uk approach to corporate governance latest

8/4/2019 UK Approach to Corporate Governance Latest

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Presented By:

Puneet Jain(071)

Rakesh Bhat( 076)

Shailesh Gupta(096)

Vinod Soni(110)


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The Role of Corporate Governance

Good corporate governance is essential to the effective operation of a free market, whichenables wealth creation and freedom from poverty.

The more ingrained the system of corporate governance in a business community, theless the need for detailed regulation to ensure effective compliance with good standardsof business behaviour.

The effective operation requires:-

An approach based on principle, and recognised internationallyHigh quality, transparent financial reportingAn environment that is tough on fraud, where there is effective enforcement andcooperation amongst regulatorsCorporate governance principles that command the support of the businesscommunity


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UK approach to Corporate GovernanceThe key aspects of corporate governance in the UK

A single board collectively responsible for the success of the company. Checks and balances:

Separate Chief Executive and Chairman. A balance of executive and independent non -executive directors.

Strong, independent audit and remuneration committees.

Annual evaluation by the board of its performance.

Emphasis on objectivity of directors in the interests of the company. Transparency onappointments and remuneration.

Effective rights for shareholders.

A Code of good practice based on extensive consultation with practitioners, and operating on

the basis of the 'comply or explain' principle.


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The Framework of UK Corporate

GovernanceStatute (Companies Acts etc)

Common Law (e.g. case law relating to directors duties)

Company constitutions

Listing RulesThe Combined Code on Corporate Governance

Guidelines issued by bodies who represent institutional investors (NAPF, ABI)

The City Code on Takeovers and Mergers

FSA Code of Market Conduct


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The Development of UK Corporate Governance (1) UK Corporate Scandals BCCI Bank, Robert Maxwell Pension Fund, Polly Peck, Barlow Clowes,

Barings.

Legislative changes - relationships between companies determined by control test, not share-holding structures accounting standards set by independent body, and recognised by statute consolidation determined by economic substance not legal form changes to The Stock Exchange listing requirements

Cadbury Committee(1992) established to develop a code of corporate governance Relationship between chairman and chief executive No single individual to have unfettered powers of decision making Role of non executive directors Importance of an Audit Committee

.


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The Development of UK Corporate Governance (2)

1995 Greenbury Report Developed guidance on directors remuneration Performance based pay for executive directors

1998 Hampel Committee Reviewed operation and experience of Cadbury and Greenbury

1998 The Listing Rules set by The FinancialServices Authority

Required companies to comply with The Combined Code or to explain why theydidnt (Rule 12.43A)

It consolidated the work of Cadbury, Greenbury and Hampel committees.

However, no guidelines for sound internal control system.

1999 Turnbull ReportDeveloped guidance on internal control

Types of risks to be controlled

Measures for updating control system


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The Development of UK Corporate Governance (4)

2003 Higgs Report Reviewed the role and effectiveness of non-executive directorsContains guidance on the roles of directors, operation of Remuneration andNomination Committees and relations with shareholders and the investmentcommunity

2003 Smith ReportDeveloped guidance on the composition and operation of Audit Committees

2003 The Combined Code Consolidates all the above initiatives into one Code (effective 1 st November 2003)


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The Standing of the Combined

CodeIt is not part of English Law

It establishes best practice not a minimum level of practice

Enforcement is by comply or explain, supported by Rule

12.43A and market forces


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Comply or Explain Impractical to develop corporate governance regulation that could address thecircumstances and individual needs of all companies - large and small

specialised or not

Solution was to develop a code of best practice and to require listedcompanies to report publicly on steps taken to comply with that code

Auditors required to report on compliance with those matters that are solelyfactual


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Enforcing UK Corporate Governance (1)

Examples of the requirements of The Combined Codebeing enforced:

Shareholders vote against board recommendation to merge with Royal Caribbean and force P&O to enter into merger negotiations with Carnival.

Vodafone shares crash. 1.5 million bonus paid to Chris Gent criticised by shareholders.

NAPF recommends that shareholders vote against the re- election of Lord St John of Fawsley as non-executive director because of his lack of independence from the board. Lord St John Fawsley re-elected as non-executive director.

Appointment of James Murdoch as CEO in spite of shareholder protests. To allay shareholder fears Jacob Rothschild is appointed as non-executive deputy chairman.


