Corporate Governance — How to Add Value to Your Company A Practical Implementation Guide Alex Knell AMSTERDAM • BOSTON (cid:127) HEIDELBERG (cid:127) LONDON m NEWYORK (cid:127) OXFORD (cid:127) PARIS (cid:127) SANDIEGO CI A SANFRANCISCO (cid:127) SINGAPORE (cid:127) SYDNEY (cid:127) TOKYO CIMAPublishingisanimprintofElsevier PUBLISHING CIMAPublishing AnimprintofElsevier LinacreHouse,JordanHill,OxfordOX28DP 30CorporateDrive,Burlington,MA01803 Firstpublished2006 Copyright©2006,ElsevierLtd.Allrightsreserved TherightofAlexKnelltobeidentifiedastheauthorofthisworkhasbeenasserted inaccordancewiththeCopyright,DesignsandPatentsAct1988 Nopartofthispublicationmaybereproducedinanymaterialform(including photocopyingorstoringinanymediumbyelectronicmeansandwhetherornot transientlyorincidentallytosomeotheruseofthispublication)withoutthewritten permissionofthecopyrightholderexceptinaccordancewiththeprovisionsofthe Copyright,DesignsandPatentsAct1988orunderthetermsofalicenceissuedbythe CopyrightLicensingAgencyLtd,90TottenhamCourtRoad,London,England W1T4LP.Applicationsforthecopyrightholder’swrittenpermissiontoreproduce anypartofthispublicationshouldbeaddressedtothepublisher PermissionsmaybesoughtdirectlyfromElsevier’sScienceandTechnologyRights DepartmentinOxford,UK:phone:(+44)(0)1865843830;fax:(+44)(0)1865853333; e-mail:[email protected] theElsevierhomepage(http://www.elsevier.com),byselecting‘CustomerSupport’ andthen‘ObtainingPermissions’ BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheLibraryofCongress ISBN 0750669241 ISBN 9780750669245 ForinformationonallCIMAPublishingPublications visitourwebsiteatwww.cimapublishing.com TypesetbyCephaImagingPvt.Ltd,Bangalore,India PrintedandboundinGreatBritain Contents Preface xi An Overview of the Book xiii Acknowledgements xv Section 1 Tell Me What I Need to Know about Corporate Governance (CG)... 1 1 Enhancing Value 3 Objective 5 What exactly is Corporate Governance (CG)? 5 How to make things change 7 Layout 8 Results of compliance 8 2 No CG Recognition – The Company You Keep 11 Proving a negative 13 Recent history fuels anxiety 13 Solution – keeping businesses honest 17 3 Why No CG? 19 4 Basic Concepts 25 A code of ethics 27 Conflicts of interests in business 27 5 Applied Concepts 29 Independence 31 Responsibility 31 Accountability 32 Fairness 32 Reputation 32 6 Director’s Duties – A Reminder 33 Statutory duties 35 Fiduciary duties 35 Duties of skill and care 35 Other and emerging legal obligations 36 Executive and Non-Executive Directors (NEDs) 37 Company Secretary 37 7 Who are the Other Stakeholders? 39 Company workforce 41 Banks and lenders 41 Customers 41 Suppliers 41 Government 42 Local community 42 Other 42 Summary 42 8 The Key Areas Addressed by CG 43 Decision-making powers 45 Risk-taking 46 Directors’ remuneration 46 Financial reporting and auditing 47 s nt e Communications between directors and nt Co shareholders 49 ● 9 The ACCEPTS™ Method 51 iv What is the ACCEPTSTM Method? 53 Scoring Chart – ACCEPTSTM Method Instructions 53 Excel® spreadsheet 54 10 Basic Steps 55 Positioning principle 57 In plain English? 57 What needs to be done? 57 Checklists 58 Section 2 Detailed Implementation... 59 11 The Board 61 What is the principle? 63 Supporting principles 63 In plain English? 63 What needs to be done? 64 Components in this section 65 Summary checklists 67 Score Chart 68 Excel® spreadsheet 68 12 The Chairman and Chief Executive 71 What is the principle? 73 Supporting principle 73 In plain English? 73 What needs to be done? 73 Components in this section 74 Summary checklists 75 Score Chart 75 Excel® spreadsheet 75 13 Board Balance 77 What is the principle? 79 Supporting principles 79 In plain English? 79 What needs to be done? 80 C o n Components in this section 81 te n Summary checklists 84 ts Score Chart 84 ● Excel® spreadsheet 84 v 14 Board Appointments 87 What is the principle? 89 Supporting principles 89 In plain English? 89 What needs to be done? 89 Components in this section 90 Summary checklists 93 Score Chart 94 Excel® spreadsheet 94 15 Board Information 99 What is the principle? 