CIMA P3 Syllabus C. Internal controls - Risk reports and stakeholder responses - Notes ^{12 / 21}

Review of internal controls

The UK's Turnbull Committee suggested that review of internal controls should be an integral part of the company's operations. 

The board, or board committees, should consider reports on control issues from others operating internal controls.

The internal control systems have a key role in:
- managing the risks linked with a company's business objectives
- helping to safeguard assets and the shareholders' investment.

As profits are partly the reward for risk-taking in business, the purpose of internal control is to help manage risk rather than eliminate it.

Relationships with shareholders

A key aspect of the relationship is the accountability of directors to shareholders. 

This can ultimately be ensured by requiring all directors to submit themselves for regular re-election.

The need for regular communication with shareholders is emphasised in most reports. 

Particularly important is communication with institutional shareholders such as pension funds who may hold a significant proportion of shares. 

A number of the reports stress how institutional shareholders can be an important force for good corporate governance, and that they have a responsibility to use their votes wisely.

The annual general meeting is the most important formal means of communication, and the governance guidance suggests that boards should actively encourage shareholders to attend annual general meetings.

The UK's Hampel Report contained some useful recommendations on how the annual general meeting could be used to enhance communications with shareholders.

• Notice of the AGM and related papers should be sent to shareholders at least 20 working days before the meeting.

• Companies should consider providing a business presentation at the AGM, with a question and answer session.

• Shareholders should be able to vote separately on each substantially separate issue

• Companies should propose a resolution at the AGM relating to the report and accounts.

The most important document for communication with shareholders is the annual report and accounts.

In extreme circumstances, the institutional shareholders may intervene more actively, for example by calling a company meeting

The UK Institutional Shareholders' Committee has identified a number of reasons why institutional investors might intervene:

• Fundamental concerns about strategy in terms of products, markets and investments

• Poor operational performance, if one or more key segments have persistently underperformed

• Management being dominated by a small group of executive directors, with the non-executive directors failing to hold management to account

• Major failures in internal controls, particularly in sensitive areas such as health and safety

• Failure to comply with laws and regulations or governance codes

• Excessive levels of directors' remuneration