Chapter 12: Corporate Governance

Supporting principle for non-executive directors (A4)

non executive directors should •Scrutinise the performance of management in meeting agreed goals and objectives •Monitor the reporting of performance •Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are very good •Responsible for determining appropriate levels of remuneration of executive directors •Prime roles in appointing, removing, executive directors and in succession planning

Provisions supporting the level and components of remuneration

the remuneration committee follows guidance The company should be able to recover sums paid or withhold the payment of any sum in specified circumstances Where a company releases an executive director to serve as a non executive director elsewhere, the remuneration report should includes statement as to whether or not the director will retain their earnings. The remuneration committee should carefully consider what compensation commitments their directors terms of appointment would entail in the event of early termination. to be to avoid rewarding poor performance Notice or contract periods should set at one year or less, it is necessary to offer longer notice or contract periods to new directors

Principles supporting financial and business reporting (C1)

• Interim reports • Other price sensitive public reports • Reports to regulators • The statutory financial statements

Uk corporate governance code sections

• Leadership • Effectiveness • Accountability • Remuneration • Relations with shareholders The code is set out as a series of main principles. Some of which have supporting principles and all of which have provisions.

Provisions supporting board appointments: the nomination committee

•A nomination committee should lead the process for board appointments and make recommendations to the board •Over 50% of members of the nomination committee should be independent non-executive directors •The board chairman or an independent non executive director should chair the nomination committee. The board chairman should not chair the nomination committee when it is dealing with the chairman successor •Non executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director Any term longer than 6 years for a non executive director should be subject to a rigorous review

Internal audit tasks (based on detailed reviews of areas of the company)

•Assessing how risks are identified, analysed and managed •Advising management on embedding risk management processes into business activities •Advising management on improving internal controls •Ensuring that assets are being safeguarded •Ensuring that operations are conducted effectively. Efficiently and economically in accordance with the company's policies •Ensuring that laws and regulations are complied with •Ensuring that records and reports are reliable and accurate •Helping management to detect or deter fraud •Helping management to identify savings and opportunities

Non independent director factors (B1)

•Been an employee of the company within the last 5 years •Have or had a material relationship with the company either directly, as a partner, shareholder, director or senior employee within the last 3 years •Received remuneration from the company apart from the director's fee, participates in the company's share option or a performance related pay scheme or is a member of the company's pension scheme •Has close family ties with any of the company's advisors, directors or senior employees •Hold cross directorship or have significant links with other directors through involvement in other company bodies •Represent a significant shareholder •Served on the board for more than 9 years from the date of their first election At least 50% of the board excluding, the chairman should comprise independent non executive directors.

Provisions supporting procedure

•Establish a remuneration committee of at least 3 or in the case of smaller companies 2 independent non executive directors •The board chairman can not be the chair but can be a member, the remuneration committee if they considered independent on appointment as chairman •The remuneration should also recommend and monitor the level and structure of remuneration for senior management. Should normally include first layer of management below board level •Shareholders should determine the remuneration of the non executive directors within the limits set in the articles •Shareholders should be invited specifically to approve all new long term incentive schemes and significant changes to existing schemes

Audit committee resposnibilities

1) Appointing the head of internal audit 2) Ensuring the function has sufficient resources (staff, access to management, and a framework of professional standards) Internal auditors should be able to confer privately with the audit committee, without the presence of management, and should have direct access to any member of the board.

Principles of the stewardship code

1) Publicly disclose their policy on how they will discharge their stewardship responsibilities 2) Have a robust policy on managing conflicts of interest in relation to stewardship, and this policy should be publicly disclosed 3) Monitor investee companies 4) Establish clear guidance on when and how they will escalate their activities as a method of protecting and enhancing shareholder value 5) Be willing to act collectively with other investors where appropriate 6) Have a clear policy on voting and disclosure of voting activity 7) Report periodically on their stewardship and voting activities

Provisions supporting commitment (B3)

A chairman's other important commitments should be made known to the board before appointment and included in the annual report. New commitments should be updated and an person can chair more than one FTSE 100 company. Non executive directors should disclose their other significant commitments to the board before appointment. The board shouldn't agree with a full time executive director taking on more than one non executive directorship in a FTSE 100 company nor chairman of such a company.

