Governance, Risk and Ethics

2 Section A: Governance and responsibility Section B: Internal control and review Section C: Identifying and assessing risk Section D: Controlling risk Section E: Professional values and ethics Governance, risk and ethics

3 Section A: Governance and responsibility A1. The scope of governance A2. Agency relationships and theories A3. The board of directors A4. Board committees A5. Directors’ remuneration A6. Different approaches to corporate governance A8. Governance: Reporting and disclosure Designed to give you knowledge and application of:

4 Study Guide A3: The board of directors  Explain and evaluate the roles and responsibilities of boards of directors. [3]  Describe the characteristics, board composition and types of directors (including defining executive and non-executive directors (NED). [2]  Describe and assess the purposes, roles and responsibilities of NEDs. [3]  Describe and analyse the general principles of legal and regulatory frameworks within which directors operate on corporate boards. [2]  Define, explore and compare the roles of the chief executive officer and company chairman. [3] Learning Outcomes

5 Explain and evaluate the roles and responsibilities of boards of directors Board Lead Control Company to Why do we need Responsible for good CG majority of companies are well run and uphold good standards of integrity Cases where directors are said to abuse their positions Directors dominating board & taking all decisions Executives running board affairs with little challenge from non-executives Lack of consideration of broader stakeholder groups No representation of institutional shareholders on board Company poorly run due to directors’ poor business judgement Lack of transparency in reporting

6 Various reports Containing recommendations for good CG practices to be followed by directors Cadbury GreenburyHampelHiggs Turnbull Responsibilities of board Setting company’s strategic aims Policy formulation Supervising management Accountability Refer to Test Yourself on page 81 Responsibilities of board

7 Describe the characteristics, board composition and types of directors Board composition Executive directors Non-executive directors Actually involved in running business of company Act in supervisory capacity to monitor & challenge work of EDs Combined code with regard to composition of board, recommends that board should identify, in annual report, all NEDs that it considers independent in character consist of 50% independent NEDs excluding chairman (except smaller companies) appoint senior NED who will be available for shareholders if they have any concerns Refer to pages 86 and 87

8 Characteristics of directors Proactive motivatingexperienced Good listening & questioning skills Good negotiating skills leadership General knowledge of business Expertise in relevant areas Refer to Case Study on page 88 Characteristics of directors

9 Describe and assess the purposes, roles and responsibilities of NEDs. Purpose of NEDs Bring experience & impartial view Play important role in securing transparency & objectivity in Act as agents of shareholders to oversee how executives manage business market communication & dialogue regulated reporting & financial reporting

10 Role of NEDs Constructively challenge & develop proposals on strategy Scrutinise performance of management in meeting goals Satisfy themselves regarding integrity of financial information Responsible for determining remuneration of executive directors Refer to Test Yourself 4 on page 91 Role of NEDs

11 Responsibilities of NEDs To be well-informed about external environment To have strong command over relevant business issues To continually meet members of senior, middle and lower level management To visit workplace to acquire & update knowledge about working of the business To seek clarification on issues of concern & take professional advice Responsibilities of NEDs

12 Describe and analyse the general principles of legal and regulatory frameworks within which directors operate on corporate boards Duties / responsibilities of directors Fiduciary duty to act in good faith General duty of skill & care Rights of directors Right to remuneration & compensation for loss of office Right to fees & expenses Employment rights under employment law of country Continued…

13 Directors should disclose their interest in following situations Transactions with the company Use of corporate property, opportunity or information Competing with the company Model code rules for directors should not deal in shares in close period should not deal in shares at time of possession of price-sensitive information If they deal in shares at any other time, should take permission of chairman Period before the announcement of the company’s interim & final financial results Continued…

14 Define, explore and compare the roles of the chief executive officer and company chairman Chairman CEO  should not be held by same person  split is necessary for good CG practice  reason is that power should never be concentrated in one hand  roles & duties should be established in writing & agreed by board  ensure board sets strategic objectives & gives direction to company  determine structure, composition and succession planning of board  set agenda for meeting & manage meetings in proper manner  ensure that AGM & shareholders’ meetings are held at regular intervals  take full responsibility of accountability towards board  develop & implement policy decisions & execute strategy  plan & manage financial & physical resources  build & maintain strong management team & act as link between board & employees represents stakeholders represents management Responsibilities Refer to pages 96 to 99

15 RECAP  Explain and evaluate the roles and responsibilities of boards of directors. [3]  Describe the characteristics, board composition and types of directors (including defining executive and non-executive directors (NED). [2]  Describe and assess the purposes, roles and responsibilities of NEDs. [3]  Describe and analyse the general principles of legal and regulatory frameworks within which directors operate on corporate boards. [2]  Define, explore and compare the roles of the chief executive officer and company chairman. [3]