P1 GOVERNANCE, RISK

AND ETHICS
Lecture 3
Nearchos A. Ioannou
M Acc, ACCA ,CFE
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Role of the Board

The board should be responsible for taking
major policy and strategic decisions.
Directors should have a mix of skills and
their performance should be assessed
regularly.
Appointments should be conducted by
formal procedures administered by a
nomination committee

South African King Report on

directors
To define the purpose of the company

and the values by which the company

will perform its daily existence and to
identify the stakeholders relevant to
the business of the company. The board
must then develop a strategy
combining all three factors and ensure
management implements that strategy.
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UK Higgs report an alternative

definition
The board is collectively responsible for

promoting the success of the company by

directing and supervising the companys
affairs.
The boards role is to provide
entrepreneurial leadership of the
company, within a framework of prudent
and effective controls which enable risk to
be assessed and managed.
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Scope and Role

Effective boards must meet

frequently
The Singapore code of corporate
Governance emphasises the need of
boards to meet regularly and as
warranted by circumstances.

Nomination committee
In order to ensure that the balance of
the board is maintained, corprorate
governance codes recommend the
board should set up a nomination
committee, to oversee the process of
board appointments and make
recommendations to the board.

Nominee committee (cont)

It needs to consider:
The balance between executives and non-

executives
The skills knowledge and experience
possessed by the current board
The need for continuity and succession
planning.
The size of the board
The need to attract board members from a
diversity of backgrounds
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UK Higgs report
It provides a detailed guidance on

the development of an induction

programme tailored to the needs of
the company and individual
directors.

UK Higgs report (cont)

Build an

understanding of
the nature of the
company its
business and its
markets

Products and

services
Group structures
Key performance
indicators
Regulatory
constrains

UK Higgs report (cont)

Build a link with
the companys
people

Meeting with senior

staff
Visits to company
sites and other HQ
to learn about
products and
services, meet with
employees

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UK Higgs report (cont)

Build an

understanding of
the companys
main relationships
including meeting
with the auditors

Major customers
Major suppliers
Major Shareholders
and customer
relations policy

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Performance of board
On the following criteria:
Performance against objectives
Responses to problems or crisis
Internal and external communication
Quality of information
Quality of feedback provided to management.
Fulfilling legal requirements.
Board fully informed of latest developments
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Types of board (Rubber

Stamp)
Makes clear decisions
Listens to in-house

expertise
Ensures decisions are
implemented

Fails to consider

alternatives
Dominated by
executives
Relies on fed information
Focuses on supporting
evidence
Does not listen to
criticism
Role of non-executives
limited
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Talking shop
All opinions give
equal weight
All opinions
considered

No effective

decision making
process
Lack of directions
from chairman
Failure to focus on
critical issues
No evaluation of
previous decisions
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The number crunches

Short-term needs of

Excessive focus on

investors considered
Prudent decisionmaking

financial impact
Lack of long-term
wider awareness
Lack of diversity of
board members
Impact of social and
environmental issues
ignored
Risk averse
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The Dreamers
Strong long-term

focus
Long-term
strategies
Consider social and
environmental
implications

Insufficient current
focus
Fail to identify or
manage key risks
Excessively
optimistic

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The adrenalin junkies

Clear decisions
Decisions
implemented

Lurch from crisis to

crisis
Excessive focus on
short-term
Lack of strategic
decision
Internal focus
Tendency to micromanage

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The semi-detached
Strong focus on
external
environment
Intellectually
challenging

Out of touch with

the company
Little attempt to
implement
decisions
Poor monitoring of
decision making

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Performance of chairman and

CEO
This should be carried out by non-

executives, but all directors should

have some form of individual
appraisal.
Consider the following:
Independence, preparedness,
committee work, development of the
organisation
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Legal rights
Directors are entitles to fees and

expenses as directors according to

the companys constitution.
Directors have a duty of care to show
reasonable competence and may
have to indemnify the company
against loss caused by their
negligence
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Legal issues(cont)
A director is required to attend the board

meetings when he is able but he has no

duty to concern himself with the affairs of
the company at other times
He is entitled to leave the routine conduct
of the business in the hands of
management and may trust them,
accepting the information and
explanations they provide.
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Conflict and disclosure of

interest
As agents directors have a duty to

avoid any conflict of interests.