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Enforcing UK Corporate Governance (2)

Nick Ritblat emerges as favourite to succeed his father as chief executive.His father, CEO and chairman, insists he will only step down as CEO if replaced by his son.

Over 50% of shareholders vote against the remuneration report at GSKs AGM. Jean -Pierre Garniers pay package and length of servicecontract are subsequently reduced following consultation with shareholders.

Shareholders object to the proposed appointment of Michael Green as executive chairman of ITV. They succeed and request an independent non-executive chairman be appointed.


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The Challenges Faced in the UK

Getting the balance right

entrepreneurial spirit v. excessive focus on procedure

Availability of people of the right calibre

Role of the institutional investor


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The rationale behind the UK approach

The UK approach starts from the position that good governance is a tool that can improve the board'sability to manage the company effectively as well as provide accountability to shareholders. To quote fromthe Cadbury Report:

"The effectiveness with which boards discharge their responsibilities determines Britain's competitiveposition. They must be free to drive their companies forward, but exercise that freedom within a

framework of effective accountability. This is the essence of any system of good corporate governance."

A regulatory framework that aims to improve standards of corporate governance is more likely to succeed,and be accepted by those that it regulates, if it recognises that governance should support, not constrain,the entrepreneurial leadership of the company, while ensuring risk is properly managed.

Governance must also work to the benefit of the shareholders by improving the long-term value of thecompany

The assessment of whether the company's governance practices are effective should be made by theintended beneficiaries - i.e. the shareholders.

Investors can take a pragmatic approach about how to apply best practice in a way that is in the bestinterests of the company


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The UK Regulatory Framework

The UK has developed a market-based approach that enables the board to retain flexibility in the way inwhich it organizes itself and exercises its responsibilities, while ensuring that it is properly accountable toits shareholders

This is done primarily through the Combined Code on Corporate Governance which operates on the basisof 'comply or explain

This 'comply or explain' approach enables judgements about, for example, the independence of non-executive directors, to be made on a case by case basis. It is supported by companies, investors andregulators in the UK, and has increasingly been adopted as a model in other financial mark

Under UK company law, shareholders have comparatively extensive voting rights, including the rights toappoint and dismiss individual directors and, in certain circumstances, to call an Extraordinary GeneralMeeting of the company

This framework is reinforced by the Listing Rules that must be followed by companies listed on the Main

Market of the London Stock Exchange. The Listing Rules provide further rights to shareholders (for example,by requiring that major transactions are put to a vote), and require certain information to be disclosed tothe market


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The benefits of the UK approach

The UK approach combines high standards of corporate governance with relativelylow associated costs.

Studies consistently show that the UK outperforms other countries in terms of governance standards, and that standards within the UK continue to rise.

(Reports published by the FTSE ISS Corporate Governance Index and GovernanceMetrics International both put the UK at the top of the list of countries by averagecorporate governance score)

Compliance costs in the UK are considered to be lower than in other countries withcomparable standards. A study published in June 2006 by Oxera on behalf of theLondon Stock Exchange found that the corporate governance requirements wereseen by some companies as one of the main factors influencing the choice betweena UK and US listing (to the advantage of the UK).


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Essential Features of UK CorporateGovernance


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The role and composition of the boardA single board with members collectively responsible for leading the company andsetting its values and standards.

A clear division of responsibilities for running the board and running the companywith a separate chairman and chief executive.

A balance of executive and independent non-executive directors for largercompanies at least 50% of the board members should be independent non-executive directors; smaller companies should have at least two independentdirectors.

Formal and transparent procedures for appointing directors, with allappointments and re-appointments to be ratified by shareholders.

Regular evaluation of the effectiveness of the board and its committees.


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Remuneration

Formal and transparent procedures for setting executive

remuneration, including a remuneration committee made up of independent directors and an advisory vote for shareholders.

A significant proportion of remuneration to be linked to performance.

Financial Reporting Council 9


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Accountability and Audit

The board is responsible for presenting a balanced assessment of

the company's position (including through the accounts), and maintaining a soundsystem of internal control.

Formal and transparent procedures for carrying out these

responsibilities, including an audit committee made up of independent directorsand with the necessary experience.


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Relations with shareholders

The board must maintain contact with shareholders tounderstand their opinions and concerns.

Separate resolutions on all substantial issues at generalmeetings.


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uk approach to corporate governance latest

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