CG Chapter 2 Latest

7/21/2019 CG Chapter 2 Latest

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PRINCIPLES OFCORPORATE GOVERNANCE

Chapter 21


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Objective

To understand the governance structure.

To have a detailed understanding of the roles,

duties and responsibilities of directors.

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1. Elements of Coror!teGovern!nce

Good Board practices

Control Environment

Transparent disclosure

Well-defned shareholder rights

Board commitment

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Goo" #o!r" Pr!ctices

Clearly defined roles and authorities

Duties and responsibilities of Directors

understood

Board is well structured

Appropriate composition and mix of skills

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Goo" #o!r" roce"$res

Appropriate Board procedures

Director emuneration in line with bestpractice

Board self!evaluation and training conducted

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Control Environment

"nternal control procedures

isk management framework present

"ndependent external auditor conducts audits

"ndependent audit committee established

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Control Environment

"nternal Audit #unction

Compliance #unction established

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Tr!ns!rent %isclos$re

Fin!nci!l Inform!tion "isclose"

Non&Fin!nci!l Inform!tion "isclose"

Fin!nci!ls re!re" !ccor"in' toIntern!tion!l Fin!nci!l Reortin'St!n"!r"s (IFRS)

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*ell&%e+ne"

S,!re,ol"er Ri',ts $inority shareholder rights formalised

%ell!organised shareholder meetingsconducted

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Board Commitment

The Board discusses corporate governance

issues and has created a corporate governance

committee

The company has a corporate governancechampion

A corporate governance improvement plan has

been created

Appropriate resources are committed to

corporate governance initiatives

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Board Commitment

&olicies and procedures have been formalised

and distributed to relevant staff

A corporate governance code has been

developedA code of ethics has been developed

The company is recognised as a corporate

governance leader

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Ot,er Entities

Corporate 'overnance applies to all types of

organisations not (ust companies in the

private sector but also in the not for profit and

public sectors

)xamples are *'+s, schools, hospitals,

pension funds, state!owned enterprises

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2. Directors and Board Structure

hareholders Board tructure

-nitary board or two tier dual/ board

structure Board of Directors

ome key board roles

0ey Board Committees

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S,!re,ol"ers

The term 1shareholders2 may seem 3uitestraightforward but shareholders may be

individuals, institutions, firms, or other entities

that own shares in a company.

"n the -0 and - there is a predominance of

institutional shareholders4 for example,

pension funds, insurance companies, mutual

funds.

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St!-e,ol"ers

The term 1stakeholders2 can encompass a

wide range of interests4 it is any individual or

group on which the activities of the company

have an impact.

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#o!r" str$ct$re

-nitary board or two tier dual/ board structure.

"mplications of board structure

)xamples of unitary structure

)xamples of two tier structure

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nit!r/ #o!r"

"s the traditional Anglo!American form of company.

A unitary board structure means that the

organisation is governed by a single decision

making body. "s characteri5ed by one single board comprising

both executive and non!executive directors.

The unitary board is responsible for all aspect of

the company2s activities. The shareholders elect

the directors to the board at company2s A'$.

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T0o tier (%$!l) #o!r"

A dual board system consists of a supervisoryboard and executive board of management. The supervisory board overseas the direction of

the business, whilst the management board is

responsible for the running of the business. 0ey operation decisions are taken by a

management board, which is accountable to asenior supervisory board.

The supervisory board exercises powers forstrategic decisions and non!operationaldecisions, such as financing and dividend policy.

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T0o tier (%$!l) #o!r"

"t comprises a board of non executives directors,found.

A management board comprises of executivemanagers, chaired by C)+

The chairman of the management board reports tothe chairman of the supervisory board.

$embers of one board cannot be members ofanother.

hareholders appoint the members of thesupervisory board, whilst the supervisory boardappoints the members of management board.

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One !n" t0o tier bo!r"

str$ct$res +ne tier system4 closer relationship and betterinformation flow

Two tier system4 embodies a clearer, formal

separation between the supervisory body andthose being 1supervised2

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One !n" t0o tier bo!r"str$ct$res 6owever whether the structure is one tier or

two tier, many codes show consensus onissues relating to board structure, function,roles, and responsibilities.

&rovisions designed to enhance the distinctionbetween the roles of the supervisory andmanagerial bodies, such as supervisory bodyindependence, separation of Chairman and

C)+ roles, reliance on board committees.

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Est!blis,in' T,e

#o!r" tep 9 )stablished a well!ordered process to elect and

appoint board and board committee members.

tep : Develop key performance indicators for directors.

tep ; Annual assessment of the effectiveness and

contribution of the board, its committees and

individuals directors

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Role of t,e #o!r"

The board is responsible for4 Determining the company2s aim and the

strategies, plans and policies to achieve those

aims. $onitoring progress in the achievement of

those aims.

