ACCA SBL: Corporate Governance

• ACCA Strategic Business Leader Module 2 focuses on corporate governance
• Corporate governance covers subjects from stakeholder management to external audit independence
• The syllabus reference is Syllabus to June 2025

Corporate Governance and Agency Theory

• Corporate Governance can be referred to as the system by which companies are directed and controlled in the interests of shareholders and other stakeholders
• Corporate Governance is a set of relationships between company directors, its shareholders and other stakeholders
• Directors are appointed to run the company on behalf of its owners in a listed company
• Directors report to shareholders twice a year with Interim and Annual Financial Statements
• Directors owe a Fiduciary Duty, which is a special duty of care

Regulatory Oversight and External Audit

• Significant corporate collapses, such as Enron and WorldCom, were drivers for corporate governance overhaul
• The global financial crisis and government bailouts also played a role
• Increased environmental concerns, such as the British Petroleum oil spill, influence corporate governance changes

Essence of Corporate Governance

• Corporate governance comprises the collective body of legislation like Company Acts in the UK and the US Sarbanes-Oxley Act of 2002
• Stock Exchange regulations from the London Stock Exchange (LSE) and the Financial Services Authority (FSA)
• In the USA, the equivalent entities are the New York Stock Exchange (NYSE) and the Securities & Exchange Commission (SEC)
• Accounting and Auditing standards such as; International Financial Reporting Standards and International Auditing Standards
• US GAAP and Corporate Governance Codes, the UK Corporate Governance Code 2018, and the South African King IV Governance Code
• Integrated Reporting (IR) involves reporting on stewardship of 6 'Capitals, following Environmental Management Accounting initiatives

The Agency Concept

• The Agency concept refers to the relationship between Shareholders ('Principals') and Directors ('Agents')
• Shareholders appoint Directors to run the company and enhance shareholder wealth through sustainable value creation
• The Agency problem arises when there is a separation of ownership and control
• Shareholders may feel Directors' remuneration is excessive
• Mechanisms like external audit and non-executive directors aim to make directors accountable
• These mechanisms incur 'Agency Costs'

'Agency' in Corporate Governance

• 'Agency' means Shareholders (Principals) appoint Directors (agents) to run the company for long-term wealth enhancement
• Directors use their skills and experience in the company's long-term interests

Director's 'Fiduciary Duty'

• A director's Fiduciary duty is a special duty of care owed to company shareholders
• A director's duties include things such as;
• Exercising skills and experience impartially to implement new strategic initiatives
• Acting ethically with competence, impartiality, and professionalism
• Complying with legislation and regulations
• Acting in the company's best interests
• And avoiding competition with the company
• Private companies may have less of an 'agency' problem, as shareholders and directors are often the same

Corporate Governance Approaches

• Principle-based governance is evident in codes like the UK Corporate Governance Code 2018 and the South African King IV Code
• Rules-based governance is evident in the US Sarbanes-Oxley Act 2002
• In Germany, a two-tier board structure is the norm, comprising Supervisory and Executive Boards
• Common themes in corporate governance include:
• Clarifying roles and responsibilities of the board, chairman, CEO, and non-executive directors
• Improving the quality & independence of external audits
• Protecting shareholder interests through better communication
• Independent oversight of director remuneration
• Emphasizing risk management and internal control

Role of The Board of Directors

• The UK Corp. Governance Code 2018 sets out the board's role to provide entrepreneurial leadership focused on shareholder wealth
• Boards must approve strategic initiatives, formulate corporate vision and mission, and implement and monitor agreed strategy
• Directors ensure that the necessary resources are in place and act in the best interest of shareholders and society

Corporate Governance in Ireland

• Euronext Dublin listed businesses must state in their annual report how the UK Combined Code's principles have been applied
• Non-compliant companies must disclose the extent, nature, and reasons for non-compliance.

Extract from BP's Financial Statements y/e 31 December 2021

• BP's board promotes the company's long-term sustainable success, generating value for shareholders and considering its operations' impact
• The board has four committees supporting its responsibilities, including Safety & Sustainability, Audit, People & Governance, and Remuneration
• Matters reserved for the board include entry to new countries, major business cessation, capital structure changes, distributions, conduct code changes, and large capital expenditures

Principles-Based Governance Recommendations (Chairperson and CEO)

• Both the UK CGC 2018 and the South African King IV codes recommend separating the Chairperson and CEO roles
• The Chairperson should be a non-executive director, responsible for leadership and effectiveness of the board
• The CEO should have executive responsibility for managing the company

Reasons for The Seperation of CEO and Chairperson

• Separating the Chairperson and CEO ensures power balance and independent performance appraisal
• Separation helps better differentiate between Chairperson (leadership & board oversight) and CEO roles (managing the company)
• Separation assures investors, and complies with international best practice

CEO Roles and Responsabilities

• CEO are expected to manage the team of executive directors, developing strategic initiatives with a view to shareholders' interests
• CEO's need to successfully implement plans, regularly report to the board and conduct briefings, including at AGMs
• CEOs need to proactively manage risk, as well as represent the company in interactions with providers of finance

