environmental matters
o employees
o social, community and human rights issues

Question 9

8. What is the role of the company secretary in financial reporting?

Answer 9

According to the ICSA a company secretary has to be competent in financial accounting and reporting and they need to understand the significance and relevance of accounting information and the process by which it is acquired.

The company secretary’s roles in financial reporting would typically include:

1. ensuring the board complies with the legal, regulatory, standards and codes to financial reporting;
2. interpreting in non-financial terms the financial performance and disclosures for the board, shareholders and other stakeholders;
3. reading the notes to the financial statements to ensure they clearly and transparently explain the figures in the financial statements, and asking for further clarification to be provided if necessary;
4. advising the board on the implications and potential reputational risk of the financial performance and disclosures;
5. providing advice and oversight, on behalf of the board, for the preparation of financial reporting documentation, annual and half yearly reports; and
6. overseeing the distribution of the documentation/disclosures.

Question 10

9. Define corporate social responsibility and explain what types of behaviour would you expect of a company to be deemed a “good corporate citizen”

Answer 10

Refers to business decision making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment.

To behave like a good corporate citizen, companies should:

• treat employees fairly and with respect
• operate in an ethical way and with integrity
• respect basic human rights
• sustain the environment for future generations
• be a responsible neighbour in their communities.

Question 11

10. In which corporate governance code are CSR issues key elements?

Answer 11

King Code IV of South Africa. The Code emphasises the concept of corporate citizenship.

Question 12

11. What are “ESG” factors? Provide two examples of each

Answer 12

1. Environmental risks – examples: climate change; energy use; natural resources; water
2. Social risks – examples: human rights; employment; health and safety; supply chain
3. Governance risks – examples: board independence; succession planning; board diversity; auditor independence

Question 13

12. What are the potential benefits of CSR policies for companies?

Answer 13

The potential benefits of CSR policies for companies are…

These may be divided broadly into four categories, but these benefits may vary between companies, industries and countries:

• Reduction in reputational risk
• Business probity risk (risk from failing to act in an honest or ethical way, for example bribery)
• Public relations and marketing benefits
• Commercial and financial benefits

Question 14

13. What are listed companies legally required to report on in their Strategic Report in terms of social and environmental issues? Under what legislation is this required?

Answer 14

Environmental matters, including the impact of the company’s business on the environment
The company’s employees; and
Social, community and human rights issues

All required under the Companies Act 2006 (Part 15 as amended by Statutory Instrument – Companies (Miscellaneous Reporting) Regulations 2018)

Question 15

14. Give three examples under the GRI framework of social disclosures and three examples of environmental disclosures.

Answer 15

three examples under the GRI framework of social disclosures and three examples of environmental disclosures:

1. Social – labour practices and decent work; human rights; society; product responsibility
   (or any disclosures on p.304 of the ICSA Study Manual)
2. Environmental – materials; energy; water; biodiversity; emissions; effluents and waste; products d services; compliance; transport; overall (total environmental expenditures); suppliers (environmental assessment); environmental grievance mechanisms.

Question 16

15. What is the the GRI framework of social disclosures?

Answer 16

GRI Framework Sustainability Reporting, as promoted by the GRI Standards, is an organisation’s practice of reporting publicly on its economic, environmental, and/or social impacts, and hence its contributions – positive or negative towards the goal of sustainable development.

Question 17

16. Name four CSR frameworks.

Answer 17

• UN Global Compact principles
• The SIGMA Project guidelines
• Equator Principles
• OECD Guidelines for Multinational Enterprises.

Question 18

17. What is the difference between responsible investing and socially responsible investing?

Answer 18

Responsible (or ethical) investing is where investors refuse to invest in ‘unethical’ companies and ‘sin stocks’ (e.g., alcohol, gambling, tobacco).

SRI includes not investing in ‘unethical’ companies, but investors also encourage companies to develop CSR policies and objectives, in addition to pursuing financial objectives.

Question 19

18. What are the main ABI guidelines in respect of ESG reporting?

Answer 19

• ESG risk assessment by the board
• ESG risk policies and procedures
• Remuneration and ESG issues

Question 20

19. What are the main areas covered within triple bottom line reporting?

Answer 20

• Economic
• Social
• Environmental

Question 21

20. Name the different CSR indices that can be used for benchmarking

Answer 21

• Dow Jones Sustainability Indices
• FTSE4Good Index Series
• BiTC Corporate Responsibility Index

Question 22

20. Name the six capitals referred to within the integrated thinking approach.

Answer 22

1. Financial
2. Manufactured
3. Human
4. Intellectual
5. Natural
6. Social

Question 23

Sustainability defined

Answer 23

Sustainability defined:

Can be defined in two ways:

• It can refer to an organization focusing on its long-term survival, balancing current requirements for operating the business without compromising the needs of future generations
• It can refer to the sustainability of the planet, with the focus being on how a company carries out its operations. Develops its strategy and manages risk to have a positive impact or lessen a negative impact on the environment

Question 24

ESG defined

Answer 24

ESG defined:

The term was first coined in 2015 in a study “Who Cares Wins” which asked financial institutions to partner with the UN and IFC to identify ways of integrating environmental, social and governance concerns into capital markets

Question 25

Categories of CSR activity?

