1. Lecture 2: Regulation of Corporate Governance
Gary Dewey

2. In the news

3. In the news

4. In the news

5. Last week Defining corporate governance
Consequences of poor corporate governance
Theoretical frameworks
Principles of good corporate governance
History of UK corporate governance
For and Against corporate governance

6. Last week What is the Cadbury Commission definition of CG?
What does a shareholder/investor want?
What do directors want?
Why is corporate governance more difficult in large PLCs?
What is agency theory?
What is agency conflict?
What are agency costs?
What are the 4 principles of CG?
What is stakeholder theory?
If CG is poor, what options are available to shareholders?

7. Today Governance and the law The UK listing regime
The US and the Sarbanes-Oxley Act 2002
Compulsory regulation v Voluntary best practice
Voluntary codes of best governance practice
The UK Corporate Governance Code
The role of the Company Secretary

8. Regulation of corporate governance
Corporate Governance, Coyle, Chapters 2-3

9. 1. Governance and the law
Regulation on corporate governance comes in 5 forms:
Company law
Laws regulating financial markets and financial services
Insolvency law
Criminal laws on money laundering and insider trading
Self regulation?

10. 1. Governance and the law
Companies Act 2006 – regulations relating to:
The preparation and auditing of financial statements
The powers and duties of directors
The disclosures to shareholders
The disclosure of directors remuneration
The general meetings of companies
The shareholder voting rights at general meetings
Prior to the Combined Code this was all that existed!

11. 1. Governance and the law Criminal law and corporate governance:
Money laundering: the process of disguising the source of money that has been obtained from serious crime or terrorism, so that it comes from a legitimate source.
Insider dealing: directors may possess price-sensitive inside knowledge about a company to buy or sell shares in the company with the intention of making a profit / avoiding a loss.

12. 1. Governance and the law
There is no specific corporate governance law in any country!
Some aspects of CG are regulated by sections of different laws - other aspects are not regulated at all
Note: A code of corporate governance usually only applies to listed companies.

13. 2. The UK listing regime
Companies whose shares are traded on a stock market are required to comply with certain rules of conduct.
The UK stock market have the Financial Conduct Authority (FCA) handbook – which includes both UK Listing Rules (LR) and Disclosure and Transparency Rules (DTR).
Within the UK Listing Rules is the UK Corporate Governance Code – all listed companies must comply with all aspects OR explain their non-compliance in their annual report and accounts – the “comply or explain” rule – referred to as a “principles” based approach.

14. 3. The US and the Sarbanes-Oxley Act 2002
As a result of corporate collapses (i.e. Enron) there was a need to protect investors – mainly by improving the accuracy and reliability of financial reporting and other disclosures.
The US took a regulatory approach and introduced the Sarbanes-Oxley Act (SOX) – applicable to all that had shares registered with the Securities and Exchange Commission (SEC).
CEO’s and CFO’s were made personally liable for the accuracy of the financial statements.
Referred to as a “rules” based approach – but SOX is not a comprehensive law on corporate governance.

15. 4. Compulsory regulation v Voluntary best practice
Advantages of a compulsory regulation system:
Protects the interests of shareholders, employees and other stakeholders
Best practice in corporate governance leads to good ethical business practices
Helps address public concerns and maintain public confidence (eg. banks)

16. 4. Compulsory regulation v Voluntary best practice
Advantages of a voluntary system:
Difficult to devise a set of rules that should apply to all companies in all circumstances
Governance is a bigger issue for large companies, and less of a problem for smaller businesses
If countries adopt different regulatory systems, companies would move to countries where rules were less onerous.
Excessive regulation may deter companies from becoming listed.

17. Progress Governance and the law The UK listing regime
The US and the Sarbanes-Oxley Act 2002
Compulsory regulation v Voluntary best practice
Voluntary codes of best governance practice
The UK Corporate Governance Code
The role of the Company Secretary

18. 5. Voluntary codes of best governance practice
A voluntary code of governance is issued by an authoritative national or international body and contains principles or best practice in corporate governance that major companies (listed companies) are encouraged to adopt and apply.
There may be main principles with associated supporting principles, and for each principle there may be provisions or recommendations about how the principle should be applied in practice (i.e. UK Corporate Governance Code)
There is no statutory requirement for companies to apply the principles of a voluntary code.

19. 5. Voluntary codes of best governance practice
Comply or Explain
If a company’s shares are traded on a stock market, they may be required by their listing rules to adopt the code of governance or to explain any non-compliance (i.e. UK)
In the UK a company should therefore produce in the annual report / accounts:
A statement of how it has applied the main principles of the code; and
A statement of whether it has complied with all the relevant provisions of the code, and if not, it must explain the nature of the non-compliance and the reasons for it.

20. 5. Voluntary codes of best governance practice
Comply or Explain
In the UK the “comply or explain” rule applies to the provisions of the code, not to the principles
Listed companies must apply the principles of governance as set out in the code
Listed companies are not required to comply with the provisions, but if they do not they must explain their non-compliance.

21. 5. Voluntary codes of best governance practice
Example:
Main Principle - A2: Division of Responsibilities
There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.
Provision – A.2.1 The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.

