Module II: Corporate

Governance
Course coordinator: Dr. Noor Rizvi
Topics
• Objectives
• Need
• Principles
• The UK Corporate Governance Code
• Audit Committee
• Roles and responsibilities of the audit committee

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Introduction
Corporate governance is something altogether different from the daily operational
management activities enacted by a company’s executives. It is a system of direction and
control that dictates how a board of directors governs and oversees a company.

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Introduction
1. Corporate governance is the structure of rules, practices, and processes used to
direct and manage a company.
2. A company's board of directors is the primary force influencing corporate
governance.
3. Bad corporate governance can cast doubt on a company's operations and its ultimate
profitability.
4. Corporate governance entails the areas of environmental awareness, ethical
behavior, corporate strategy, compensation, and risk management.
5. The basic principles of corporate governance are accountability, transparency,
fairness, and responsibility.

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OBJECTIVES
๏ To ensure that the company’s assets are used efficiently and
productively and in the best interests of its shareholders and
other stakeholders;
๏ To eliminate or mitigate conflicts of interest, particularly
those between management and shareholders.

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NEED
• In large companies many shareholders are relatively passive,
and the BOD is given free rein to make whatever decisions
they wish.
• Auditing was instituted so at least once a year, when the
financial statements (FS) were presented to the members of
the company, the auditors would examine them and give
some expression of opinion to the members of the company
as to whether the financial statements were true and fair.
• The auditors therefore examine the financial statements, and
this adds credibility to those statements.

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Principles of corporate governance
By: Organisation of Economic Cooperation Development(OECD)in 1999

๏ It should promote transparent and fair markets and support effective

supervision and enforcement.
๏ It should protect shareholders' rights and ensure all are fairly treated (ie
including minority shareholders).
๏ It should provide for stock markets to contribute to good corporate
governance (eg by prohibiting insider trading).
๏ It should recognise the rights of all stakeholders, not just shareholders.
๏ It should ensure timely and accurate disclosure of all material matters,
including financial position, performance, ownership and governance.
๏ It should ensure the strategic guidance of the entity, effective monitoring
of management by the board and the board’s accountability to the entity
and their shareholders. 8
 The UK Corporate Governance Code
The Principles of the Code emphasise the value of good
corporate governance to the long-term success of the company.

Main principles of the UK Code:

๏ Board Leadership and Company Purpose
๏ Division of Responsibilities
๏ Composition, Succession and Evaluation
๏ Audit, Risk and Internal Control
๏ Remuneration
 The ACCA has specified that for AA, the UK C G Code published by the Financial Reporting Council (FRC) is an example of best
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practice.
Comply or explain
“comply or explain’’ approach: trademark of corporate governance in the UK

The Code has no force in law and is enforced on listed

companies through the Stock Exchange.

Listed companies must state that they have complied with the
code or else explain to shareholders why they haven’t. This
allows some flexibility.

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Board Leadership and Company Purpose

๏ Every company should be headed by an effective board which is

collectively responsible for the long-term success of the company.

๏ All directors must act with integrity, lead by example and promote
the desired culture.

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Division of Responsibilities
• No one individual should dominate decision making (to avoid
concentration of power).
• Split between chairperson and CEO
• The chair is responsible for leadership of the board and should be
independent on appointment (e.g. not an employee within the last 5
years).
• At least half the board should be non-executive directors (NEDs) who are
considered independent (e.g. no close family ties with executive directors,
no significant shareholdings, etc).
• NEDs should provide constructive challenge and strategic guidance and
hold management to account.

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Composition, Succession and Evaluation
• Appointments to the board should be subject to a formal, rigorous and
transparent procedure led by a nomination committee. Most of the
committee should be independent NEDs (atleast 50%).
• The board and its committees should have a combination of skills,
experience and knowledge.
• The length of service of the board should be considered and membership
regularly refreshed. The post of chair should not be held beyond nine
years.
• The board should undertake a formal and rigorous annual evaluation of
its own performance and that of its committees and individual directors.
• All directors should be submitted for re-election annually.

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Audit, Risk and Internal Control

• The board should establish formal and transparent policies and

procedures to ensure the independence and effectiveness of internal
and external audit and the integrity of financial statements.
• The board should present a fair, balanced and understandable
assessment of the company’s position and prospects.
• The board should establish procedures to manage risk, oversee internal
controls and determine the nature and extent of the principal risks the
company is willing to take to achieve its long-term strategic objectives.
• The board should establish an audit committee of independent NEDs.

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Remuneration
In essence, remuneration should be sufficient to attract, retain and motivate directors of
sufficient quality… but avoid paying more than is necessary.

• A significant proportion of executive directors’ remuneration may be structured to link

rewards to corporate and individual performance.

• Directors should not receive high pay irrespective of company performance.

• 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 his or her own remuneration. This means
that a remuneration committee (NEDs) should be formed to fix directors’
remuneration.
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The audit committee
The audit committee should be composed of independent
NEDs:
• a minimum of three members (or two for smaller companies);
• the chair of the board should not be a member;
• at least one member must have recent and relevant financial
experience;
• the committee must have competence in the relevant
business sector.

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Main roles and responsibilities of the audit
committee

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Bad corporate governance
Volkswagen- Dieselgate
The development of the details of "Dieselgate" (as the affair came to be known) revealed that for years
the automaker had deliberately and systematically rigged engine emission equipment in its cars in order
to manipulate pollution test results in America and Europe. Volkswagen saw its stock shed nearly half
its value in the days following the start of the scandal and its global sales in the first full month following
the news fell 4.5%.

VW's board structure was a reason for how the emissions rigging took place and was not caught earlier.
In contrast to a one-tier board system that is common in most companies, VW has a two-tier board
system, which consists of a management board and a supervisory board. The supervisory board was
meant to monitor management and approve corporate decisions, however, it lacked the independence
and authority to be able to carry out these roles.

The supervisory board comprised a large portion of shareholders. Ninety percent of shareholder voting
rights were controlled by members of the supervisory board. There was no real independent
supervisor; shareholders were in control of the supervisory board which canceled out the purpose of
the supervisory board, which was to oversee management and employees and how they operate within
the company, which of course included rigging emissions. 18
THANK YOU

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