Chp 4: Main Aspects of Corporate Governance

UK Listing Rules

-All companies are subject to company law but public listed companies have to abide additional regulation called 'Listing Rules' -Listing rules dictate matters such as: i. company seeking listing for 1st time (IPO) ii. communication of new share offers iii. rights issues iv. potential/actual takeover bids for company - Require company to produce half-yearly financial reports & yearly reports

Statutory external audit

-Companies with 2 of the following need to have a full statutory audit by registered auditor: i. turnover exceeding 6.5mil pounds ii. net asset exceeding 3.26mil pounds iii. more than 50 employees

Companies House

-Keeps public record of companies registered in Great Britain -Functions: i. incorporate & dissolve limited companies ii. examine & store company info delivered under Companies Act & related legislation iii. make info available to public

Company Registration

-To gain official recognition, company must be registered with Companies house. If not, it has no legal existence & cannot enter into any contracts

Corporate governance adopted principal

-company should respect shareholder rights & help shareholder to exercise them -company should recognise they may have obligations to other stakeholders -board need the skills & understanding to review & challenge management performance -companies should develop code of conduct that promote ethical & responsible decision-making -company should have proceudres to independently verify their financial reporting

Registration Documents

-company's name -public/private company -liability limited/not & whether limited by shares/guarantee -location of company -statement of proposed officers -proposed Articles of Association if company is limited by shares, document must also include statement of capital & initial shareholdings

Articles of Association

-contain main provisions governing relationship between shareholder & the company -moderating balance of power between shareholders -comprise the regulations for running the company internal affair -must specify how many members must be present if the proceedings at meeting are to be regarded as valid (a.k.a quorum)

Financial Reporting Council (FRC) Guidance on Audit Committees

-should establish an audit committee of at least 3 or in case of smaller companies 2 -roles & responsibilities of audit committee: i. monitoring integrity of company internal financial control ii. monitor & review effectiveness of company's internal audit function iii. recommend to board for it to put to shareholder for their approval of appointment of external auditor, remuneration & terms iv. review & monitor external auditor independence, objectivity & effectiveness of the process v. to report to board if any improvement is required & making recommendation of solution

Corporate governance

-system which organisation are directed & controlled -process which company objectives are established, achieved & monitored -concerned with relationship & responsibilities between board, management, shareholders & stakeholders -transparency & accountability are important element

Statutory reporting requirements

-there are certain documents that companies are legally required to submit to Companies House as part of statutory reporting requirements -documents required: i. Annual Return -contains office address, principal business activities, details of directors, company secretary & share capital -company deliver an annual return at least once a year ii. Report & accounts -Companies Act requires every company must keep accounting records for: a. disclosure with accuracy at any time b. enable directors to ensure acc are prepare comply with requirements of Act -annual acc are useful for investors & stakeholders who wants to know condition of company -annual acc includes income statement, balance sheet & director's report iii. Directors' report -include business review -analysis of company performance by using key financial reporting indicators -in case of quoted company (publicly traded-shares can be bought or sold in stock exchange) review must incude: i. main trends & factor likely to affect the future development, performance & position of company ii. info on environmental matters, employees, social & community issues, company policies & person with whom company has contractual arrangement. iv. Directors' remuneration report -must be approved by BOD & signed by a director/company secretary -includes detailed summary of performance for share & long term incenctive schemes -details of directors' service contracts, salaries, fees, bonuses, share options, long term incentive schemes, pensions, retirement benefits, compensation for past directors & sums paid to 3rd parties for directors' services v. Chairman's statement -optional, not required by Act -its a broad statement about company's activities attributed to company's chairman vi. Submission of annual acc -all companies have to keep accounting records & all limited companies must send their acc to Companies House -private companies must file their acc within 9 months of year end & public companies must file within six months -quoted companies must ensure their report & acc are available on website

Internal Audit

Can assist directors with implementation of good corporate governance by: -maintaining sound system of internal control by reviewing how company identifies & manage risks -reviewing board reports -ensuring directors are up to date with new acc & auditing issues -communicating with external auditor & ensuring unified approach work -ensuring board receives correct info required from external auditors