Appointing a C)+ with appropriate leadership

3ualities

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Role o the Board

Board must achieve three core ob(ectives4

&rovide superior strategic guidance to ensure thecompany2s growth and prosperity,

)nsure accountability of the company to itsstakeholders including shareholders, employees,customers, suppliers, regulators and the community.

)nsure that a highly 3ualified executive team ismanaging the company.

Decisions relating to board composition and structureare importance in determining whether and to whatextend, the board is successful in achieving theseob(ectives

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Princile Resonsibilities of t,e#o!r" & CCG

A board is reuired to e!plicitl" assumethe si! specifc responsibilit" o the boardRevie#ing and adopting a strategic plan

or the compan"$%verseeing the conduct o thecompan"&s business to evaluate #hetherthe business is being properl" managed$'denti"ing principal ris(s and ensuringthe implementation o appropriates"stems to manage these ris(s$

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Princile Resonsibilities of t,e#o!r" & CCG

)uccession planning* including appointing*training* f!ing the compensation o and #hereappropriate* replacing senior management$

+eveloping and implementing an investor

relations programme or shareholdercommunications polic" or the compan"

Revie#ing the adeuac" and the integrit" othe compan"&s internal control s"stems and

management inormation s"stems* includings"stems and management or compliance #ithapplicable la#s* regulations* rules* directivesand guidelines$

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%irectors2 Core %$ties & CCG

,$ iduciar" dut" The dut" to act in good aith

+irectors must act honestl" in line #ith #hat the"believe to be the compan"&s interest$

The dut" to e!ercise po#er or a properpurpose A director must at all times e!ercise his po#ers

or a proper purposes and in good aith* in the

best interest o the compan"$ The dut" to e!ercise discretion properl"

A director has #ide latitude in e!ercising thepo#ers vested in him under articles o associationand he must e!ercise them properl"$

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%irectors2 Core %$ties

The dut" to avoid con.ict and sel-dealingThe improper use o a compan"&s propert"* position*

corporate opportunit" or competing #ith the compan"b" a director or an o/cer o a compan" is prohibitedunless #ith a consent o a general meeting

2$ +ut" to use reasonable care s(ill and diligence A director is reuired to e!ercise reasonable care*

s(ill and diligence according to the (no#ledge* s(illand e!perience #hich ma" reasonabl" be e!pected

o a director having the same responsibilities* andbased on the act * an" additional (no#ledge* s(illand e!perience #hich the director in act has$

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#o!r" Le!"ers,i !n"Cometencies A balanced board avoids the ris( o

being nominated b" an individual ora small group #ithin management$

Wider s(ill sets #ill promote broad-based competencies #ith a pluralit"o vie#points that acilitate sound

and constructive decision-ma(ing$

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Core Cometencies

0ersonal1ualities eadership

)trategic Wor( ethics 0roessionalis

m

Competencies 'ndustr"

(no#ledge

Business3udgment

E!pertise

)pecial s(ills

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In"een"ent %irectors

A board is strengthened signifcantl"b" a group o non-e!ecutive directors#ho have no connection #ith the

compan"$ 'ndependent directors are essential

or protecting the interests o minorit"

shareholders and can ma(e signifcantcontributions to a compan"&s decisionma(ing$

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Some -e/ bo!r" roles

Chief )xecutive +fficer C)+/

Chairman

enior "ndependent Director

Company ecretary

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Role of C,!irm!n

$onitor the workings of the board, especially theconduct of board meetings

)nsure that all relevant issues for the effective runningof company2s business are on agenda.

)nsure that 3uality information to facilitate decisionmaking delivered to board members on a timely basis.

)ncourage all directors to play an active role in boardactivities.

Chair general meetings of shareholders.


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Role of CEO

The role o CE% is seen as critical to theperormance o compan"$ A CE% is e!pectedto provide4

eadership)trategic vision5igh- level business 3udgment and #isdom$The abilit" to meet immediate perormance

targets #ithout neglecting longer-termgro#th opportunities o the compan"$

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Senior In"een"ent%irectorAct as =deputy= to the Chairman of the Board as

and when re3uired.

Chair meetings with the other non!executive

directors without the Chairman being present/encouraging open dialogue, particularly

regarding the Chairman>s performance.

Be available to shareholders in case they have

concerns which cannot, or should not, be

addressed by the Chairman or )xecutive

Directors.

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Senior In"een"ent%irectorAct on the results of any performance evaluation

of the Chairman.

$aintain sufficient contact with ma(or

shareholders, when re3uested, to understandtheir issues and concerns thereby assisting the

Board to develop a balanced understanding.

Attend the Company>s A'$ and be available fordiscussion with shareholders.

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Com!n/ Secret!r/

$ust act in good faith and avoid conflict ofinterest.

esponsibilities4

#acilitating the work of the board by ensuringthat the directors have all information they need

for the main board and board subcommittees.

Advise the boards via the chairman on all

governance matters.

