Corporate Governance Lecture Notes PDF

00:01 Welcome to part four, the very last part of the series of lectures under Corporate Governance. Today we will deal with the content of the Code of Corporate Governance, then we\'ll talk about independent directors and address the requirements for board composition and the various board committ...

00:01 Welcome to part four, the very last part of the series of lectures under Corporate Governance. Today we will deal with the content of the Code of Corporate Governance, then we\'ll talk about independent directors and address the requirements for board composition and the various board committees, and we\'ll end off with the discussion of the enhanced disclosure requirements for remuneration of directors and CEOs. 00:29 This is a representation of the table of contents of the Code of Corporate Governance. I actually urge all of you to read the entire code cover to cover, including its preamble and introduction. It\'s actually a fairly readable code, moderately engaging, and will not take you very long to read. 01:00 The first thing we want to look at under the code is the concept of an independent director. The test of independence is found in provision 2.1 of the code. This states that an independent director is one who is independent in conduct, character and judgement. Well, these are fairly subjective concepts. This person must have no relationship with the other person. 01:25 with the company, its related companies, its substantial shareholders or its officers that could interfere or be reasonably perceived to interfere. Notice that this is a test of perception. 01:40 going on with the exercise of his independent business judgment in the best interests of the company. It\'s a fairly lengthy, involved definition of independence and quite frankly, difficult to apply in practice. 01:59 Listing Rule 210.5d sets out certain baseline objective tests that disqualify a director from being independent. And these are in the listing rule so they are mandatory. If for example, he has been employed by the listed group within the last three financial years, or has an immediate family member similarly employed who is senior enough for their remuneration to be dealt with by the remuneration committee. 02:29 or has been a director of the issuer for a period of nine years. Now, this nine years is hard coding the nine-year rule into the listing rules. The results in any director being disqualified from being independent if he has served on the board for a cumulative period of nine years or more, whether in the capacity of an independent director, executive director, or non-independent, non-executive director. These tests in the listing rules are mandatory. 02:58 Unlike the code where those tests are comply or explain or even in the practice guidance where it\'s also just voluntary. 03:12 Moving on to board composition. The purpose of this slide is to explain that some requirements on board composition can be found in the code, and some requirements are found in the listing rules. You will see that in the first line, provision 2.3 of the code requires that all listed boards must have a majority of non-executive directors. But again, this is a code requirement, and so it is applied on a comply or explain basis. 03:42 It\'s not mandatory. The second requirement is for at least one third of your board members to be independent. This is a listing rule requirement in rule 210.5c, and therefore, it is mandatory. You cannot comply or explain your way out of it. The last two requirements are both code requirements in provisions 2.2 and 3.3 of the code. If the chairman is not independent, 04:11 You need a majority of your board to be made up of independent directors, and you should have a lead independent director appointed. 04:21 Listing Rule 210.5a requires rookie or greenhorn directors who are appointed to the listed board for the first time, who actually have no prior experience acting as the director of a listed company, to undergo mandatory training as a director if they want to be appointed to the board. You are given a one-year grace period so that a first-time director can first be appointed to the board and then undergo training in the next 12 months. 04:51 720 sub 5 also requires all directors to subject themselves to renomination and reappointment by shareholders at the AGM at least once every three years, regardless of what your constitution says. 05:09 Then we\'ll talk about board committees. The first one that we\'ll be looking at is the audit committee. It is the only board committee prescribed by law. Section 201B of the Companies Act requires all listed companies to have an audit committee. The code also requires the establishment of board committees to perform the functions of an audit committee, a normative committee, and a remuneration committee. 05:37 All listed boards must have written terms of reference, setting up the authorities, roles, and responsibilities and duties of these committees. 05:47 Let\'s look more closely at the audit committee. The audit committee needs to comprise of at least three directors, all of whom must be non-executive and the majority of whom must be independent, including the audit committee chair. 