Incorporation of businesses

Main legislation covering limited companies is Companies Act 2006 & affecting: i. company info ii. statutory reporting iii. company meetings iv. responsibilities of company's directors & officers

Guidance on Board Effectiveness

The Institute of Chartered Secretaries & Adminitrators (ICSA) developed guidance on FRC behalf that deals with: -role of board & directors -board support & role of company secretary -decision making -board composition & succession planning -evaluating performance of board & directors -audit, risk & remuneration -relations with shareholders

3 lines of defence model

i. Clarifying responsibilities -once risk strategy is set, it is the responsibility of front-line managers to ensure risks are identified & controlled. This is known as first line defence -risk management is actively involved in discussing effective control. This is known as second line of defence -internal audit has responsibility of reviewing overall risk management operation. When external parties review the activities, their feedback provides useful assessment of effectiveness of risk management practices. This is known third line defence ii. Management controls -Underwriting: limits of authority for individual underwriters, second review of quotations, regular review of pricing schedules, monitor risk accumulation practices - Claims: claims payments reviewed by second member of staff, claim validity checking, reinsurance coverage reviewed by senior management - Finance: daily reconciliation, limit authorities for acc payable, anti money laundering measures - HR: check new staff, regular training, absence monitoring IT: back up record daily, relocation of contingency plans, anti virus software, data security & quality management iii. Risk Management -Scope of risk: a. strategic -new lines of business, takeover bids, opening branches, policy distribution b. insurance/underwriting & reserving c. investment/market & credit

Principle definitions

i. Data means info: -store in form capable of being processed by computer/other automatic equipment -recorded in any form for later processing by computer/other automatic equipment -stored as part of relevant filing system ii. Personal data: -relates to living individual who can be identified from that info. These include any expression of opinion iii. Ordinary personal data: -includes name, address & phone number iv. Sensitive personal data: -racial/ethnic origin, political opinions, religious beliefs, health, sexual orientation, criminal convictions v. Data subject: -any living individual who is the subject of personal data vi. Data subject access: -right of an individual to access personal data relating to them which is held b a data controller vii. Data controller: -any person who makes decision with regard to particular personal data viii. Data processor: -person who processes the data on behalf of data controller x. Processing -obtaining & recording data -retrieve/use the data -disclosure/making data available

Outline of UK Corporate Governance Code

i. Leadership -company should be headed by effective board who is responsible for long term success -have clear division of responsibility -chairman responsible for leadership of board ii. Effectiveness -board & committee should have skills, experience, independence & knowledge of company for them to run their duties & responsibilities -should be formal, rigorous & transparent procedure for appointment of new directors -board should be supplied with info to enable them run their duties iii. Accountability -board should present understandable assessment of company's position & prospects -responsible for determining nature & extent of risks they're willing to take to achieve goals iv. Remuneration (money paid for a service) -should be sufficient to attract, retain & motivate directors of quality required to run the company & avoid paying more than necessary -emphasize on long term success of company vi. Relations with shareholders -should be a dialogues with shareholders on mutual understanding of objectives -board should use annual general meeting (AGM) to communicate to investors to encourage their participation -companies should explain how they are to engage with shareholders when significant percentage of them voted against a resolution vi. Going concern, risk management & risk control -company should identify uncertainties material, access risk & explain how they're being managed, state whether they're able to continue in operation, monitor risk management & internal control system at least annually

Role of company secretary

i. Maintaining statutory registers. Statutory registers are: -register of members -register of directors & secretaries -register of directors' interests -register of charges -register of interests in share (for public companies) ii. Notice of AGM -21 days prior written notice for AGM -14 days for other meeting to pass a resolution iii. Special & extraordinary resolutions -ensure Companies House is sent copies of every special resolution/agreement of directors iv. Ensuring that statutory forms are filled promptly -changes in company info to be notified using its special form v. Acc -supply every member of company with a copy of annual acc 21 days before meetings which acc are to be laid vi. Minutes of directos' meetings & general meetings vii. Making acc & documents available for inspection