Bob Tricker

Corporate Governance –
Principles, Policies and Practices 3e

Chapter 14
Board Activities – corporate
governance in practice

© Bob Tricker, 2015. All rights reserved.

 Board activities – corporate governance in
practice

In which we review:

• committees of the board

• the influence of the audit committee
• the role of internal audit in corporate governance
• the importance of the external auditor
• the significance of the company secretary

Tricker: Corporate Governance, 3rd edition

 Board Committees
1) Audit committee (duties follow)

2) Remuneration committee
- responsible for determining
remuneration
and conditions of top executives

3) Nominating committee
- responsible for proposing names for
nomination
as additional or replacement directors
4) Compliance committee
-responsible for ensuring compliance
with corporate governance
requirements (sometimes by audit com.)
5) Strategic Risk Committee
(sometimes by audit com.)
6) Other board committees
- executive, strategic, ad hoc
 

Tricker: Corporate Governance, 3rd edition

 The influence of the Audit Committee [AC]

• Every director should be aware of

significant matters that have arisen
during the audit by the independent,
external auditor

• Audit committee comprised of

independent directors, provides a bridge
between the external auditor and board

• Corporate governance codes require

listed companies to have audit
committees.

Tricker: Corporate Governance, 3rd edition

 Duties of an audit committee - 1

1. Liaison between the external auditor, the internal

auditor and the board as a whole.
2. Advising the board on the appointment. re-
appointment, resignation, or replacement of the
external auditor.
3. Ensuring the independence of the external auditor
4. Reviewing the extent of non-audit work undertaken by
the external auditor and the fees involved
5. Reviewing the audit fees and advising the board
accordingly
6. Considering the scope of and the plans for the audit by
the external auditors.

Tricker: Corporate Governance, 3rd edition

 Duties of an audit committee - 2

7. Agreeing the scope of the work and plans of the internal audit
8. Supervising the work of the head of the internal audit function,
including the setting of policies, procedures, and plans, the
budgeting of resources, the remuneration and performance of
staff, the monitoring of results, and the effectiveness of the
function
9.Ensure that the activities of the external and internal auditors
are coordinated, avoiding both duplication or incomplete
coverage
10. Reviewing the appointment, performance, remuneration, and
replacement or dismissal of the head of the internal audit
function, ensuring continuing independence of the internal audit
function from undue managerial influence.

Tricker: Corporate Governance, 3rd edition

 Duties of an audit committee - 3

11. Reviewing with the external and internal auditors

and advising the board on the adequacy of the
company’s internal control systems, security of
physical assets, and protection of information.

12. Reviewing with the external and internal auditors

and advise the board on the conduct of the external
audit, particularly any important findings,
(‘management letter’), with management’s response;
and report any significant changes to the financial
results or to management controls that resulted.

Tricker: Corporate Governance, 3rd edition

 Duties of an audit committee - 4

13 Reviewing with the external and internal auditors and

advising the board on the company’s financial
statements (interim and annual) prior to publication, the
auditor’s report to the shareholders, any changes to
accounting policies, material issues arising in or from
the financial statements; and compliance with
accounting standards, company law [and if appropriate
stock exchange] reporting requirements and corporate
governance codes of good practice.

Tricker: Corporate Governance, 3rd edition

 Duties of an audit committee - 5

14. Reviewing any other published information, such as the

directors’ report, any operating statement and ensure that it
is consistent with the audited financial statements
15. Reviewing the exposure of the company to risk and any
matters that might have a material affect the company’s
financial position, including any matters raised by company
regulators or stock exchange listing committees.
(Sometimes the responsibility of a separate board Strategic
Risk Committee)
16. Reviewing annually the charter of the audit committee
itself and advising the chairman of the board if changes are
necessary.

Tricker: Corporate Governance, 3rd edition

Remuneration Committee
 Functions of the Remuneration Committee [RC]

1. Establish a formal and transparent procedure for developing policy

on top executive remuneration
2. Determine remuneration packages for each director

3. No director should be involved in fixing his or her own remuneration.

4. Levels of remuneration sufficient to attract and retain directors
5. The component parts of executive directors’ remuneration should be
structured to link rewards with corporate and individual performance
6. The role of the remuneration committee has become significant and
visible given shareholder and media concern about excesses (more
info)
7. In most jurisdictions a company’s annual report must contain a
statement of remuneration policy with details of the remuneration of
each director.
8. Transparency is important in corporate governance.

