PERFORMANCE AND RISK STRATEGY

CHAPTER 5: CORPORATE GOVERNANCE

27 February 2024
LEARNING OUTCOMES

Lead Component

A3: Ways of managing risk a) Roles and responsibilities

B3: Explain governance risks a) Explain the role of board and

its committees in managing
strategic risk.
b) Explain failure of governance
and its impact on strategy

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 ✓ What is Corporate Governance CG?
✓ Development of CG
✓ Problems with poor CG
✓ Principles of good governance
Chapter 5 ✓ Board responsibilities
Outline ✓ Independence and Effectiveness
✓ Different board committees
✓ Corporate social responsibility
✓ Impact of failed governance on
strategy
What is Corporate Governance?

‘The system by which organisations are directed

and controlled.’ (Cadbury, 1992;p.15)

‘A set of relationships between a company’s

directors, its shareholders and other stakeholders.
It also provides structure through which the
objectives of the company are set, and the means
of obtaining these objectives and monitoring
performance are determined.’
(OECD,2004: p,4)
Development of Corporate Governance
➢ Increased corporate failures in the 1980s and 1990s
resulted in the development of governance regulations
➢ The UK Corporate Governance Code was further
developed in accordance with the 2008-09 global
financial crisis.

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Problems with Poor Governance
Dominance of the organization by one
individual
Rules and formal controls in place are
ignored
Organisations are run in the interest of
management, rather than
shareholders/stakeholders
Excessive pay and benefits
Lack of effective scrutiny by auditors and
stakeholders
Some control over board appointments or
a seat on the board for a major investor
Increased scrutiny by appointing the right
calibre of directors
A financial audit by a reputable firm
Some control over pay and benefits for
directors and full disclosure
Fines and/or punishments in the event
that company directors do not comply
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Principles of Good Corporate Governance
1 Board Leadership and Company Purpose

2 Division of Responsibilities

3 Composition, Succession and Evaluation

4 Audit, Risk and Internal Control

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Board Leadership and Company Purpose
• Every company should be headed by an
effective and entrepreneurial board
• The board should be responsible for
setting the purpose, values and strategy of
the company
• The board should make sure that
resources are available for the meeting of
company objectives
• The board should ensure a satisfactory
dialogue with shareholders and
stakeholders

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Board Responsibilities
Chair of the Board
Leadership of the board, ensuring the
effectiveness and setting its agenda
Ensuring the board receives accurate,
timely information
Ensuring effective bi-directional
communication between board and
shareholders
Facilitating effective contribution from
NED’s and ensuring constructive board
relationships
CEO
Leadership of the organization, ensuring
effectiveness of operations and setting
strategy
Providing accurate and timely information
about company performance
Communicating effectively with significant
stakeholders
Facilitating effective implementation of
board decisions
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Board Responsibilities
Chair of the Board CEO
Lead board induction, training and Co-operating in induction, training and
development programmes development of board members
Meet with NEDs privately from executives Co-operating by providing necessary
resources and information

Facilitating board appraisal Co-operating in board appraisal

Encouraging active engagement by all Co-operating with all the members of the
members of the board board

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Considerations for Board Memberships
Size-
Balance between the benefits
of having varied views and
opinions alongside need for
coherent decision making

Inside/outside mix – Diversity-

the split between executive mix in terms of gender,
decision makers and non ethnicity, backgrounds,
executive directors experience etc

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The role of Non-Executive
Directors
The main advantages of bringing NEDs
STRATEGY ROLE
onto a board are as follows:
Contribute to
development of • External expertise and experience
Strategy • Wider perspective
• Independent and objective view
• Complies with corporate governance
SCRUTINISING codes
RISK ROLE
ROLES OF
ROLE • Assurance to and confidence for third
Financial systems, Review the
accurate and risk NED performance of parties
management robust management in
meeting objectives
However, the key problems with NEDs
tend to centre around two issues
PEOPLE ROLE • Lack of true independence
Decide • Effectiveness
remuneration of
board and ensure
appropriate
succession planning

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Independence
Reasons for NED Independence
• To provide a detached and objective view
of board decisions
• To provide expertise and communicate
effectively
• To provide shareholders with an
independent voice on the board
• To provide confidence in corporate
governance
• To reduce accusations of self-interest in
the behaviour of executives
Threats to Independence
✓ Close family ties with directors
✓ Significant Shareholder
✓ Serving on the board for more than
5 years
✓ Employee in last 5 years
✓ Cross directorship in other
companies
✓ Material business relationship with
company in last 3 years
✓ Receive other remuneration from
the company besides director’s fee
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Effectiveness
To be effective, a NED needs to:

➢ build a recognition by executives of their contribution in order to promote

openness and trust
➢ be well informed about the company and the external environment in which it
operates
➢ have a strong command of issues related to the business
➢ insist on a comprehensive, formal and tailored induction, continually develop
and refresh their knowledge and skills to ensure that their contribution to the
board remains informed and relevant

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Nomination Committee

✓ The nomination Committee serves the role of ‘HR’ for the board
✓ It matters who is on the board and how the board is made up!
✓ In terms of best practice, majority of members should be NEDs
Main responsibilities
▪Regular review of board structure, size and composition
▪Consider balance of NEDs vs executives, diversity and skills
▪Provide a balance of power between CEO/Chair
▪Give full consideration to succession planning for directors
▪Identify and nominate candidates when vacancies arise
▪Make recommendations concerning reappointment

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 Audit Committee
Responsibilities include
➢ Monitoring the integrity of the financial statements of the
company
➢ Provide appropriate guidance on the clarity of financial
statements for stakeholders
➢ To review internal financial controls unless performed
by risk committee
➢ To monitor and review the effectiveness of the
company’s internal audit function and in the absence,
consider the need for one
➢ To make recommendations on the appointment, re-
appointment and removal of the external auditor

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Remuneration Committee
• The remuneration committee determines the organization’s general policy on
the remuneration of executive directors, the chair and senior managers.
• The remuneration committee should have at least 3 independent NEDs, or 2 in
the case of smaller companies

The following factors should be considered when determining the remuneration of

executive directors:
1. Clarity – transparent and fair
2. Simplicity –easy to understand
3. Risk – avoiding remuneration that affects the company’s reputation
4. Predictability – no surprises
5. Proportionality –link between reward, strategy and company performance
6. Culture – aligned to the values and strategy of the company
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 Risk Management Committee
The risk management committee should have at least 3 independent NEDs, or 2
in the case of smaller companies
Responsibilities include
➢ Approving the organization’s risk management strategy
➢ Reviewing reports on key risks
➢ Monitoring overall exposure to risks and ensures it remains within limits set by the
board
➢ Assessing the effectiveness of the organization’s risk management systems
➢ Providing early warning to the board on emerging risk issues and significant
changes in the exposure to risks
➢ Reviewing the company’s statement on internal controls in conjuction with the
audit committee

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Corporate Governance and CSR
The board should managing stakeholder’s interests for the following reasons:
• More informed board and management decision making
Corporate • Avoidance and reduction of business risks due to better
business intelligence
Value • Brand value and reputation
• Diverse perspectives encourage innovation

Rise in Shareholder
Activitism

Rise in Sustainable and

Responsible Investing

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Corporate Failure (Now)

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Is Corporate Governance useful?

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Think Time….