Corporate Governance Workbook PDF

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Company Law in ContextCorporate Governance – WorkbookContentsIntroduction................................................................................................................................ Introduction.........................................................................................

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Company Law in Context Corporate Governance – Workbook

Contents Introduction................................................................................................................................3 WORKSHOP About this Study Unit.................................................................................................................4 Study Unit Objectives | Checklist...............................................................................................5 What is Corporate Governance?................................................................................................6 Definition................................................................................................................................6 Corporate Leadership.............................................................................................................8 Why is Corporate Governance Important?............................................................................9 Corporate Governance Failures | Case Studies and Consequences................................10 How Effective is Corporate Governance?.............................................................................15 Beyond Corporate Governance............................................................................................17 Disclosure and Reporting.........................................................................................................18 Statutory Registers...............................................................................................................19 The Statutory Reporting Scheme.........................................................................................21 Filing Requirements: Who files what?.................................................................................29 Delivery and (Late) Filing......................................................................................................32 Auditors Duties and Liabilities..................................................................................................33 TUTORIAL Introduction..............................................................................................................................38 Self-test questions................................................................................................................39

Introduction (Good) corporate governance has become a key element in the effort to improve confidence in corporate activities. In essence, it is based on a set of relationships between a company’s management, its shareholders and other stakeholders, both internal such as employees, and external, such as suppliers, customers, and creditors. Corporate governance, however, is only part of the larger context in which companies operate. Factors such as business ethics and corporate awareness of the environmental and societal interests of the communities in which a company operates can also have an impact on its reputation and its long-term success. Corporate governance then is affected by the relationships among participants in the governance system. Shareholders, such as individuals, family holdings, bloc alliances, or other corporations acting through a holding company or cross shareholdings, can significantly influence corporate behaviour. As owners of equity, they are increasingly demanding a voice in corporate governance. Creditors play an important role in a number of governance systems and can serve as external monitors over corporate performance. Employees and other stakeholders play an important role in contributing to the long-term success and performance of the corporation, while governments establish the overall institutional and legal framework for corporate governance. These relationships are subject, in part, to law and regulation and, in part, to voluntary adaptation and, of course to market forces. A key element in the effort to improving confidence in corporate performance and therefore corporate governance is an effective disclosure and reporting framework. Companies are required to prepare and file accounts and reports with Companies House and HMRC on an annual basis. Additionally, a company, unless exempted, is obliged by companies legislation to appoint an auditor to provide independent, external professional oversight.

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WORKSHOP

About this Study Unit In this [online] session we will look at corporate governance, what it means, and how (or indeed whether) companies can be socially responsible, but also how (and, again, whether) good governance can be ensured through reporting and disclosure. By the end of this session, you will: 

have an appreciation of the corporate governance discussion in light of corporate failures;

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an understanding of the statutory disclosure and transparency regime, its extent and to whom it applies; and

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see what auditors can, and cannot, achieve through the auditing process.

What you need to do before each session The workshop and the tutorial will be timetabled, so please check your timetable for your slots. To prepare: 

Read the workbook carefully so you are aware of what’s coming up in the sessions.

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You can listen to the prep recording alongside.

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Have a second tab open or a smartphone available for in-class activities.

Before starting your session, try finding a quiet space where you will be able to focus without disturbing others.

What will the sessions look like? Both workshops and tutorials will be timetabled and will include: 

Introduction



Activities / In-class exercises

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Plenary and time for reflection and asking questions about the Study Unit content.

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How this Study Unit relates sessions and your assessment

to

other

This Study Unit creates more context of where companies sit, what the expectations on these entities as actors and participants of society are and whether regulations are too tight or not tight enough. Its content draws on your previous understanding of companies and company law, and places these in context. In particular, this will help you understand the requirements and provides you a basis for discussion in question 3 of Coursework 2.

Study Unit Objectives | Checklist Use this to check your own understanding while reading through the workbook. By the end of this Study Unit, you should have covered and understand: ☐ what corporate governance as a concept encompasses; ☐ what good corporate governance is meant to prevent; ☐ a company’s disclosure and reporting obligations as part of corporate governance; ☐ the differences in filing obligations – which type of company has to file what, when and why; ☐ whose legal duty it is to ensure filing obligations are complied with but who practically ensures and effects filing with relevant bodies such as Companies House and HMRC; and ☐ the role auditors play in companies’ filing obligations and their duty of care in that regard.

