Corporate Governance Corporate governance is the system by
Corporate Governance � Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting. � Para 2. 5 of Cadbury Committee, 1992 UK
Agenda �UK Corporate Governance Code, 2014 �Developments in Corporate Governance and 2015, Report by FRC UK in Stewardship January 2016 �EU Directions on Statutory Audits of Public Interest Entities �Companies (Amendment) Bill 2016 �Listing Obligations & Disclosure Regulations 2015 issued by SEBI � Financial Reporting Standards
Comply or Explain Code is not a set of rigid rules It contains a Principles – Main and Supporting Recognizes that alternatives to the principles are justified under circumstances Explain the reasons to the shareholders, in case of non-compliance Shareholders have right to challenge the explanations but should not evaluate in a mechanic manner Departures from the Code should not be automatically treated as breaches
The Main Principles of the Code � Section A: Leadership � Section B: Effectiveness � Section C: Accountability � Section D: Remuneration � Section E: Relations with shareholders
Section A: Leadership A. 1: The Role of the Board Main Principle: Every company should be headed by an effective board which is collectively responsible for the longterm success of the company.
A. 2: Division of Responsibilities Main Principle: be There should responsibilities at the between the running executive responsibility company’s business. No one individual powers of decision. clear division of a head of the company of the board and the for the running of the should have unfettered
A. 3: The Chairman Main Principle: The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
A. 4: Non-Executive Directors Main Principle: As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.
Section B: Effectiveness B. 1: The Composition of the Board Main Principle: The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
B. 2: Appointments to the Board Main Principle: There should be a formal, rigorous transparent procedure for the appointment of new directors to the board. and
B. 3: Commitment Main Principle: All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.
B. 4: Development Main Principle: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
B. 5: Information and Support Main Principle: The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.
B. 6: Evaluation Main Principle The board should undertake a formal rigorous annual evaluation of its performance and that of its committees individual directors. and own and
B. 7: Re-election Main Principle: All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
Section C: Accountability C. 1: Financial and Business Reporting Main Principle: The board should present a fair, balanced and understandable assessment of the company’s position and prospects.
C. 2: Risk Management and Internal Control Main Principle: The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.
C. 3: Audit Committee and Auditors Main Principle: 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.
Section D: Remuneration D. 1: The Level & Components of Remuneration Main Principle: should be Executive directors’ remuneration designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.
D. 2: Procedure Main Principle: be a formal and transparent There should developing policy on executive procedure for remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.
Section E: Relations with shareholders E. 1: Dialogue with Shareholders Main Principle: There should be a dialogue with shareholders based on the mutual understanding of objectives. as a whole The board has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
E. 2: Constructive Use of General Meetings Main Principle: The board should use general meetings to communicate with investors and to encourage their participation.
Governance of Listed Companies Overall compliance rates Compliance with Code provisions remains high, with 90 per cent of FTSE 350 companies reporting that they were either complying with all, or all but one or two, of its 54 provisions.
Top 10 areas of Non-compliance with the Code, requiring explanation, as reported by FTSE 350 companies in their 2014/2015 annual report
Compliance with Selected Provisions of the UK Corporate Governance Code FTSE 350 Companies Code provision Smaller Companies 2015 2014 A. 2. 1 – Separate Chairman and CEO 99% 96% 99% B. 1. 2 – Met minimum provisions for number of Independent NEDs 92% 90% 88% 90% C. 3. 1 – Met minimum provisions for Audit Committee composition 97% 92% 94% 93% D. 2. 1 – Met minimum provisions for Remuneration Committee composition 95% 91% 90% 89% B. 2. 1 – Met minimum provisions for Nomination Committee composition 98% 96% 97% 99%
Explanations where less than half the board, excluding the chairman, comprises independent Non-executive Directors (B. 1. 2) Board Composition The Board currently comprises the Chairman, six non-executive directors and six executive directors; additionally, XX served as a nonexecutive director throughout the year to 30 September 2014. The Board, having given thorough consideration to the matter, considers the other five non-executive directors to be independent. XX joined the Board in 2004 and served on the Board until 30 September 2014. XX had served on the Board for more than nine years by the date of retirement … Taking into consideration XX’s independence of character and judgement, asset management knowledge and significant major plc board experience, the Board is of the opinion that XX remained an independent non-executive director until the date of retirement. Contd.
