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Corporate Governance in UK

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Title: Corporate Governance in UK


1
Corporate Governance in UK
  • By Abdur Rashid Mirza
  • University of Lahore
  • School of Accountancy and Finance

2
Corporate governance and development
  • 1991 - Collapse of firms declared healthy in
    audited returns, the Financial Reporting Council,
    the London Stock Exchange and the UK accountancy
    profession established the Cadbury Committee to
    inquire into financial aspects of corporate
    governance.

3
Cadbury Report Recommended
  • Conformity with its Code of Best Practice. This
    was voluntary.
  • More clear and detailed financial reporting in
    order to
  • Inspire public confidence in corporations
  • Enable directors to advance the best interests of
    the company and to avoid concentrations of power.
  • The clear separation of the responsibilities of
    CEO and chair of the board.

4
Non-executive directors should
  • (A non-executive director (NED, also NXD) or
    outside director is a member of the board of
    directors of a company who does not form part of
    the executive management team.)
  • Have a stronger role on boards.

5
Non Executive Directors
  • Strategy Contribute to the development of
    strategy.
  • Performance Non-executive directors should
    scrutinize the performance of management in
    meeting agreed goals and objectives.
  • Risk Non-executive directors should satisfy
    themselves that financial information is accurate
    and that financial controls and systems of risk
    management are defensible.
  • People Non-executive directors are responsible
    for determining appropriate levels of
    remuneration of executive directors.

6
Cadbury also recommended
  • The Establishment of Audit Committee
  • The establishment of an Audit Committee with at
    least 3 non-executive directors and access to
    independent audit advice.

7
Implementation
  • Since 1993, the London Stock Exchange has,
    required listed companies to include in annual
    reports statements of compliance with the Code of
    Best Practice or, give reasons for not doing so.
  • In December 1994, Guidance to the interpretation
    of the Cadbury Code was issued.

8
Implementation 2
  • The Code had called upon the directors to report
    on the effectiveness of the companys system of
    internal control, the Guidance requires only that
    directors state
  • that directors are responsible for the companys
    system of internal financial control
  • that such a system is only relatively secure, not
    absolutely so
  • the most important procedures for internal
    financial control
  • that directors have reviewed the system of
    control

9
Principle 1 Lay solid foundations for management
and oversight

Formalize and disclose the functions reserved to
the board and those delegated to
management.Adopt a formal board charter that
details the functions and responsibilities of the
board or a formal statement of delegated
authority to management.
10
Principle 2 Structure the board to add value
A majority of the board should be independent
directors. An independent director is independent
of management
11
Principle 3 Promote ethical and responsible
decision-making
  • Clarify the standards of ethical behavior
    required of company directors and key executives
    .
  • Establish a code of conduct
  • Promote Honesty.

12
Principle 4 Safeguard integrity in financial
reporting
Require written statements from the CEO and the
CFO to the board that the companys financial
reports present a true and fair view of its
financial condition in accordance with relevant
accounting standards. Establish an audit
committee of at least 3 non-executive directors,
not chaired by chair of board.
13
Principle 4 Safeguard integrity in financial
reporting
Establish an audit committee of at least 3
non-executive directors, not chaired by chair of
board.
14
Principle 5 Make timely and balanced disclosure
Develop continuous disclosure policies and
procedures.
15
Principle 6 Respect the rights of shareholders
Design and disclose a communications strategy to
promote effective communication with shareholders
and encourage effective participation at general
meetings.
16
Principle 7 Recognize and manage risk
Establish a system to identify, assess, monitor
and manage risk. The CEO and CFO should certify
to the board that the companys risk management
and compliance systems are operating effectively.
17
Principle 8 Encourage enhanced performance
Disclosure of performance evaluation of the
board. Induction program for new directors. All
board members to have direct access to company
secretary. Board members to have access to
independent advice at company expense.
18
Principle 9 Remunerate fairly and responsibly
Disclose companys remuneration policies
including cash, fees and other benefits. The
board should establish a remuneration committee
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