Leadership: division of responsibilities (main principle A2)

A clear division of responsibilities should be in order at the head of the company between the running of the board and the executive responsibility for running the company's business. no one individual should have unrestricted powers of decision (centralisation)

UK Corporate Governance Code

A code of practice with a shareholder led approach to corporate governance. It requires shareholders as well as companies. The most recent version is the UK corporate governance code of 2014.

Internal audit

A semi independent part of the company which monitors the effective operation of its internal control and risk management systems. Internal audit is itself a key element of the company's system of internal control.

Stewardship

Accountability of management for the resources entrusted to them as agents of the company's owners

Provisions for re-election (B7)

All directors of FTSE 350 companies should be subject to annual election by shareholders. •Directors should be subject to election by shareholders at the first AGM with intervals of no longer than 3 years •Non executive directors who have served longer than 9 years should be subject to annual re-election The board should have in writing why they believe a candidate should be elected and this should be communicated to the shareholders.

Effectiveness: re-election (main principle B7)

All directors should be submitted for re election at regular intervals, subject to continued satisfactory performance.

Effectiveness: committee (main principle B3)

All directors should give enough time to the company to discharge their responsibilities.

Effectiveness: development (main principle B4)

All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

Audit committee recent and relevant financial experience (C3)

•Monitoring the integrity of the financial statements of the company •Reviewing the company's internal financial controls and to review the company's internal control and risk management systems (independent directors must authorise this) •Monitoring the effectiveness of the company's internal audit function •Making recommendations to the board and thereby to shareholders for their approval in general meeting regarding appointment, re appointment and external auditor removal etc •Reviewing the external auditor's independence and objectivity and the effectiveness of the audit process •Reporting to the board how it discharged its responsibilities •Developing and implementing policy on the engagement of the external audit to supply non audit services.

Provisions supporting the non executive directors (A4)

Appoints one independent non-executive directors to be senior independent director. To provide a sounding board for the chairman and serves as an intermediary for the other directors when necessary. The senior independent director should be available to shareholders if they have concerns. The chairman should hold meetings with the non executive directors without the executives present. Non executive directors should meet without the chairman present at least annually to appraise the chairman's performance. On resignation, a non executive director should provide a written statement to the chairman if they have any concerns.

Provisions supporting the role of the board (A1)

•Regular meetings of the board to discharge its duties effectively •The annual report should include a statement of how the board works. Including a statement of which types of decision are taken by the board and which are delegated to management The annual report should identify the board's chairman, the deputy chairman, the chief executive, the senior independent (non executive) director and the chairman and members of the board committees. It should also set out the number of meetings of the board and its committees and individual attendance by directors.

Disclosure Statement: Comply or Explain

Companies in the FTSE 350 must make a disclosure statement about the code. Reporting on how the company applies the main principles in the code then either confirming that it complies or does not and if not then explaining why it doesn't. This should be explained to shareholders and non compliance can only occur if good governance can be achieved otherwise.

Leadership: The role of the board (Main principle A1)

Every company should be headed by an effective board which is collectively responsible for the long term success of the company.

Renumeration: level and components of remuneration (main principle D1)

Executive directors, remuneration should be designed to promote the long term success of the company.

UK corporate governance code 2014

FCA disclosure and transparency rules for companies. this code focused on. Companies providing information about the risks which affect their longer term viability. giving a clearer and broader view of solvency. Boards making sure that executive remuneration is aligned to the long term success of the company

External Audit

Financial statements of larger companies are subject to external audit. External audit is to make an opinion in an audit report whether the financial statement produced by the directors give a 'fair and true view' of the financial performance of the company during the reporting period and of its financial position by the end of the period.

Principles supporting dialogue with shareholders (E1)

Most shareholder contact is with the chief executive and finance director, but the board chairman should ensure that all directors are made aware of their major shareholders issues and concerns. The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient.

Shareholder engagement

Procedures designed to ensure that shareholders derive value from their investments by dealing effectively with concerns over under performance

What does the audit opinion mean?

Shareholders believe that the opinion of the external auditor means that the financial statements of the company are correct. If the statements are found to be incorrect then the shareholders then blame the auditor for 1: failing to spot the problem 2: Lacking objectivity 3: Failing to challenge the views of the company's management about accounting policies and the accounting treatment of certain items.

