Governance is the system by which an organisation is directed and controlled so that its objectives are

achieved in an acceptable and sustainable manner

Good practice in corporate governance

• Risk management and reduction, and good internal controls

• Ethical and sustainable pursuit of the business's strategy in a way which safeguards against misuse
of resources, physical or intellectual and which aims at ensuring success over the long term

• Openness and transparency; disclosure of information

• Integrity and probity: applying the spirit of the law as well as its letter, and being honest in all
dealings

• Accountability: monitoring and judging directors' performance based on the returns that the
company has achieved under their stewardship

• Reducing the potential for conflict

• Reconciling the interests of shareholders and directors as far as possible

Symptoms of poor corporate governance

• Domination of the board by a single individual or group, with other board members merely acting as
a rubber stamp

• No involvement by the board: meeting irregularly, failing to consider systematically the

organisation's activities and risks, or basing decisions on inadequate information

• Inadequate control function, for instance no internal audit, or a lack of adequate technical
knowledge in key roles, or a rapid turnover of staff involved in accounting or control
 • Lack of supervision of employees

• Lack of independent scrutiny by external or internal auditors

• Lack of contact with shareholders

• Emphasis on short-term profitability, leading to concealment of problems or errors, or manipulation

of financial statements to achieve desired results

• Misleading financial statements and information

There are two basic governance structures:

• Statutes

• Codes of practice

Different countries use different combinations of statutes and codes of practice, depending in part on
whether they have principles-based or a shareholder led approach to governance structures

Possible structures for the board of directors

• A unitary board is responsible for both management of the business and reporting to the
shareholders, via the financial statements and shareholder meetings.

• A dual or supervisory board structure, as is seen in Germany for instance, with roles split between:

• The management board, with responsibility to manage the company using similar powers to
the unitary board, and

• The supervisory board: an independent separate board elected by the shareholders and the
employees, often comprising a series of committees with delegated powers.
Rules on corporate governance, especially with regard to:

• The board of directors (a unitary board is required)

• Directors' powers and duties

• The relationship of the company with directors, such as loans to directors and the interests of
directors in company contracts

• Accountability for stewardship and financial reporting via the financial statements

• Rules on meetings and resolutions

Code of ethic: A formalisation of principles, values, responsibilities and obligations

Consistency of conduct: with the message effectively communicated, the behaviour of employees can be
standardised or made consistent across all its operations and locations

Whistle blower: Employees who make the decision to 'blow the whistle' are driven to do so by their own
moral values and their need to 'do the right thing', but they will normally only do so once they have tried but
failed to get the problems addressed internally
Leadership: the role of the board (main principle A1)

• Set the company's strategic aims

• Ensure that the necessary financial and human resources are in place for the company to meet its
objectives

• Review management performance

• Set the company's values and standards and ensure that its obligations to its shareholders and
others are understood and met

• All directors - both executives and non-executives - must act in what they consider to be the best
interests of the company, consistent with their statutory duties

Provisions supporting the role of the board

• The board should meet regularly enough to discharge its duties effectively, with a formal schedule of
matters specifically reserved for its decision

• The annual report should include a statement of how the board operates, including a high level
statement of which types of decision are taken by the board and which are delegated to
management

• The annual report should identify the board's Chairman, the Deputy Chairman, the Chief Executive,
the senior independent (non-executive) director and the chairmen and members of the board
committees.

Leadership: The Chairman

• Is responsible for setting the board's agenda and ensuring that adequate time is available for
discussion of all agenda items, in particular strategic issues
• Should promote a culture of openness and debate by facilitating the effective contribution of non-
executive directors in particular and ensuring constructive relations between executive and non-
executive directors

• Is responsible for ensuring that the directors receive accurate, timely and clear information

• Should ensure effective communication with shareholders

• The Chairman should, on appointment, meet the independence criteria.

• A Chief Executive should not go on to be Chairman of the same company

Leadership: non-executive directors (main principle A4)

• Scrutinise the performance of management in meeting agreed goals and objectives

• Monitor the reporting of performance

• Satisfy themselves on the integrity of financial information and that financial controls and systems of
risk management are robust and defensible

• Be responsible for determining appropriate levels of remuneration of executive directors

• Have prime roles in appointing, and where necessary removing, executive directors, and in
succession planning

Non-executive directors to be the senior independent director:

• To provide a sounding board for the chairman and

• To serve as an intermediary for the other directors when necessary

• The senior independent director should be available to shareholders

• The Chairman should hold meetings with the non-executive directors without the executives
present.

