CPA: CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Corporate governance is the system by which companies are directed and controlled. Good corporate

governance is important because the owners of a company and the people who manage the company are not always the same.

Principles of corporate governance

• The board

1. Every company should be headed by an effective board, which is collectively responsible for the success of the company.
2. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

• The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.

1. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
2. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.
3. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

• 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 at regular intervals, subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board.
• Remuneration

1. Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.
2. 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 remuneration.

• Accountability and audit

1. The board should present a balanced and understandable assessment of the company’s position and prospects.
2. The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.

• The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors.
• Relations with shareholders

1. There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that satisfactory dialogue with shareholders takes place.
2. The board should use the AGM to communicate with investors and to encourage their participation.

• Institutional shareholders

1. Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives.
2. Institutional shareholders have a responsibility to make considered use of their votes.

Importance of corporate governance

1. The corporate governance framework promotes transparent and efficient markets, and ensures consistency with the rule of law and clearly articulates the division of responsibilities among different supervisory, regulatory and enforcement authorities.

II The corporate governance framework protects shareholders’ rights.

III The corporate governance framework ensures the equitable treatment of all shareholders,

including minority and foreign shareholders. All shareholders have the opportunity to obtain

effective redress for violation of their rights.

IV The corporate governance framework recognizes the rights of stakeholders established by

law or through mutual agreements and encourages active co-operation between corporations and

stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises.

V The corporate governance framework ensures that timely and accurate disclosure is made

on all material matters regarding the corporation, including the financial situation, performance,

ownership, and governance of the company.

VI The corporate governance framework ensures the strategic guidance of the company, the

effective monitoring of management by the board, and the board’s accountability to the company

and the shareholders.

AUDIT COMMITTEES

An audit committee can help a company maintain objectivity with regard to financial reporting and the

audit of financial statements. An audit committee is a sub-committee of the board of directors, usually containing a number of non-executive directors

 

 

BENEFITS OF AUDIT COMMITTEES

1. Improve the quality of financial reporting, by reviewing the financial statements on behalf of the Board
2. Create a climate of discipline and control which will reduce the opportunity for fraud

• Enable the non-executive directors to contribute an independent judgement and play a positive role

1. Help the finance director, by providing a forum in which he can raise issues of concern, and which he can use to get things done which might otherwise be difficult
2. Strengthen the position of the external auditor, by providing a channel of communication and forum for issues of concern
3. Provide a framework within which the external auditor can assert his independence in the event of a dispute with management

• Strengthen the position of the internal audit function, by providing a greater degree of independence from management
• Increase public confidence in the credibility and objectivity of financial statements

ROLES AND RESPONSIBILITIES OF AUDIT COMMITTEES

The board should establish an audit committee of at least three, or in the case of smaller companies,

two members, who should all be independent non-executive directors.

The main role and responsibilities should be set out in written terms of reference and should include:

(a) To monitor the integrity of the financial statements of the company and any formal

announcements relating to the company’s financial performance, reviewing significant financial reporting issues and judgements contained in them

(b) To review the company’s internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors or by the board itself, the company’s control and risk management systems

(c) To monitor and review the effectiveness of the company’s internal audit function

(d) To make recommendations to the board for it to put to the shareholders for their approval in general meeting in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditors

(e) To monitor and review the external auditor’s independence, objectivity and effectiveness, taking into consideration relevant professional and regulatory requirements

(f) To develop and implement policy on engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provisions of non-audit services by the external audit firm and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed, and making recommendations as to the steps to be taken.

The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. A separate section of the annual report should describe the work of the committee in discharging those responsibilities.

• The audit committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
• The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report.
• The audit committee should have primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditors. If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or re-appointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position.
• The annual report should explain to shareholders how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded.

Drawbacks of audit committee

Opponents of audit committees argue that:

(a) The executive directors may not understand the purpose of an audit committee and may perceive

that it detracts from their authority.

(b) There may be difficulty selecting sufficient non-executive directors with the necessary competence

in auditing matters for the committee to be really effective.

(c) The establishment of such a formalised reporting procedure may dissuade the auditors from

raising matters of judgement and limit them to reporting only on matters of fact.

(d) Costs may be increased.