Relations with shareholders: dialogue with shareholders (main principle E1)

Shareholders should dialogue based on mutual understanding of objectives. The board as a whole has responsibility for making sure that a satisfactory dialogue with shareholders takes place. nothing should override the law which states to treat shareholders equally with regard to access to information.

Leadership: non-executive directors (main principle A4)

Should constructively challenge and help develop proposals on strategy.

Provisions supporting risk management and internal control (C2)

The annual report should include... 1) A robust assessment of the principal risks facing the company including those that would threaten its business model, future performance, solvency etc. 2) The prospects of the company including it's current position and principal risks, over what period they have done so and why they consider that period to be appropriate. 3) A statement as to whether the company has a reasonable expectation to continue in operation and meet its liabilities as they fall due over the period of their assessment The board should monitor the company's risk management and internal control systems and at least annually do a review of the effectiveness of those systems and report this to the shareholders.

Provisions supporting dialogue with shareholders (E1)

The board chairman makes sure the views of the shareholders are communicated to the board as a whole The chairman should discuss governance and strategy with major shareholders Non executive directors should be offered the opportunity to attend scheduled meetings with major shareholders and should expect to attend meetings if requested by major shareholders. Senior independent director should host meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major sharholders

Principles supporting development (B4)

The board chairman should ensure that the directors continually update their skills and their knowledge and familiarity with the company. The company should provide the resources needed for developing and updating its directors knowledge and capabilities.

Accountability: risk management and internal control (main principle C2)

The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving strategic objectives.

Principles supporting the composition of the board (B1)

The board should be big enough so the needs of the business can be met and that changes to the board's composition can be managed without disruption. An appropriate mix of executive and non executive directors should be present so that no small group of individuals can dominate the board's decisions. Committee membership must be refreshed and undue reliance should not be placed on particular individuals. Only the committee chairman and members are entitled to be present at meetings of the nomination, audit or remuneration committees.

Effectiveness: Information and support (main principle B5)

The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharged its duties.

Provisions supporting the audit committee and auditors (C3)

The board should create an audit committee of at least 3 or in smaller companies have 2 independent non executive directors. In smaller companies the chairman may be a member of but not chair. At least one member of the audit committee should have recent and relevant financial experience. The audit committee should provide advice on whether the annual report and accounts taken as a whole are fair, balanced and understandable. Review arrangements by which staff of the company may in confidence raise concerns about possible improprieties in matters of financial reporting or other matters. Internal audit should be reviewed by the audit committee where there is no internal audit function Should have primary responsibility for making a recommendation on the appointment, re-appointment and removal of external auditors A separate section of the annual report should describe the work of the committee in discharging responsibilities.

Accountability: audit committee and auditors (main principle C3)

The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company's auditors.

Effectiveness: the composition of the board (main principle B1)

The board should have a good balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

Provisions supporting the composition of the board (B1)

The board should identify in the annual report each non executive director including the chairman of the board. Its independent the board should determine whether the director is independent in character and judgement and whether there are things that will affect their judgement. The board should state its reasons if it thinks that a director is independent meaning its not in relationship with others.

Provisions supporting information and support (B5)

The board should make sure that directors especially non executive directors have access to independent professional advice where they judge it necessary to discharge their responsibilities. Committees should be provided with enough resources to perform their duties All directors should have access to the services and advice of the company secretary. Both the appointment and removal of the company secretary should be a matter for the board as a whole

Accountability: financial and business reporting (Main principle C1)

The board should present a fair, balanced and understandable assessment of the company's position and prospects.

Effectiveness: evaluation (main principle B6)

The board should take an annual evaluation of its own performance and that of its own committee and individual directors.