• On resignation, a non-executive director should provide a written statement to the Chairman

The composition of the board (main principle B1)

• The board should be big enough that the requirements of the business can be met

• The board should include an appropriate combination of executive and non-executive directors such
that no individual or small group of individuals

• Committee membership must be refreshed and undue reliance should not be placed on particular
individuals.

Provisions supporting the composition of the board

• Have been an employee of the company within the last five years

• Represent a significant shareholder

• Have served on the board for more than nine years from the date of their first election
At least 50% of the board, excluding the Chairman, should comprise independent non-executive
directors. A smaller company should have at least two independent non-executive directors.

The nomination committee

• Over 50% of members of the nomination committee should be independent non-executive directors

• The board Chairman or an independent non-executive director should chair the nomination

• Non-executive directors should be appointed for specified terms subject to re-election and to
statutory provisions relating to the removal of a director.

Any term beyond six years for a nonexecutive director should be subject to particularly rigorous review,
and should take into account the need for progressive refreshing of the board

Effectiveness: commitment (main principle B3)

• A Chairman's other significant commitments should be disclosed to the board

• Non-executive directors should disclose their other significant commitments to the board

• The board should not agree to a full-time executive director taking on more than one nonexecutive
directorship in a FTSE 100 company nor the Chairmanship of such a company

Accountability: financial and business reporting (main principle C1)

• Interim reports

• Other price-sensitive public reports

• Reports to regulators

The statutory financial statements

Accountability: risk management and internal control (main principle C2)

• It acknowledges responsibility for the system of internal control and for reviewing its effectiveness

• The system is designed to manage rather than eliminate the risk of failure to meet business
objectives

• The system can only provide reasonable, not absolute, assurance against material misstatement or
loss

• An ongoing process is in place for identifying, evaluating and managing significant risks facing the
company

• The process has been in place for the year under review and up to the date of the annual report and
accounts

• The process is regularly reviewed by the board and is in accord with FRC's guidance on internal
control

• There is a process to deal with the internal control aspects of any significant problems disclosed in
the annual report and accounts
Accountability: audit committee and auditors (main principle C3)

• The board should establish an audit committee of at least three or, in the case of smaller companies,
two independent non-executive directors.

• At least one member of the audit committee should have recent and relevant financial experience

• Roles and responsibilities include:

• Monitoring the integrity of the financial statements of the company

• Reviewing the company's internal financial controls

• Monitoring and reviewing the effectiveness of the company's internal audit function.

• appointment, re-appointment and removal of the external auditor to approve the

remuneration and terms of engagement of the external auditor

• Reviewing and monitoring the external auditor's independence and objectivity

• Developing and implementing policy on the engagement of the external auditor

Reporting to the board on how it has discharged its responsibilities

The role of external audit

• The directors' remuneration report

• The company's compliance with the UK Corporate Governance Code

Audit opinion

• Directors, who are required by the UK Corporate Governance Code and the FRC's guidance

• Management who implement and monitor the system of internal control determined by the
directors

The role of internal audit

Internal audit: A semi-independent part of the company which monitors the effective operation of its
internal control and risk management systems.

Internal audit is itself a key element of the company's system of internal control.

• Assessing how risks are identified, analysed and managed

• Advising management on embedding risk management processes into business activities

• Advising management on improving internal controls

• Ensuring that assets are being safeguarded

• Ensuring that operations are conducted effectively, efficiently and economically in accordance with
the company's policies

• Ensuring that laws and regulations are complied with

• Ensuring that records and reports are reliable and accurate

• Helping management to detect or deter fraud

• Helping management to identify savings and opportunities

The board's audit committee:

• Appointing the head of internal audit

• Ensuring the function has sufficient resources eg staff, access to management, and a framework of
professional standards

Remuneration: Procedure (main principle D2)

• The board should establish a remuneration committee of at least three, or in the case of smaller
companies two, independent non-executive directors

• The board Chairman may be a member of, but not chair, the remuneration committee if they were
considered independent on appointment as Chairman

• The remuneration committee should have delegated responsibility for setting remuneration for all
executive directors and the Chairman.

• The committee should also recommend and monitor the level and structure of remuneration for
senior management.

• The board itself or, where required by the company's Articles, the shareholders should determine
the remuneration of the non-executive directors within the limits set in the Articles.

• Shareholders should be invited specifically to approve all new long-term incentive schemes and
significant changes to existing schemes