Explanations where less than half the board, excluding the chairman, comprises independent non-executive directors (B. 1. 2) Contd. Board Changes We did not comply during the year, nor do we currently comply, with the Code requirements on the number of independent directors. The Board remains of the opinion that its size and composition should reflect the needs of the business and seeks to achieve this in compliance with the Code.
Explanations where companies have a combined Chairman and CEO (A. 2. 1) The Board notes the Code principle stating that there be a clear division of responsibilities at the head of the Company and provision that the roles of Chairman and Chief Executive not be exercised by the same individual. In order to successfully lead the Company through the period of flux as a result of its flotation to the London Stock Exchange and upgrade to a premium listing, the Board, following due consideration determined that it was, and remains to be, in the best interests of the Company and Group to retain XX as an Executive Chairman. Contd.
Explanations where companies have a combined Chairman and CEO (A. 2. 1) Contd. The Board, with assistance from the Nomination Committee, will keep this arrangement under review. It is envisaged that XX will become Non-Executive Chairman once the business transformation is complete creating a vacancy for, and thereby separation of, the role of Chief Executive Officer. As a result, the division of responsibilities between the and Chief Chairman Executive will be clearly established, set out in writing and agreed by the Board. Contd.
Explanations where companies have a combined Chairman and CEO (A. 2. 1) Contd. The Directors consider that the structure of the Board and the integrity of the individual Directors ensures that no single individual or group dominates the decision making process. There is a common purpose of promoting the overall success of XX with a unified vision of the definitions of success, the core strategic principles, and the understanding, alignment and mitigation of risks.
Audit Tendering The Code revision in 2012 added a recommendation that FTSE 350 companies should put their external audit contract out to tender at least every ten years. 46 FTSE 350 companies put their external audit engagement out to tender in the period to 31 October 2015 (up from 27 previously), with 36 of those companies changing auditors as a result.
Audit Committee Reporting Audit committees to provide more detail on the work they do: descriptions of the significant issues considered by the audit committee in relation to the financial statements and how they were addressed; how the audit committee external audit process; and assessed the effectiveness approach to appointing the auditor and safeguarding of the objectivity and independence relative to the use of non-audit services. Overall disclosures in this area have improved companies in the FTSE 350 not giving an explanation. with only few
Boardroom Diversity • Code expects Board to set out policy on Boardroom Diversity. • This has led to an improvement in the quality of reporting on gender diversity. • Wider characteristics such as race, experience and approach are gaining greater attention.
Fair, Balanced and Understandable Code asked boards to confirm that the company’s annual report and accounts taken are fair, as a whole balanced and understandable (FBU), a primary outcome of which is for the narrative sections of the annual report to reflect more accurately the company’s position, performance and prospects. FTSE 350 annual reports found that all companies bar two (2014: 25) now include such a statement
2014 Code Changes Risk Management and Internal Control The 2014 Code changes require companies to: state whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so; robustly assess their principal risks and explain how they are being managed or mitigated; state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. Contd.
2014 Code Changes Risk Management and Internal Control Contd. It is expected that the period assessed will be significantly longer than 12 months; and monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report. Risk appetite, quantification of risk and assessing the effect of internal controls are three significant challenges
Remuneration Code requires Remuneration Policies to emphasis on long term success and mechanism to recover or withhold variable pay. Encouraging compliance reported.
Shareholder Engagement Code required the companies to disclose : How they engage with the shareholders How they assess their concerns How they respond to the concerns Increase in Minority Shareholders Voting in General Meetings
Significant Minority Voting at FTSE 350 AGMs Resolution Type Number of resolutions voted against by 20% Number Defeated or more of shareholders 2015 2014 Audit & Reporting - 2 - - Corporate Actions 1 1 - - Director elections 4 16 - - Issue of shares & pre-emption rights 11 12 1 2 Remuneration – policy 4 13 - 1 Remuneration – report 24 26 1 2 Shareholder Rights 10 7 1 2 Total 54 77 3 7
Stewardship and Engagement �UK Stewardship Code 2010 has aimed to increase the profile of discussion on the Stewardship in the Investment Chain. Quality of reporting to improve to give a clear picture on the Stewardship issues
EU Directives on Statutory Audits
Regulation (EU) 537/2014 dt. 16 th April 2014 �Audit Fees �Non-Audit Fees �Transparency Report �Joint Audits
Article 4 Audit Fees �Fees for provisions of Audit Fees shall not be contingent fees. �Permissible Non-audit fees to be limited to no more than 70% of average fees paid in last 3 consecutive years for statutory audits. �Where fees from P/E exceeds 15% of total fees to disclose to Audit Committee and discuss threats to independence.