Relations with shareholders: constructive use of the AGM (main principle E2)

The board should use the AGM to communicate with investors and to encourage their participation

Supporting principles for the role of the board (A1)

The board's role is to provide entrepreneurial leadership of the company within a framework that allows risk to be controlled and managed. The board should... •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 ensure that its obligations to its shareholders and others are understood and met •All directors (executives and non-executives) must act in the best interests of the company consistent with their statutory duties

Supporting principle for the chairman (A3)

The chairman •Responsible for setting the board's agenda and making sure that enough time is available for discussion of all agenda items, in particular strategic issues •Promotes a culture of openness and debate by ensuring a constructive relationship between executive and non-executive directors •Making sure directors receive accurate, timely and clear information •Effective communication with shareholders

Principles supporting information and support (B5)

The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary. The secretary responsibilities would be good information flows within the board and its committees, between senior management and non executive directors. Advising the board through the chairman on all governance matters.

Leadership: the chairman (main principle A3)

The chairman is responsible for leadership of the board and ensuring its effectiveness in all aspects of its role

Principles of evaluation (B6)

The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board. The chairman should propose new members and resign current directors where necessary. Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role. The board should consider a balance of skills, experience, independence and knowledge of the company on the board, diversity and other factors relevant to it's effectiveness. Non executive directors led by the senior independent director are responsible for performance evaluation of the chairman taking into account the views of executive directors.

Provision supporting the use of the AGM

The chairman should arrange for the chairmen of audit, remuneration and nomination committees to be available to answer questions at the AGM, and for all directors to attend. The company should arrange for the notice of the AGM and related papers to be sent to shareholders at least 20 working days before the meeting.

Provision supporting the chairman (A3)

The chairman should on appointment meet the independence criteria. A chief executive should not go on to be chairman of the same company. If a board decides a chief executive should become chairman then the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report.

Provisions supporting financial and business reporting (C1)

The directors should explain the annual report, their responsibility for preparing the annual report and accounts and state that they consider the report, accounts as a whole is fair, balanced and understandable and provides enough information for shareholders to make an informed decision. The basis on which the company created or preserves value over the longer term and the strategy for delivering the objectives of the company. A statement by the auditor about their reporting responsibilities The directors should report in annual and half yearly financial statements

The responsibility of preventing fraud and error

The external auditor is not responsible for detecting fraud and error. the responsibility for detecting fraud and error lies with 1) Directors: Managing the system of internal control and risk management 2) Management: they implement the system of internal control determined by the directors

External audit's role in corporate governance?

The external auditor simply reports an independent and expert opinion on how the company is complying with the UK corporate governance code however the responsibility to do something about it lies with the directors and shareholders.

Compliance with the UK corporate governance code

The general requirement of companies is to treat shareholders equally with respect to information access. FTSE 350 listed companies must comply with the main principles of the code, there are certain circumstances that justify departure of these principles. In these cases the company must review all provisions of the code and explain if it departs. Shareholders are encouraged not to consider departures as necessarily being breaches of the Code. Smaller companies outside of the FTSE 350 can be more flexible about how they apply the code.

Principles supporting procedure (D2)

The remuneration committee should 1) Consult the chairman and/or chief executive about their proposals relating to the remuneration of other executive directors 2) Be responsible for appointing any consultants in respect of executive director remuneration conflicts of interest should be avoided where executive directors or senior management are involved. Shareholders should be contacted about remuneration.

Principle supporting the level and components of remuneration (D1)

The remuneration committee should judge where to position their company relative to other companies. they should use comparisons between themselves and other companies with caution.

Provision supporting the division of responsibility (main principle A2)

The roles of chairman and chief executive should not be exercised by the same person. the division between the two should be made, set out in writing and agreed by the board.

Principles supporting board appointments (B2)

The search for board candidates should be made upon 1) Merit 2) Against objective criteria 3) Regards to the benefits of diversity on the board This process involves a nomination committee making a recommendation to the board as a whole which then makes the appointment to the board. This appointment should then be voted by the shareholders at the next annual general meeting (AGM).

Effectiveness: appointments to the board (Main principle B2)

There should be a formal and transparent appointment of new directors to the board.

Remuneration: procedure (main principle D2)

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No directors should be involved in deciding his or her own remuneration.

Auditors of listed companies

They have to report on 1) The director's remuneration report 2) The company's compliance with the Uk corporate governance code

External auditor qualification

To act as an external auditor a body corporate, partnership or individual must be a member of a recognised supervisory body like the ICAEW. They must also hold an appropriate qualification (which may include approved non UK qualifications). External auditors are appointed by a shareholder vote following recommendations by the board and audit committee.