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What is Corporate Governance? Owing to the separation of management from ownership the expectation is that the BoD ensures that the company is run well and profitably on behalf of the shareholders. However, the question has been raised whether companies, as part of society, should be able to make profit at any cost. This is where the issue of corporate governance, and its associate concept of corporate social responsibility, become part of a wider debate. At this point, you are familiar with the fact that companies are legal entities that have separate legal personality. Such entities may own property, employ people, enter into contracts, incur debts, commit crimes and be the victim of crimes, has nationality and even has, some, ‘human’ rights. You should also remember that companies are a flexible form of business organization and can be adapted to serve the needs of the business, from the single shareholder/director, private limited by shares company to the PLC with its shares listed on a stock exchange. Companies, moreover, can be trans- or multinational which means that they have a presence in more than one jurisdiction. This can be to facilitate its business and as a means of risk dispersion (remember Adams v Cape in  CORPORA CORPORAT TE PERSONALIT PERSONALITY Y) but also as tax avoidance schemes. Companies, of course, are set up to benefit from the concepts of ‘separate personality’ and ‘limited liability’. As such, companies are investment vehicles and […] the wider the gap between ownership and management, the clearer the goal of making money for shareholders as management is judged by way of financial performance. [Berle and Means (1932)]

While financial performance remains a core concern, the purpose of companies in wider society has increasingly been brought into focus. How do they act and for whose benefit? Should financial performance be always tied to short-term results or is there an argument for long-term sustainability and, if so, how is this to be achieved? This is where the debate on ‘corporate governance’ starts.

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Definition Corporate governance has many definitions. Here is a, limited, selection: 

‘Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.’1

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‘Corporate governance is about promoting corporate fairness, transparency and accountability.’2

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‘Some commentators take too narrow a view, and say it (corporate governance) is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymous with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edges…corporate governance as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers and indeed for the reputation and standing of our nation and its economy.’3

One of the problems is: there is no agreement on a definition or the definitional scope. By looking at the factors involved, it is possible to deduce, however, that corporate governance is about:  Relationships: between the management, the board of directors, the auditors, shareholders, creditors and other stakeholders BUT focus is on shareholders and managers.  Structures: objectives of the company, means of attaining those objectives and monitoring performance.  Regulation: internally (articles of association) and externally (Acts of Parliament, Statutory Instruments).

At its narrowest point, therefore, corporate governance is about a system by which companies are directed and controlled. But considering their impact on society at large, that appears too narrow. The general assumption is that the smaller the company, the easier it is 1 A Shleifer and RW Vishny, ‘A Survey of Corporate Governance,’ 52(2) The Journal of Finance (1997) 737 2 J. Wolfensohn, president of the Word bank, as quoted by an article in the Financial Times (21 June 1999) 3 NG Maw et al ., Maw on Corporate Governance (CUP 1994) 1

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to exercise control. In bigger, especially quoted or listed companies, large and diverse shareholder numbers require trust in the management. But what if management fails? Are only the shareholders negatively affected? Or will others, the stakeholders, also feel the brunt? And who is then in control? Should the government intervene? Consider examples such as Carillion (2018) and Thomas Cook (2019), both of which are discussed below in Corporate Governance Failures | Case Studies.

Corporate Leadership Companies, as artificial entities, need persons to act on their behalf. Within the company, the BoD is the ultimate decision-making body with the power to delegate (cf Common Arts 3

and 5 [Private and Public], Model Articles 2008/3229). As the board is protect and advance the company’s interests, it requires those on the board to be capable and experienced (cf  DIRECT DIRECTORS ORS DUTIES AND LIABILITIES LIABILITIES).

Board structure and practices4 The UK system features a unitary board: executive directors and, where required, independent, non-executive directors act together as one board. Depending on the company’s size, the board should have an appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. While no individual or small group of individuals should be able to dominate the board's decision-making, it is the CEO who is responsible for delivering the agreed strategy and for the day-to-day running of the company's business. In practice, substantial managerial authority is delegated by the board to the company's executives; the board appoints the executives and exercises an oversight function by approving decisions that do not require shareholder approval and that have not been fully delegated (remember  CORPORA CORPORATE TE DECISION-MAKING DECISION-MAKING). Standing committees of the board typically include at least a nomination committee, audit committee and remuneration committee, but the creation of other standing committees, or ad hoc committees to exercise delegated powers, is permitted. 4 See Hayden Cooke and Murray Cox, ’Spotlight: corporate leadership in United Kingdom’, The Corporate Governance Review (10th edn, March 2020)

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T Terminology: erminology: Ex Executive ecutive Directors and Non-Ex Non-Executive ecutive Directors (N (NEDs) EDs) Executive Directors are full-time positions with service contracts (s 227, CA06). Although they are traditionally not entitled to remuneration, the articles do make relevant provision (art. 19 [Private] and art. 23 [Public], Model Articles 2008/3229). The MD or CEO, usually a position provided for in the company’s articles, has the overall responsibility for the running of the company.