Tricker: Corporate Governance, 3rd edition

 Functions of the remuneration committee

Remuneration ratcheting (up/down):

1. International comparisons: “to ensure we hold executive directors of the

calibre we need, we have to give rewards that are broadly comparable to
those they could obtain in the industry anywhere in the world.”
2. The headhunter argument: “this director has to receive a package that is
30% more than that of the highest paid director.
3. The 'top of the industry' claim: “our firm prides itself on being one of the
leaders in the industry, so we expect to pay our directors in the upper
quartile of the industry range as shown by the comparator pay research.”
4. The fear of loss of people: “we could lose our directors to the competition
unless we pay competitive rates.”
5. Doubling up the bonus: “we believe that it is important for directors’ rewards
to be performance related. Moreover, we expect excellent performance in
both the short and the long term. So we calculate bonuses on the annual
profits, then we have a parallel three-year scheme which rewards directors if
earnings per share grows by 30% over that period.”

Tricker: Corporate Governance, 3rd edition

 The Nomination Committee [NC]

1. Standing committee of the main board

comprised mainly or wholly of INEDs
2. Purpose – to avoid domination of director selection
by CEO and/or chairman & preventing board
becoming self-perpetuating ‘club’ [without
external intervention]
3. Supposed independence can be illusory (unreal);
1. If INEDs are themselves part of the ‘club’
2. Need to support CEO and/or chairman
3. Owe an allegiance to those who nominated
them.

Tricker: Corporate Governance, 3rd edition

 Board Committees [BC]

To be effective, board committees need clear terms of reference on ;

1. A constitution and clear terms of reference

2. Details of membership – committee size and quorum,
qualifications for membership, nomination, terms of appointment,
rotation, removal, remuneration
3. Chairman’s appointment and responsibilities
4. Committee duties –authority delegated by the board
5. Relations between the committee and top executives,
6. Frequency of meetings
7. Secretary to the committee, notice for meetings, agenda, minutes
8. Staff support, access to legal and other professional advice.

Tricker: Corporate Governance, 3rd edition

 Board committees

To be effective, board committees also need clear terms of

reference on:

1. Accountability, transparency, reporting requirements

2. Circulation of committee minutes to all directors
3. Opportunity for other directors to raise questions and discuss
committee issues at main board meetings
4. Regular review of committee’s performance and purpose
5. Amendments to constitution and terms of reference where
appropriate.

Tricker: Corporate Governance, 3rd edition

 The role of internal audit

1. The role of internal audit - to provide independent assurance that risk

management, governance and internal control processes are operating
effectively

2. Internal auditors deal with issues that are fundamentally important to

the survival and prosperity of any organization

3. Unlike external auditors, they look beyond financial risks and

statements to consider wider issues such as the organization’s
reputation, growth, its impact on the environment and the way it treats
its employees

4. Internal auditors have to be independent people who are willing to

stand up and be counted. They provide an independent, objective and
constructive view.
Source: Institute of Internal Auditors

Tricker: Corporate Governance, 3rd edition

 The role of internal audit

Boards and their audit committees expect internal audit to provide;

1. an ongoing analysis of business processes and associated controls
2. an evaluation of the extent and effectiveness of these control systems
3. regular reviews of operational and financial performance
4. assessments of the achievement corporate mission, policies and
objectives
5. identification of areas for more efficient use of resources
6. confirmation of the existence and value of the company’s assets
7. ad hoc inquiries into possible irregularities and frauds
8. reviews of the compliance framework
9. identification of compliance issues and confirmation of compliance
10. reviews of the organization’s values and code of conduct or ethics
11. And if no board strategic risk committee:
1. an evaluation of the risk assessment and review systems
2. regular evaluation of risk at all levels in the organization
3. ad hoc reviews of unacceptable levels of risk

Tricker: Corporate Governance, 3rd edition

 Importance of the external auditor

• US Public Company Accounting Oversight Board

• PCAOB standards require auditors to:

– obtain reasonable assurance that effective internal control
over financial reporting has been maintained
– assess the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk
– perform such other procedures as are considered necessary
in the circumstances.