06:04 At least two members, including the Chairman, must have recent and relevant accounting or related financial management expertise or experience. This is a code requirement, so this is all comply or explained. 06:21 What are the duties and functions of the AC, the audit committee? Well, it\'s supposed to do many things. Some of these things are set out here. For a fuller list, I recommend you read provision 10.1 of the code, which explains the AC\'s duties in more detail. In addition, listing rule 719, sub 3, requires the issuer to establish and maintain an effective internal audit function. 06:50 The Remuneration Committee, on the other hand, has these duties, which I will not read out, but you can go into provision 6.1 of the Code for a fuller list of the functions and duties of the RC. The RC, much like the AC, needs to comprise of at least three directors, all of whom must be non-executive, and a majority of whom, including the Chairman, must be independent. 07:16 The Nominating Committee, or the NC, has slightly different composition requirements. It requires at least three directors, similar to the RC and the AC, but here there is no requirement for the Nominating Committee to comprise of all non-executive directors. That is absent. So the N**[ominating Committee is the only committee where the CEO or other executive director can be a member]**. 07:46 It only requires a majority, including the chairman, to be independent, quite unlike the AC and the RC. This is because the nominating committee\'s job, as you will see in the next slide, involves recommending new directors to be appointed to the board. And it\'s viewed that the CEO is critical to have input in that decision as to what sort of skills and expertise gap presents itself. 08:12 what type of skills and background knowledge the CEO feels the company should have on the board to plug any expertise gaps. The lead independent director, if there\'s one, should be a member of the nominating committee. 08:28 duties and functions of the nominating committee are found in provisions 4.1 and 4.4 of the code, and some of these are set out here. 08:41 The Code now places more emphasis on risk and has recommended the establishment of a Board Risk Committee, which in practice can sometimes be merged with the Audit Committee to form an Audit and Risk Management Committee. This is to help the company identify, determine the nature and extent of the significant risks which the issuer is willing to take in achieving its strategic objectives and value creation and also help monitor, assess those risks. 09:11 Listing Rule 1207.10 is also a **key** provision that requires the audit committee and the Board to comment on the adequacy and effectiveness of the issuers\' risk management and internal control systems. 09:28 Principle 8 of the Code states that the listed company should be transparent in its remuneration policies and the level and mix of remuneration, how it sets its remuneration and the relationship between remuneration and value creation and performance of the company should be disclosed. Provision 8.1 of the Code goes on to explain that on a comply or explain basis, the company should disclose the remuneration and breakdown of the pay for the top five 09:56 KMP or Key Management Personnel in bands of 250,000 and also in aggregate. So individually in bands and in aggregate. Provision 8.1 however is on a comply or explain basis. 10:14 Conversely, listing rule 1207.10d now requires specific disclosure of the exact remuneration of the directors and CEOs. This disclosure needs to include quite a lot of details, the base and fixed salary, variable performance, related income, bonuses, benefits in kind, options and other share-based incentives and other long-term incentives. For annual reports of 10:42 financial years ending on or after 31st December 2024 onwards, listed companies must comply with exact remuneration disclosures for their directors and CEOs. - Lecture 4: Corporate governance - Comply-or-explain regime under the Code -- Rule 710 - Board Matters - 1\. The Board's Conduct of Affairs 2\. Board Composition and Guidance 3\. Chairman and CEO 4\. Board Membership 5\. Board Performance Remuneration Matters - 6\. Procedures for Developing Remuneration Policies 7\. Level and Mix of Remuneration 8\. Disclosure on Remuneration Accountability and Audit - 9\. Risk Management and Internal Controls 10\. Audit Committee Shareholder Rights and Engagement - 11\. Shareholder Rights and Conduct of General Meetings 12\. Engagement with Shareholders Managing Stakeholder Relationships - 13\. Engagement with Stakeholders General principles and provisions of the Code Practice Guidance Board composition -- At least 2 two non-executive directors who are independent and free of any material business or financial connection with the issuer; and 1/3 of board; Rule 210(5) - Directors' training -- Rule 210(5)(a), Rule 720(7), Practice Note 2.3. Board committees -- Rule 210(5) Enhanced disclosure of remuneration of directors and CEOs -- Rule 1207(10D) Content of Code of Corporate Governance Independent Directors - Provision 2.1 of the Code - **[Rule 210(5)(d) Objective test]** for Independendent Director\'s independence - Board Committees - Board Composition - Audit committee s201B CA - Remuneration committee - **[Nominating committee]** - Enhanced disclosure of remuneration of directors and CEO