Chairperson's Responsibilities

• Convene board meetings focused on strategic issues with sufficient time allocated
• The are responsible for ensuring the circulation of good quality information to directors
• Maintaining constructive relations between the non-executive/ executive directors
• Ensuring the required board committees function properly, evaluating CEO performance and chairing board meetings

Real World Ceo Removal Circumstances

• A CEO lost confidence after a major environmental disaster, prompting stakeholder pressure
• A CEO and executive directors were involved in fraudulent transactions threatening the company's survival
• An investment bank collapsed due to the all-powerful CEO/ chairman role combination
• Where a CEO suddenly resigned, so the CFO was appointed as the CEO to provide reassurance
• When a health crisis created a vacancy for CEO, requiring the need for a credible replacement

Exampels of CEO departures

• John Flint, CEO of HSBC, was removed despite solid financial results, possibly due to strategic disagreements
• Steve Easterbrook, CEO of McDonald's, was removed after violating company policy including working relationships
• Dennis Muilenburg of Boeing resigned following fatal crashes and regulatory pressure
• In these situations, share prices can vary depending on investors' reaction
• Alison Rose (CEO 2023) CEO Alison Rose stepped down with immediate effect (July 2023), after she admitted to a "serious error of judgment" in discussing former Brexit party leader Nigel Farage's

UK and US Governance

• UK companies with a premium Listing on the London Stock Exchange must comply with the UK 2018 Corporate Governance Code
• The Wates Principles requires large UK companies to report on their corporate governance
• The UK and Ireland follow a unitary board system, with Executive and Non-executive directors.
• Compliance with the UK CGC 2018 is not a legal requirement

UK Corporate Governance Code 2018

• The sections of the code is outlined as follows;
• Board leadership & Company Purpose
• Division of Responsibilities
• Composition, succession and evaluation
• Audit, Risk and Internal Control
• Remuneration
• The UK Corporate Governance Code 2024 will come into effect for financial years commencing from 1 January 2025

US Corporate Governance

• The US follows a unitary board system
• US listed companies must comply with the Sarbanes-Oxley Act 2002
• The Sarbanes-Oxley Act set up a new regulator to oversee public company audits
• Key sections include 302, 404, and 802 relating to financial statement accuracy, internal controls, and record retention
• Section 407 requires companies to have at least one "audit committee financial expert", with experience in accounting principles

Sarbanes-Oxley Act and External Audit

• The Sarbanes-Oxley Act prohibits External Auditors such as; Bookkeeping, Actuarial, Legal and Internal Audit services
• Under the UK Corporate Governance Code 2018 the Audit Committee decides what services auditors can provide

Key UK vs US Governance Differences

• In the US, Sarbanes-Oxley Act compliance is mandatory, while in the UK, the Corporate Governance Code is self-regulatory
• Sarbanes-Oxley requires audit partner rotation every 5 years, the UK recommends tendering every 10 years
• Sarbanes-Oxley prohibits specific services by external auditors. The UK's Audit Committee makes the decision
• Sarbanes-Oxley prohibits loans to Directors, whereas in the UK, there is no specific recommendation against it
• The U.S. appointed a new regulator, while the UK did not
• The US has no mandatory requirement to separate Chairman and CEO roles though the UK Code recommends it

Singapore Code

• The Singapore Code of Corporate Governance 2005 is similar to the UK CGC 2018, and compliance is not mandatory

Key Considerations for the Board of the UK

• Shows the recommended corporate governance structure in the UK

Reporting to Shareholders

• Shareholders receive reports from multiple sources via the AGM and Annual Report
• Sources include External Auditors, Board of Directors, Audit Committee, Remuneration Committee, and Nomination Committee
• The Chairman and CEO also report to shareholders in writing
• Roles of include, the Board providing entrepreneurial leadership and robust internal controls
• The Chairperson oversees the board and ensures it operates strategically, CEO runs the company and implements strategy
• The Non-Executive Directors (NEDs) act as shareholder representatives and challenge strategic initiatives
• They also enhance audit process independence and remuneration packages

Key Roles of Non-Executive Directors

• NEDS must assess existing strategy and contribute to its formulation of future strategy
• Directors need to assess performance of other Directors and the Chairman
• Board must evaluate control and risk management and they need to determine remuneration
• NEDS have an important say in helping plan and identify skills when putting people into correct positions

Effective Committee Membership

• Every company should have a membership including, diversity and range of skills

Enhancing The Effectiveness of Non-Executive Directors

• The effectivenss on Directors can be increased in the following wasys; Independence, skill, and career assesments
• Also Directors should enhance their skills and have good communications skills
• And Chairpersons should take leading roles with members

Length Of Time as NED

• The duration as a NED can undermine his independence
• Familiarity and Self Interest can give a threat to effectiveness
• In addition, people should look out for intimidation tactics

Corporate Governance Weaknesses

• DCS is highly centralised and the CEO doesn't allow much authority to people that are most likely of taking risks.

Governance Structures

• Governance is commonly split in two groups; They are One Tier or Two Tier.

The Organisation for Economic Co-Operation

• Broad Principles a. The ability to vote correctly b. All shareholders should be treated correctly c. Transparency and and Disclosure d. Board Responibilities
• Not binding and can be often ineffective