22. 5. Voluntary codes of best governance practice
Example:
Provision – A.2.1 The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.
“The roles of Chairman and Chief Executive are not exercised by the same individual, the division of responsibilities is clearly established between the Chairman, Robert Swannell and Chief Executive, Steve Rowe and these are set out in the Governance Framework which is reviewed and approved by the Board”.

23. 5. Voluntary codes of best governance practice
When a company explains its non-compliance with a provision of the UK code, it should outline how its actual governance practices:
Are consistent with the principle to which the particular provision relates;
Contribute to good governance; and
Promotes delivery of business objectives
Who must this explanation satisfy?

24. 5. Voluntary codes of best governance practice
The purpose of a voluntary code is to raise standards of corporate governance in major companies
This principles based approach is a recognition that the same set of rules are not always appropriate in every way for all companies.
Sometimes non-compliance with provisions is desirable, given the circumstances that the company faces, and therefore some flexibility should be allowed

25. 5. Voluntary codes of best governance practice
The UK code provides guidance to shareholders on how they should respond to any non-compliance with the provisions of the code.
It suggest that shareholders should give due regard to the particular circumstances of the company, and bear in mind the size and complexity of the company and the nature of its risks and challenges.
“While shareholders have every right to challenge companies explanations if they are unconvincing, they should not be evaluated in a mechanistic way and departures from the Code should not be automatically treated as breaches”

26. 6. The UK Corporate Governance Code
A code for listed companies since 1992:
From 1998 to 2010 – Combined Code
2010 to 2016 – UK Corporate Governance Code
Reviewed and amended periodically by the Financial Reporting Council (FRC)
5 main sections: Leadership, Effectiveness, Accountability, Remuneration, Relations with Shareholders – 18 main principles & 54 provisions
UK Stewardship Code – aimed at the governance responsibilities of institutional investors.

27. 7. The role of the Company Secretary
The Companies Act (2006) states that public companies must have a company secretary
They are not a member of the board, and therefore have no direct responsibility for corporate governance and accountability to shareholders.
They are involved at board level and can give advice and assistance to the chairman, the board, board committees and individual directors.
Key roles include company administration, support for board meetings and the promotion of high standards of governance throughout the company.

28. 7. The role of the Company Secretary
The company secretary should ensure that information flows between the board and its committees, and between executive and non-executive directors.
They should ensure that all board procedures are complied with, and advise the board and directors on all governance issues.
“The company secretary should be responsible for advising the board through the chairman on all governance issues”

29. 7. The role of the Company Secretary
ICSA is the chartered membership and qualifying body for people working in governance, risk and compliance, including company secretaries.
ICSA helps to meet increased demand for qualified governance professionals in all sectors and has responded to these needs with a broad range of qualifications and services for the wider governance, risk and compliance communities.

30. Summary Governance and the law The UK listing regime
The US and the Sarbanes-Oxley Act 2002
Compulsory regulation v Voluntary best practice
Voluntary codes of best governance practice
The UK Corporate Governance Code
The role of the Company Secretary

31. ACFI320 Coursework
You are a consultant who has been hired by an institutional investor (your client), who is looking to invest in a number of FTSE 350 companies in the near future.
In order to assess potential opportunities, the client needs to understand the corporate governance arrangements within any organisation that they consider for investment, and so they are commissioning you to provide them with this analysis and assessment.
You are therefore required to research and evaluate the corporate governance arrangements for one of the ten FTSE 350 companies listed below.

32. ACFI320 Coursework
Your analysis should demonstrate to your client how the organisation complies with the UK Corporate Governance Code (2016), and highlight any areas of non-compliance.
You should present your findings in a business report format, and conclude with appropriate recommendations as to how corporate governance may be improved, and your overall opinion as to whether or not the corporate governance arrangements are acceptable, which should then assist the client in their investment selection.
Your report should include the following: title page, contents page, executive summary (no more than 1 page), introduction, brief company background, main body/sections, recommendations, conclusion/opinions and references.

33. Market Capitalisation
ACFI320 Coursework
This assignment represents 50% of the module assessment.
The word limit is 2,500 words. This word limit excludes title page, contents page, appendices, footnotes and references, but includes an executive summary. Electronic submission only.
Due date: on or before 2pm on Wednesday 11th April 2018.
Company
Market Capitalisation
FTSE 350
Position 1
Travis Perkins
£3,733m
114 2
Merlin Entertainments
£3,392m
127 3
Metro Bank
£3,256m
131 4
Inchape
£3,031m
140 5
Wizz Air Holdings
£2,693m
158 6
Unite Group
£1,931m
193 7
Savills
£1,466m
227 8
Rathbone Brothers
£1,391m
234 9
888 Holdings
£1,013m
292 10
esure group
£1,011m
294

34. ACFI320 Coursework

35. ACFI320 Coursework - Support
Discussion Board on VITAL
Example Reports on VITAL
Librarian Visit – Week 5

36. Tutorial 1 – Week 3
Case study (Klopp) now on VITAL.
Please prepare for the tutorial by identifying as many points as possible, in order that we can then review and discuss in class.

37. Next week Lecture 3: Leadership – The Board of Directors Gary Dewey