Non-Executive Directors are part-time appointments and are a requirement for listed companies although are increasingly recommended for all companies. They are meant to oversee general management policy and corporate strategy, and monitor the executive directors on behalf of the shareholders and the general public. Their role, however, is disputed and there have been, arguably, unrealistically high expectations.5 ‘ Non-executive directors are subject to the same legal framework as their executive counterparts . Accordingly, their position can be somewhat invidious in many cases where they are expected to act without the executives’ day to day decision-making power and detailed knowledge of the business. The duty of care owed by nonexecutive directors would also appear to be the same as that expected of the executive directors. However, the non-executive is likely to have to do less than an executive director to discharge his duty.’ [Consultation Paper No 153 (1998), para. 17.23]

Nonetheless, NEDs are subject to the same duties as executive directors (  DIRECT DIRECTORS’ ORS’ DUTIES AND LIABILITIES LIABILITIES). The Chartered Governance Institute has issued guidance on the qualities of NEDs.

Why is Corporate Governance Important? Corporate excesses and failures have sparked the debate, especially the question in how far the BoD is controlled and whether the shareholders in General Meeting should take a more active stance. Generally speaking, should tighter controls be imposed on the BoD? Some notorious and in some instances even infamous instances of corporate failures that were 5 To what extent the expectations are indeed set too high was considered in Re Polly Peck International plc (No. 2) [1994] 1 BCLC 574

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attributed to bad, insufficient, inadequate or even non-existing governance include Maxwell in the early 1990s, Enron in the 2000s (although the unravelling of this failure is still ongoing), the failure of Northern Rock in 2007/8 and, more recently, the precarious situation of Carillion. The debate on corporate governance itself, therefore, is not new and over the years a variety of issues has come to light, including  corporate failures in management;  (lack of) auditor independence; and  excessive directors’ remuneration and severance packages.

Owing to the variety of interests affecting companies, the complexity of the issue has been raised. To whom do companies owe responsibilities? Let’s explore some of the more notorious examples.

Corporate Governance Failures | Case Studies and Consequences This was the case that started it all, in 1991. Robert Maxwell’s company looked to take over the British Printing Corporation in 1980. Following further purchases in the mid-1980s, the company started facing liquidity issues. To raise finances, the company was floated on the Stock Exchange in 1991. This ill-

conceived ‘rescue attempt’ led to bankruptcy. The main losers of this were

the investors, the employees (who found that their pension fund had been depleted to cover company debts) and creditors. It turned out that Maxwell had been running his companies with no internal or external oversight. This was the first time that a company’s failure led to a loss of confidence in market protection and a major shake-up.

The Cadbury Committee, 1992 This was the first reaction and reflected the low level of confidence in the accuracy and detail of financial reporting. The report resulted in a Code of Best Practice applicable to all

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companies listed on the LSE but also encouraging others to follow. For listed companies, compliance with the Code was a condition to remain listed. In annual reports, they had to explain in how far they had followed the Code and, if not, why not. This became known as the “comply or explain”-appro explain”-approach ach ach. The key recommendations included  clearly defined split of responsibilities on the BoD;  executive directors’ service contracts should not exceed three years;  appointment of NEDs; and  the board should establish an audit committee.

The Greenbury Committee, 1995 This committee focussed on directors’ remuneration in particular. The focus was on the lack of correlation between remuneration and corporate performance. Consequently, the committee proposed the establishment of independent remuneration committees. These recommendations were included in a new Combined Code. Yet, the recommendations did little to quell concerns regarding excessive compensation payment to departing executives and excessive remuneration payments to current executives despite the company underperforming. This led, eventually, to the implementation of tighter regulation, 6 which brought about key changes to the legal framework in listed companies, according to which the directors' remuneration report must include a separate forward-looking policy part subject to approval by ordinary resolution at least every three years. Company directors have to publish a strategic report in line with the Companies Act

2006 (Strategic Report and Directors’ Report) Regulations 2013/1970 – Part 15, Ch. 4A, CA06. These reports are to help shareholders assess how directors have performed their duty to promote company’s success (cf. s 172, CA06) and must include info on the gender gap, environmental matters, social, community and human rights issues. BUT: Has this brought about the changes envisaged? Arguably, no: Top FTSE bosses paid typical worker's annual salary in just 33 hours (6 January 2020).

The Hampel Committee, 1998 6 Exemplified by the Directors’ Remuneration Report Regulations 2002/1986 , the Enterprise and Regulatory Reform Act 2013 (amending Part 15, CA06 ) and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013/1981. More recently, the ...