Tricker: Corporate Governance, 3rd edition

 Importance of the external auditor

The appointment, remuneration and removal of

auditors

• In most jurisdictions, the auditor of listed companies

is formally appointed, reappointed or replaced by the
shareholders in general meeting on the advice of the
board, typically working through their audit
committee.

• In private companies, the auditor is typically chosen

by the board.

Tricker: Corporate Governance, 3rd edition

 Importance of the external auditor

The independence of external auditors

• The standing of independent external auditors hinges

on the definition and confirmation of independence

• US PCAOB requires registered public accounting firm

to describe to the audit committee of listed clients, all
relationships between the auditor and the audit client
or persons in financial reporting oversight roles at the
audit client that may reasonably be thought to bear
on independence.

Tricker: Corporate Governance, 3rd edition

 The significance of the company secretary

• Many company law jurisdictions require the

appointment of a company secretary (CoSec) with
statutory duties

• In the United States the role of company secretary is

known as the corporate secretary and is often taken
by the company’s legal officer

• The company secretary is an officer of the company

and has a duty to act in good faith in the best interest
of the company.

Tricker: Corporate Governance, 3rd edition

 The significance of the company secretary

• In the UK only public companies must have a

CoSec. Private companies have the option to
have a company secretary if the shareholders
wish.

• In some jurisdictions, the company secretary

can be a ‘legal person’ that is a limited
company: in others the CoSec must be a real
person.

Tricker: Corporate Governance, 3rd edition

 Board effectiveness

The Company Secretary (CoSec)

The American Society of Corporate Secretaries

suggests that they organize meetings of board,
board committees and shareholders, maintain
corporate records and stock records and liaise
with the securities markets. “The corporate
secretary should be “the primary liaison between
the corporation’s directors and management.”

Tricker: Corporate Governance, 3rd edition

 Board effectiveness

The duties of the company secretary may include:

• Advising the chairman on legal rules and regulations affecting the
enterprise.
• Convening board, board committee and company (shareholder)
meetings
• Advising on and guiding board and board committee procedures
• Advising the chairman on agenda and writing the minutes for the
chairman's approval
• Maintaining the company’s statutory records such as the register of
members (shareholders), register of directors and their interests,
director’s service agreements,
• Filing company law returns with the companies’ registrar or regulatory
authority
• Ensuring compliance with companies legislation, the corporate
governance codes, and where appropriate the stock exchange listing
requirements
• Ensuring compliance with other relevant regulations and laws
• Administering changes to the company constitution (memorandum or
articles of association.
Tricker: Corporate Governance, 3rd edition
 The significance of the company secretary

• “The company secretary has a key role to play in

ensuring that the board procedures are both followed
and regularly reviewed
• The chairman and the board should look to the
company secretary for guidance on what their
responsibilities are … and on how these
responsibilities should be discharged
• All directors should have access to the advice and
services of the company secretary
• The chairman is entitled to strong support from the
company secretary in ensuring the effective
functioning of the board”
• UK Cadbury Report (1992)

Tricker: Corporate Governance, 3rd edition

 The significance of the company secretary

• “The company secretary should be responsible

for advising the board through the chairman on
all governance matters.

• Under the direction of the chairman, the

company secretary’s responsibilities include;
– ensuring good information flows
• within the board and its committees
• between senior management and non-executive directors
– facilitating induction and assisting with professional
development of directors”.
UK Corporate Governance Code

Tricker: Corporate Governance, 3rd edition

 Board activities – corporate governance in
practice

We have reviewed:

• committees of the board

• the influence of the audit committee
• the role of internal audit in corporate
governance
• the importance of the external auditor
• the significance of the company secretary

Tricker: Corporate Governance, 3rd edition

 Group Exercise

Analyse the companies listed in Bursa

Malaysia. Study 5 Annual Reports and report
the committee(s) established by each of the
companies and make necessary comparison. In
your group’s opinion, which committee has the
most influence and why ?

Tricker: Corporate Governance, 3rd edition