Corporate governance - acca PDF

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Corporate governance 1 Codes of corporate governance: Corporate governance is the system by which companies are directed and controlled. Good corporate governance is important because the owners of a company and the people who manage the company are not always the same. The importance of corporate governance: Corporate governance is important because it ensures that stakeholders with a relevant interest in the company's business are fully taken into account. In other words, it is necessary for structures to be in place to ensure that every stakeholder in the company is not disadvantaged. As it is the directors that manage the company, the burden of good corporate governance falls on them. It is important that they manage the company in the best way for the shareholders, employees and other parties. OECD Principles of Corporate Governance: The OECD Principles of Corporate Governance set out the rights of shareholders, the importance of disclosure and transparency and the responsibilities of the board of directors. The key issue in corporate governance is that: A high degree of priority [is] placed on the interests of shareholders, who place their trust in corporations to use their investment funds wisely and effectively. OECD Principles of Corporate Governance (a) To promote transparency, fair markets and efficient allocation of resources. (b) To protect shareholders' rights and ensure all shareholders are treated fairly. (c) To provide incentives relating to investment and to allow stock markets to function in a way that supports corporate governance. (d) To recognise the rights of stakeholders and to encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of enterprises. (e) To allow timely and accurate disclosure of material matters. (f) To ensure companies are effectively guided and monitored. The UK Corporate Governance Code: The UK Corporate Governance Code contains detailed guidance for UK companies on good corporate governance.

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2 Principles of the UK Corporate Governance Code (for listed UK companies) Leadership 1- 'Every company should be headed by an effective board, which is collectively responsible for the longterm success of the company. 2- 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. 3- The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. 4- As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy'. (FRC UK Corporate Governance Code: The Main Principles of the Code, Section A) Effectiveness 1- '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. 2- There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. 3- All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. 4- All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. 5- 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. 6- The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. 7- All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance'. (FRC UK Corporate Governance Code: The Main Principles of the Code, Section B) Accountability 1- 'The board should present a balanced and understandable assessment of the company's position and prospects.

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3 2- 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. 3- The board should establish formal and transparent arrangements for considering how it should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company's auditor'. (FRC UK Corporate Governance Code: The Main Principles of the Code, Section C) Remuneration 1- 'Executive directors' remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied. 2- There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding their own remuneration'. (FRC UK Corporate Governance Code: The Main Principles of the Code, Section D) Relations with shareholders 3- 'There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. 4- The board should use the AGM to communicate with investors and to encourage their participation'. (FRC UK Corporate Governance Code: The Main Principles of the Code, Section E) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 1- Have a defined process for the effectiveness of internal control 2- Review regular reports on internal control 3- Consider key risks and how they have been managed 4- Check the adequacy of action taken to remedy weaknesses and incidents 5- Consider the adequacy of monitoring 6- Conduct an annual assessment of risks and the effectiveness of internal control 7- Make a statement on this process in the annual report

2 Audit committees: An audit committee can help a company maintain objectivity with regard to financial reporting and the audit of financial statements.

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4 the advantages of having an audit committee: (a) Improve the quality of financial reporting, by reviewing the financial statements on behalf of the board (b) Create a climate of discipline and control which will reduce the opportunity for fraud (c) Enable the non-executive directors to contribute an independent judgement and play a positive role (d) Help the finance director, by providing a forum in which they can raise issues of concern and which they can use to get things done which might otherwise be difficult (e) Strengthen the position of the external auditor by providing a channel of communication and forum for issues of concern (f) Provide a framework within which the external auditor can assert their independence in the event of a dispute with management (g) Strengthen the position of the internal audit function, by providing a greater degree of independence from management (h) Increase public confidence in the credibility and objectivity of financial statements

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