Answer 25

Categories of CSR activity: 1. Pet projects – personal interest of board members/senior execs, but offer minimal benefits to society or the organisation 2. Philanthropy – usually take the form of large charitable donations to groups of people, institutions or individuals. Confers majority of benefit to society. Often little fanfare made so questionable as to the benefit to the organization making them. 3. Propoganda – focused primarily on building the organization’s reputation with little real benefit to society (e.g., sponsoring large sporting events) 4. Partnerships – usually create value for the organization by addressing major strategic issues or challenges which in turn leads to a long-term sustainable benefit for society

Question 26

CSR partnerships?

Answer 26

CSR partnerships: 2004 study (Alban & Henderson) identified seven essential principles that make partnership collaborations work long term: 1. Identify clear reasons to collaborate 2. Find a ‘fairy godmother’ 3. Set simple, credible goals 4. Get professional help 5. Dedicate good people to the cause 6. Be flexible in defining success 7. Prepare to let go and plan an exit strategy for the partnership

Question 27

CSR Frameworks?

Answer 27

CSR Frameworks... 1. UN Guiding Principles on Business and Human Rights – apply to all businesses regardless of size, sector, location, ownership or structure. Companies required to put in place effective remedies fo those who suffer from business-related human rights abuses 2. UN Global Compact (2000) – 10 principles covering human rights, labour, the environment and anti-corruption 4. The SIGMA Project - 2003 guidelines consist of a set of Guiding Principles related to five capitals: natural, human, social, manufactured, financial; and a Management Framework that integrates sustainability issues into core processes and mainstream decision making 5. Equator Principles – a risk management framework adopted by financial institutions, for determining, assessing and managing environmental and social risk 6. OECD Guidelines for Multinational Enterprises – including guidelines on general, employment and environment policies

Question 28

Measuring CSR initiatives

Answer 28

Measuring CSR initiatives.... When deciding what targets and measurement to use, an organisation should consider: 1. Focus on outcomes 2. Measuring the outcome is not as simple as measuring quantifiable targets 3. Listen to stakeholders 4. Do not undervalue stories 5. Learn from others 6. Identify and measure the risks 7. Measure, refine, modify, measure again

Question 29

CSR and senior executive remuneration

Answer 29

CSR and senior executive remuneration... Some companies use CSR targets or achieving a certain status on a CSR index as part of performance criteria in bonus and incentive schemes for senior executives. For example: Royal Dutch Shell tracks a range of environmental and social indicators as part of its performance appraisal system Boards should consider whether it is appropriate for their companies to set CSR targets for senior executives. Targets should only be set where a company has developed clearly articulated business cases for CSR initiatives, outlining how the initiative helps secure the overall sustainability of the company.

Question 30

Advising the board on being socially responsible

Answer 30

Advising the board on being socially responsible... CSR should be on the board’s agenda with the following being covered: 1. Highlighting the risk on non-compliance in respect of reporting requirements 2. The commercial benefits of carrying out CSR activities as part of discussions on the legal and compliance requirements 3. Benefits will come from management where they see competitive advantage in adopting CSR initiatives 4. The possibility of meeting some of the s.172 requirements relating to stakeholder engagement through CSR initiatives 5. Developing policies and criteria to govern CSR activities, aligned with the organization’s ethical values 6. Linking management’s rewards, remuneration and other benefits to the achievement of CSR targets

Question 31

Engagement with stakeholders...

Answer 31

Advising the board on being socially responsible... 1. Reactively – defensively, when forced to 2. Proactively – customer surveys, engaging directly to get input, involving stakeholders in decisions 3. Interactively – ongoing relationships of mutual respect, openness and trust using many of the ‘proactive’ channels Engagement with the workforce: Principle E - ‘The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.’ Provision 5 – one or combination of methods to be used (or explain alternative arrangements and why considered effective): - a director appointed from the workforce - a formal workforce advisory panel - a designated non-executive director

Question 32

“Stakeholder Voice in Board Decision Making” (2017)

Answer 32

“Stakeholder Voice in Board Decision Making” .... 10 core principles for boards to understand and take account of interests of key stakeholders. I have listed only 5: 1. Identify and regularly review who key stakeholders are and why 2. Determine which stakeholders need to be engaged with directly 3. Identify what stakeholder expertise is needed in the boardroom 4. Take stakeholder perspective into account when recruiting directors 5. Chair, with company secretary’s support, should keep adequacy of training and induction on stakeholder-related matters under review

Question 33

The role of the company secretary in stakeholder engagement

Answer 33

The role of the company secretary in stakeholder engagement: 1. Explaining to the board the business case for stakeholder engagement 2. Assisting the board with stakeholder engagement 3. Advising the board on reporting on stakeholder engagement 4. Alerting the board and/or management to opportunities and risks associated with stakeholder engagements 5. Advising the board on the setting up of a committee responsible for stakeholder issues **One key action in most of the above is for the company secretary to ensure that all these issues are included on the Board meeting agendas as frequently as required**