Article 5 Prohibition of the provisions of non-audit services a) Tax services relating to: preparation of tax forms; i. payroll tax; ii. customs duties; iii. iv. identification of public subsidies and tax incentives unless support from the statutory auditor or the audit firm in respect of such services is required by law; support regarding tax inspections by tax authorities unless v. support from the statutory auditor or the audit firm in respect of such inspections is required by law; vi. calculation of direct and indirect tax and deferred tax; vii. provision of tax advice Contd.
Article 5 Prohibition of the provisions of non-audit services Contd. (b) Services that involve playing any part in the management or decision-making of the audited entity; (c) Bookkeeping and preparing accounting records and financial statements; (d) Payroll services; (e)Designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information or designing and implementing financial information technology systems; Contd.
Article 5 Prohibition of the provisions of non-audit services Contd. (f) Valuation services, including valuations performed in connection with actuarial services or litigation support services; (g) Legal services, with respect to: (i)the provision of general counsel; (ii) negotiating on behalf of the audited entity; and (iii)acting in an advocacy role in the resolution of litigation; (h) Services related to the audited entity's internal audit function; Contd.
Article 5 Prohibition of the provisions of non-audit services Contd. (i) Services linked to the financing, capital structure and allocation, and investment strategy of the audited entity, except providing assurance services in relation to the financial statements, such as the issuing of comfort letters in connection with prospectuses issued by the audited entity; (j) Promoting, dealing in, or underwriting shares in the audited entity; Contd.
Article 5 Prohibition of the provisions of non-audit services Contd. (k) Human resources services, with respect to: (i)management in a position to exert significant influence over the preparation of the accounting records or financial statements which are the subject of the statutory audit, where such services involve: — searching for or seeking out candidates for such position; or — undertaking reference checks of candidates for such positions; (ii) structuring the organization design; and (iii) cost control
Article 13 Transparency Report Within 4 months from the end of the F. Y. to publish Transparency Report on website. To remain available for 5 years.
Article 17 Duration of Audit Engagement Maximum period of 10 years and then cooling of 4 years. 20 years where public conducted 24 years where more appointed. tender than process one firm is is
Companies (Amendment) Bill 2016
Companies (Amendment) Bill, 2016 �MCA constituted the Companies Law Committee � Report submitted in February 2016 �Amendment Bill introduced in Parliament and referred to Standing Committee
Principles for Amendments � Ease of Doing Business � Formation of Capital � Compliance Cost should not be high Striking Balance with Corporate Governance
Listing Obligations and Disclosures Regulations 2015
Obligation under LODR Listed company to ensure compliance by KMP Directors Promoters Any person dealing with company
Corporate Governance �Quarterly Compliance Report on CG within 15 days. �Details of all material Related Party Transactions �New Form to disclose qualifications in Audit Reports
Financial Reporting Standards �True and Fair to be followed in letter and spirit �Principle Based vs Rule Based Accounting � Court Schemes �Enhanced Disclosures under IFRS/ Ind AS �Fair Value & Expected Loss Model under IFRS 9 – Challenge in Emerging Economies
Corporate Governance and Accounting Scandals � Paper published in Chicago Journal by Anup Agrawal and Sahiba Chadha � Close relationship between lack of CG and Accounting Scandals � Co-relation between Earnings Restatements and Corporate Frauds
Frequency Distribution of Restating Firms Initiated by Regulators: SEC Department of Justice Comptroller of Currency Auditor Company N Total 21 2 2 15 119 159 Total 98 56 5 159 Total 130 21 8 159 Accounts restated: Core Noncore Mixed Restatements that: Reduce Earnings Increase Earnings Have an unknown effect
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