Any action against the director in
connection with a conflict of interest
will normally be taken by the company
The type of remedy will vary on the
breach of duty
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Some remedy
Director may have to account for a
personal gain.
The court may declare that
transaction is unlawful.

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Time-limited appointments
Some roles particularly the CEO or

chairman may be for a fixed period.

Ordinary directors may have to retire
from the board on reaching a
retirement age(65 or 70) and may or
may not be able to seek re-election.

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Service contracts
They set out terms and conditions of
directors appointment, including the
duration of the appointment or the
required minimum period of notice.
Contracts may be available to the
shareholders for inspections

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Retirement by rotation
Directors are often required to retire from

the board and seek re-election the latest

once every three years.
Directors will generally be entitled to
seek re-election if they have retired by
rotation. However, retirement by rotation
provisions allow shareholders a regular
opportunity to vote directors out of office.
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Departure from office

He may leave the office in the following ways:
Resignation (written notice may be required)
Not offering himself for re-election when his
term of office ends
Death
Dissolution of the company
Being removed from office
Being disqualified

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Disqualification
Directors may be disqualified if they

become bankrupt, suffer mental

disorder or being absent from court
without permission
Legally disqualified by court. Possible
disqualification may include failing to
keep proper accounting records and
trading when their company is insolvent
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Insider dealing/trading
In some regimes a criminal offence in

using inside information to buy or sell

shares in a stock market.
Insider information, information not
yet made public.It is an abuse of
directors roles as agents.

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Board membership and

roles
Size with greater size come greater

opportunities for representation of

varied views.
Inside/Outside mix What proportion
should be executive and what nonexecutive
Diversity From various
backgrounds and genders.
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Chairman and CEO

Chairman Heading the board of
directors
CEO Leading the management
team and below board level

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Role of chairman
Running board and setting agenda
Ensuring that the board receives accurate and
timely information
Ensures effective communication with
shareholders
Ensures time allowed for discussion is
sufficient
Taking the lead in providing an induction
programme for new directors
Facilitating board appraisal

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Role of the CEO

Running the organisations business
Proposing and developing group

strategy
Implementing decisions of the board
Developing the main policy statements
Reviewing organisation structure and
performance
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Board Committees
Internal audit
Nomination
Remuneration
Risk committee Responsible for

overseeing the organisations risk

response and management
strategies
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Unitary boards Vs Multi-tier

boards
Unitary boarda single board
Multi-tier board split executives
and other directors.

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Advantages Unitary board

If all directors attend the same

meetings highly unlikely that nonexecutives will be excluded from

decision making.
Relationship of directors better.
Better decision making.

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Disadvantages unitary
board
Asking a non-executive to be a manager and

monitor is a demanding task

Time requirements of non-executives may be
onerous in terms of time spent in board
meetings and the commitment required to
obtain sufficient knowledge about the
company.
It makes no specific provision for employees to
be represented on the management board.
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Advantages of multi-tier
boards
Clear separation between the monitors

and those being monitored

The supervisory board acts as a
safeguard against management
inefficiency
The supervisory board takes account of
needs of stakeholders other than the
shareholders, especially employees
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Disadvantages of multi-tiers
Confusion over authority and lack of

accountability
Not very effective since the
management board may restrict the
flow of information to the supervisory
board

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Remuneration of nonexecutives
The board of shareholders should

determine the remuneration of nonexecutives within the limits described

by the companys constitution.

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Disclosures in the annual

report
Remuneration policy
Arrangements for individual directors
Duration of contracts with directors
Remuneration package of top 5 key
executives (Singapore code of CG)

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Proxy votes
A proxy is a person appointed by a

shareholder to vote on behalf of that

shareholder at company meetings.

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Myners Report
It aimed to address concerns about

problems in administering proxy

votes and the beneficial owners not
taking sufficient interest in the votes

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Myners Report
Reccomendations
Adoption of electronic voting to enhance

the efficiency of the voting process and

reduce the loss of proxy votes
Report comes down against stock lending.
Investment managers should report to
their clients how they have exercised their
voting responsibilities.
Votes at meetings decided on the show of
hands, with one vote per member present
unless a poll is called.
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Question 3
Make use of all matters raised in the
corporate governance Part.

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