United Kingdom Company Law – Corporate Governance [Part 2]

OECD principles

The organization for economic co-operation and development (OECD) has developed a set of principles that leads corporate governance in more than thirty countries.

These principles also deal with governance issues and problems, issues of ethical concern and environmental issues.

These principles categorized into five broad areas.

• Rights of shareholders
• Equitable treatment of shareholders
• Role of stakeholders
• Disclosure and transparency
• The responsibilities of the board

Rights of shareholders

According to these principles the shareholders of the company must have following rights;

• Right to participate and vote in annual general meetings
• Right to elect members of board
• Right to appoint and remove auditors
• Right to receive annual accounts and other material information

Equitable treatment of shareholders

Shareholders of the company may participate from all over the world through financial markets by putting investment. It may create differentiation but it must be removed by treating all class shareholders equally including minority shareholders or overseas. The rights of shareholders must be protected by the directors and managers protested against the variation of class rights.

Protection of stakeholders

As we know about the stakeholders, according to these principles the rights of all stakeholders must be protected as they are important to develop corporate structure.

In the companies a system must be developed in which all the employees from lower level had easy access towards their seniors to discuss their problems. It may enhance the better communication system in the organization. 

Disclosure and transparency

A disclosure is necessary in all material cases regarding the company.

For example disclosure must be given in case of financial issues, foreseeable risk factors, control systems, structure and policies of the companies.

These disclosures may enhance the trust of investors and other stakeholders which leads to more investment and more business.

Responsibilities of the board

Board which may consist of executive and non executive directors is responsible to control measure and monitor the performance of overall management. All the board members should maintain the relation of good faith with other employees and with the company also and take decisions in the best interest of shareholders. The board members must show independent judgment in all types of decisions.

Other aspects of corporate governance under UK corporate governance codes

Some other aspects of governance are discussed here;

• Leadership
• Effectiveness
• Accountability
• Director’s remuneration
• Relations with shareholders

For completion of every task there is a need of leader to make it possible. In the companies also a system of leadership is maintained for the long term success of the company. The role of leadership is provided by the collective board consist of independent non-executive directors.

Board is responsible to maintain the governance structure and giving overall direction to the company and setting the strategies for the business.

The board may consist of following people with clear responsibilities.

• Chairman
• Non-executive directors

Chairman

The chairman is the leading person at the board and oversight the overall board including non-executive directors. The chairman has authority to precede all types of meetings and set the agenda to discuss in the meeting. All the strategic matters discussed with the chairman because strategies and policies are developed by the leading person in the board.

The chairman must ensure that board must receive accurate and timely information by the management to take right decision making.

Non-executive directors

After the chairman the non-executive directors challenge the strategy and oversight the overall board and report to the chairman.

They play significant role in decision making and determining the actions of executive directors. Their roles are more significant with an independent judgment. They should monitor the performance of management against the objectives of the company.

So from above it is concluded that the responsibilities of chairman and non executive directors must be separate with persons of power.

An effective system of corporate governance developed if the overall board works under an accurate system with following aspects.

Composition of Board

As it is discussed before that the board is composed of executive and non-executive directors, so there must be a balance between NEDs and EDs to make it sufficient for managing the operations. Half of the board members must be independent non-executive director for public listed companies.

All the board members must have unique skills, experience, independence and knowledge of the company.

Induction and development

An ongoing process of induction and development must be maintained in the companies and should be updated regularly to refresh the skills and knowledge of board members.

Appointments of the board

There must be a formal system of appointment for the board. All the directors and other senior officers should be appointed on merit against the due objectives. For this purpose a nomination committee should be established so to make this process more effective and easy.-election should be developed which the members have to follow before re-election.

Re-election process

Directors and auditors are entitled to re-elect in the companies though voting or applying for re-election in annual general meetings. So a proper system of r

 Commitment to the board

All the board members should be committed to their work and discharge their duties on regular basis. The behavior of seniors leads the other management to be committed regularly and ultimately objectives of the company will be achieved.

Information system

The board should be supported with an accurate and timely information system so that all the board members discharge their duties with an efficient manner.

This system provides a source of knowledge about all the transactions, decisions and functions of the business. From this a good communication system is flowed between seniors and lower management.

Evaluation system

As we know that when we implement any control then we monitor the whole process to get better results. Is the same way an evaluation system should also be maintained in the companies which measure the performance of all systems, procedures and the individuals also so that it is get ensured that an effective board system is working.

Accountability is the factor which makes the person to be answerable against the duty or responsibility towards the individuals who have assigned the responsibility or duty.

In any corporate sector this factor is seen with the hierarchy maintained in the companies. We all know that in all organizations and companies the juniors are accountable towards their seniors against the work assigned by them. They are answerable weather they have completed their duty or not.

Despite of this individual reporting an overall system of corporate reporting is also maintained through following aspects;

• Financial reporting
• Risk management and internal control reporting
• Audit committee and audit reporting

The overall company’s position and performance is shown through financial reports annually or quarterly. In these reports directors are reporting about their duties and explain the basis on which they have achieved the objectives of the business and discuss also about the future prospects.

Directors also report on the going concern status of the business.

The board is responsible to determine the factors which may create risks through establishing risk committee which measure risks and implement controls to reduce the level of risk. All the directors are responsible to maintain good and sound system of controls and monitoring risk management and then report to the shareholders that they have done their duties successfully in this matter.

Under the corporate governance system an audit committee should be developed which monitor the accounts, internal controls and functions independently because audit committee consist of independent NEDs.

All the internal systems are checked by the internal auditors and they make recommendation to improve the systems which are weak or not achieving the overall objectives.

They also help the external auditors by giving correct reports so that they can easily review the whole systems and finally prepare audit reports which clearly explain that weather the accounts are giving true picture or not.

The remuneration of directors is another main and subjective matter in all of the companies and organizations where there is separation of ownership and management.

The companies must follow a formal system in which remuneration packages are decided.

A remuneration committee must be established for executive remuneration which consists of independent non-executive directors. Directors are avoided to set their own remuneration. And the remuneration of non-executive directors set by the shareholders and the chairman of the board.

A remuneration package may be consisting of basis salary, incentives, bonuses, bonus issues (shares) and the other non monitory benefits. The remuneration must be sufficient to retain and motivate them because they are precious to the company if they are competent.

The remuneration committee should set the package with and independent judgment and according to the performance of directors.

The board must keep a good communication system with all of the company’s shareholders and especially the major shareholders to understand their problems and issues.

Different types of meetings can be organized for this purpose like the annual general meetings (AGM) and extraordinary general meetings (EGM).

In annual general meetings all the investors are invited to share the knowledge and agenda set by the directors. The chairman of the meeting proposes a resolution for each separate issue in the organization and requires the willingness of shareholders. All the necessary steps are taken by the permission of shareholders because they are the actual owners.

It is concluded that all the above aspects must be followed in all the companies to achieve better results.