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Role of t,e Com!n/Secret!r/& CCG

7. "mplementation of corporate governance

8. upports the board and chairman

9. Appointment a new directors

:. Compliance with filling and administrative

re3uirements.

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#o!r" Committees

Boards can delegate po#ers to committees butsuch delegation should be sub3ect to theollo#ing4 +elegated authorit" in accordance #ith the

compan"&s Articles o Association$ Clearl" established terms o reerence*

defning their responsibilities and authorit"*#hich are approved b" board$

The board must supervise its delegation$ The board must not merel" adopt or rel" on

the committee&s recommendations #ithoutproper assessment and testing or challengingthe same$

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3e/ #o!r" Committees

The board may appoint various subcommittees4

Audit committee

emuneration committee

*omination committee

isk committee

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A$"it Committee

The audit committee is fundamental to the

concept of corporate accountability and

sound governance.

An audit committee provides the board

with assurance of the 3uality and reliability

of financial information used by the board

and of the financial information issuespublicly by the company.

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A$"it Committee

The Audit Committee2s primary duties and responsibilitiesare to4$onitor the integrity of the Company2s internal controlsover financial reporting.

$onitor the 3ualifications, independence and performanceof the Company2s independent auditor and internal auditingfunction.&rovide a channel of communication among the Board, theindependent auditor, internal auditing function, managementand other concerned individuals.As a committee of the Board of Directors, assist the Boardin meeting its fiduciary duties to shareholders and theCompany.

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Rem$ner!tion committee

The remuneration committee is established to ensurethat remuneration arrangements support the strategicaims of the business and enable the recruitment,motivation and retention of senior executives while

complying with the re3uirements of regulatory andgovernance bodies, satisfying the expectations ofshareholders and remaining consistent with theexpectations of the wider employee population.

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Rem$ner!tion committee

A remuneration committee will, in accordance with theCode2s provisions, commonly have delegated authorityto set executive pay. "ts proposals will be discussedwith the chairman and@or chief executive, and there

may be a broad policy on directors2 pay agreed withthe board, but the responsibility will lie with thecommittee, not the board.

By contrast, the nomination committee will usually

make recommendations to the full board and leave thefinal decision to the board as a whole. $embership ofthese committees is closely defined by the Code.

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Nomin!tion Committee

The nomination committee has tworesponsibilities4 identifying and nominatingdirectors and evaluating them on an annual basis.

The board of every company should appoint acommittee of directors composed exclusively ofnon!executive directors, a ma(ority of whom areindependent, with the responsibility for proposingnew nominees to the board and for assessing

directors on an ongoing basis. The actual decision as to who should benominated should be the responsibility of the fullboard after considering the recommendations ofsuch a committee $CC'/

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Potenti!l A" 4ocCommittees

The following list is not intended tosuggest that all of these committeesshould exist; it's ultimately up to theorganization to determine whichcommittees should exist and what they

should do.

C!m!i'n(nonproft)

Pl!ns !n" coor"in!tes m!jor f$n"r!isin'event5 sometimes ! s$bcommittee of t,eF$n"r!isin' Committee

Ethics+evelops and applies guidelines or ensuringethical behavior and resolving ethical con.icts

Events 6or 0rograms70lans and coordinates ma3or events* such asundraising (nonprots)* team-building or planning8sometimes a subcommittee o the undraisingCommittee

ResearchConducts specifc research and9or data gatheringto ma(e decisions about a current ma3or unction in

the organi:ation

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Potenti!l A" 4oc Committees

Campaign(nonprot)

0lans and coordinates ma3or undraisingevent8 sometimes a subcommittee othe undraising Committee

Ethics+evelops and applies guidelines orensuring ethical behavior and resolvingethical con.icts

Events 6or0rograms7

0lans and coordinates ma3or events*such as undraising (nonprots)* team-building or planning8 sometimes asubcommittee o the undraisingCommittee

Research

Conducts specifc research and9or data

gathering to ma(e decisions about a

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Non&e6ec$tive "irectors(NE%s)

&rovide a control or counterweight to theexecutive directors, that is, independent non!

executive directors help provide balance on the

board

Contribution to the overall leadership and

development of the company

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In"een"ence of NE%s

1"ndependence2 means that the non!executivedirector is not4

)mployed by the company

#ormer employee of company within last ;years/ Closely related to the company by economic or

other ties

Closely related to the directors or advisers of thecompany no family ties/ erving on board for more than 7 years epresenting a significant shareholder

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Concl$"in' comments

Boards may be one tier unitary/ or two tierdual/

-nder both types of system there is usually a

supervisory function and a managerial functiona distinction more formalised in the two tiersystem/

ole, duties, and responsibilities of directors

concern strategic decisions based on ade3uateinformation, and with accountability toshareholders and other stakeholders asappropriate/.

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#est Pr!ctice in Coror!te


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#est Pr!ctice in Coror!teGovern!nce

There is no single model of good corporategovernance.

&rinciples and best practices recommendations

in code of corporate governance differences

between countries/

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