101 Supporting principles 101 In plain English? 101 What needs to be done? 102 Components in this section 102 Summary checklists 104 Score Chart 104 Excel® spreadsheet 104 16 Board Performance Evaluation 107 What is the principle? 109 Supporting principles 109 In plain English? 109 What needs to be done? 109 Components in this section 109 Summary checklists 110 Score Chart 111 Excel® spreadsheet 111 17 Board Re-election 113 What is the principle? 115 Supporting principles 115 In plain English? 115 nts What needs to be done? 116 e nt Components in this section 116 o C Summary checklists 118 Score Chart 119 ● vi Excel® spreadsheet 119 18 Board – Rewards (a) Level and Make-Up 123 What is the principle? 125 Supporting principle 125 In plain English? 125 What needs to be done? 125 Components in this section 127 Summary checklists 129 Score Chart 131 Excel® spreadsheet 131 19 Board – Rewards (b) Procedure 135 What is the principle? 137 Supporting principles 137 In plain English? 137 What needs to be done? 138 Components in this section 139 Summary checklists 141 Score Chart 142 Excel® spreadsheet 142 20 Accountability (a) Financial Reporting 147 What is the principle? 149 Supporting principle 149 In plain English? 149 What needs to be done? 149 Components in this section 150 Summary checklists 151 Score Chart 152 Excel® spreadsheet 152 21 Accountability (b) Internal Control 155 What is the principle? 157 In plain English? 157 What needs to be done? 157 Components in this section 158 Summary checklists 159 Co n Score Chart 159 te n Excel® spreadsheet 159 ts 22 Accountability (c) Audit Committee ● vii and Auditors 161 What is the principle? 163 In plain English? 163 What needs to be done? 163 Components in this section 165 Summary checklists 169 Score Chart 171 Excel® spreadsheet 171 23 Relations with Shareholders – Dialogue 177 What is the principle? 179 Supporting principles 179 In plain English? 179 What needs to be done? 180 Components in this section 181 Summary checklists 182 Score Chart 182 Excel® spreadsheet 182 24 Relations with Shareholders – Constructive Use of the AGM 185 What is the principle? 187 Supporting principles 187 In plain English? 187 What needs to be done? 187 Components in this section 188 Summary checklists 189 Score Chart 190 Excel® spreadsheet 190 25 How Did You Do? 193 Review where you are 195 What do my results mean? 195 A word of encouragement 195 Grand Score Chart 197 26 What to Do Now? 199 s Initial review 201 nt e An essential requirement 201 nt o C Map of Code CG Requirements 202 Plan of attack – preparation 202 ● viii Plan of attack – the Board itself 203 Plan of attack – the Board Committees 204 Plan of attack – the shareholders 205 Plan of attack – the financial reporting and auditors 206 Appendix 1 Annual Report – CG Disclosures 209 Annual report section: Directors, officers and advisors 211 Annual report section: Corporate Governance 211 The Board 211 Board Committees 212 Appendix 2 Matters Reserved for the Board ICSA Guidance Note 217 Appendix 3 The Role of the Chairman 231 Appendix 4 The Role of the Chief Executive 235 Appendix 5 Guidance on the Role of the Non-Executive Director 239 Appendix 6 Sample Letter of Non-Executive Director Appointment 243 Appointment 245 Time commitment 245 Role 245 Fees 246 Outside interests 246 Confidentiality 247 Induction 247 Review process 247 Insurance 247 Independent professional advice 248 Committees 248 C Appendix 7 Chairman of the Nomination o n Committee – Job Description 249 ten ts ● Appendix 8 Chairman of the Remuneration ix Committee – Job Description 253 Appendix 9 Chairman of the Audit Committee – Job Description 257 Appendix 10 Performance Evaluation Guidance 261 Performance evaluation of the Board 264 Performance evaluation of the Non-Executive Director 265 Appendix 11 The Whistle-blowing Procedure 267 Appendix 12 Nomination Committee – Terms of Reference 271 Appendix 13 Remuneration Committee – Terms of Reference ICSA Guidance Notes 283