AFMP4
Syllabus A. Role Of The Senior Financial Adviser A3. Ethical and governance issues

A3f. Governance structures and policies 5 / 7

Syllabus A3f)

Establish an ethical financial policy for the financial management of the organisation which is grounded in good governance, the highest standards of probity and is fully aligned with the ethical principles of the Association.

UK corporate governance

In the UK there are 3 main reports recommending best practice in Corporate Governance

  1. The Cadbury report

  2. The Greenbury report

  3. Hampel report

The reports recommend:

  • Separate MD & chairman

  • Minimum 50% non executive directors
    (NEDs)

  • Independent chairperson

  • Maximum one-year notice period

  • Independent NEDs (three-year contract, no share options)

  • Executive remuneration should be subject to the recommendations of a remuneration committee (entirely or mainly NEDs).

  • An Audit committee, comprising of at least 3 NEDs.

  • Governance should be viewed as an opportunity to enhance long term shareholder value.

  • The Board is responsible for maintaining a sound system of internal control.

US corporate governance

In the US, statutory requirements for publicly-traded companies are set out in the Sarbanes-Oxley Act.

These requirements include:

  1. The certification of published financial statements by the CEO and the chief financial officer (CFO)

  2. Faster public disclosures by companies

  3. Legal protection for whistleblowers

  4. A requirement for an annual report on internal controls

  5. Requirements relating to the audit committee, auditor conduct and avoiding ‘improper’ influence of auditors.

The Act also requires the Securities and Exchange Commission (SEC) and the main stock exchanges to introduce further rules relating to matters such as

  1. the disclosure of critical accounting policies,

  2. the composition of the Board and

  3. the number of independent directors.

European corporate governance

In Europe most large companies are not listed on a Stock Market, and are often dominated by a single shareholder with more than 25% of the shares (often a corporate investor or the founding family).

Banks are powerful shareholders and generally have a seat on the boards of large companies.

A major difference that exists in the board structure for companies is that the UK has a unitary board (consisting of both executive and non-executive directors).

It is common in Europe to have a two-tier board structure consisting of a supervisory board (elected by shareholders normally) and an executive board.

In Germany, the supervisory board has to consist of 50% trade union representatives.

The Supervisory Board does not have full access to financial information, is meant to take an unbiased overview of the company, and is the main body responsible for safeguarding the external stakeholders’ interests.

The presence on the Supervisory Board of representatives from banks and employees (trade unions) may introduce perspectives that are not present in some UK boards.

In particular, many members of the Supervisory Board would not meet the criteria under UK Corporate Governance Code for their independence.