THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES
THE INSTITUTE OF CHARTERED SECRETARIES AND
ADMINISTRATORS
International Qualifying Scheme Examination
CORPORATE GOVERNANCE
JUNE 2011
Suggested Answers
The suggested answers are published for the purpose of assisting students in their
understanding of the possible principles, analysis or arguments that may be identified
in each question
1
SECTION A
Q1.
A. S. Eastwell & Sons Limited (Eastwell) is a private company incorporated in
Hong Kong. Albert founded the company in July 1992 and has acted as its
Chairman and Chief Executive Officer (CEO) ever since. Other members of the
board include Ben, Charles and Dan, who are in charge of the financial,
administrative and marketing functions respectively.
Eastwell runs a supermarket chain which competes with two market leaders. Its
articles of association are in the form of Table A in the First Schedule to the
Companies Ordinance (CO) (Chapter 32, Laws of Hong Kong).
The next board meeting is scheduled to take place in four weeks’ time. As the
Company Secretary, you have been busily preparing the agenda for that
meeting. Details of two of the matters that the board is due to discuss at the 4
July meeting are as follows.
The first matter
About a month ago Dan was approached by Sparkin Shop Limited (Sparkin),
one of the market leaders, to consult with them on selling organic fruits and
vegetables to the high end of the market via the Internet. The consultancy
contract is estimated to be worth $1.5 million per year for three years.
Dan has been keen to accept Sparkin’s offer for two reasons. First, he regards
Internet shopping and sale of organic products as the two growth areas in the
stagnant food retailing sector.
However, Eastwell has been uncertain whether it should develop those two
areas. While the board did discuss the possibility of integrating its organic
products sales division with the Internet shopping facility during its last two
board meetings in March and April, it failed to reach any consensus.
Second, Dan complains that although his marketing campaigns have
contributed significantly to Eastwell’s commercial success in the past three
years (annual growth of 10%), he has been remunerated much less than Ben
and Charles. The Sparkin contract, however, represents a 40% premium on
Dan’s current salary.
2
Dan has privately sought your advice on the consequences of signing the
consultancy contract without the board’s knowledge or resigning from office
should the board refuse to let him accept the Sparkin offer following disclosure.
The second matter
In celebration of the 20th anniversary of its founding, Eastwell would like to list
its shares on the Main Board of the Stock Exchange of Hong Kong Limited
(SEHK) by the second quarter of 2012.
To ensure Eastwell’s corporate governance standards meet the SEHK’s
requirements, the board asked you last October to conduct a preliminary review
of Eastwell’s operations and internal control systems.
You have made two recommendations to the board. First, Albert should not
perform the roles of Chairman and CEO at the same time as this is a possible
breach of the Rules Governing the Listing of Securities on SEHK (Listing
Rules). Albert, however, does not see any problems arising from his holding the
two positions concurrently.
Second, Eastwell’s internal control systems should be revamped and upgraded
as a matter of urgency. Ben has obtained from each of the four international
auditing firms (Big Four) a price quote for the revamp and upgrading. However,
the board thinks that the fees charged by the Big Four are too high.
Instead, Albert has advocated that the board should award the contract to Grant
Thurston Howard (GTH), a firm which has audited Eastwell’s accounts since
the company was established. According to Albert, GTH has successfully
reviewed the internal control systems of a variety of clients in the past ten years
and it charges only $400,000 for the job. The sum is at least 70% cheaper than
any of the quotes from the Big Four’s but still amounts to 52% of Eastwell’s
audit fees for last year.
REQUIRED:
Q1
(a) Advise Dan whether he will breach any laws on directors’ duties ín
Hong Kong by accepting the Sparkin offer. If a case can be made
3
against Dan, discuss the actions that he can take to avoid breaking
the law.
[Where appropriate, candidates may refer to case law to support their
arguments in answering Part (a).]
Ans
(a) As a director of Eastwell, Dan occupies a fiduciary position towards the
company of which board he forms: Regal (Hastings) Limited v Gulliver
[1967] 2 AC 134. ccording to Mason J (now Mason NPJ) in Hospital
Products Limited v United States Surgical Corp (1984) 156 CLR 41, a
fiduciary undertakes to act in the interests of another person when
exercising a power or discretion which will affect the interests of that
person in a legal or practical sense. In our case, Dan is placed in a
position of trust and confidence in relation to Eastwell and the company
has to rely on and trust Dan to look after its interests.
The distinguishing or core obligations of a fiduciary are loyalty and good
faith: Bristol and West Building Society v Mothew [1998] Ch 1. Two
aspects of these obligations are incumbent on Dan:
Non-conflict duty: the duty not to place himself in a position where his
interests would or may conflict with duties owed to Eastwell; and
Not-to-profit duty: the duty not to make a profit from his position as a
director of Eastwell.
Non-conflict duty
The test for this duty is the ‘reasonable man test’, i.e. whether a
reasonable person looking at the relevant facts would think there is a real
sensible possibility of conflict of interests between Dan and Eastwell:
Phipps v Boardman [1967] 2 AC 46.
As the board discussed the possibility of integrating Eastwell’s organic
products sales division with the internet shopping facility in the last two
meetings in March and April, Eastwell is a potential competitor to Sparkin
in this regard. The consultancy contract is therefore information relevant to
Eastwell’s interests. Since the information, which is of concern to the
company, came to Dan in May while he was a director of Eastwell, Dan is
obliged, because of his fiduciary position, to let Eastwell know it and not
keep it to himself for his own personal interests, even if:
4
•
He may have received the information in his private capacity: Industrial
Development Consultants Limited v Cooley [1972] 1 WLR 443; or
•
Eastwell decides not to take up the business opportunity in the end:
Gencor ACP Limited v Dalby [2000] 2 BCLC 734.
Dan, however, failed to let the board know about the offer and thus
breached this duty.
Not-to-profit duty
Equally, Dan, as a fiduciary, must not, without the informed consent of
Eastwell, make a profit deriving from his position of trust and confidence:
Mothew. Since Dan has not sought consent from the board to accept
Sparkin’s offer (he sought your advice privately), he will breach this duty
and is liable to account for any profits he can make from the contract, e.g.
the $1.5 million per year, on the ground that he has appropriated property
which rightly belongs to Eastwell: CMS Dolphin Limited v Simonet [2001] 2
BCLC 704. This is so even if the business opportunity is one which could
not have been available to Eastwell in the first place: Regal Hastings.
Dan’s case
Dan may be able to accept the consultancy contract without breaching his
fiduciary duties based on the following grounds:
•
Dan resigns from Eastwell;
•
The business opportunity is not yet a maturing business opportunity
actively pursued by Eastwell; or
Eastwell rejects the business opportunity.
Resignation from Eastwell
Case authorities in Hong Kong (Kishimoto Sangyo Co Limited v Akihiro
Oba [1996] 1 HKLRD 196) and England (Island Export Finance Limited v
Umunna [1986] BCLC 460) indicate that after Dan has terminated his
fiduciary relationship with Eastwell by resigning his office, he is able to
take up Sparkin’s offer because he is fully entitled to benefit himself by
using such skills, know-how, experience and contacts as he has acquired
while still being a fiduciary. This, however, does not detract from Dan’s
obligation to let Eastwell know the business opportunity before he resigns:
Sanders v Parry [1967] 1 WLR 753.
However resignation from Eastwell alone will not result in Dan being able
5
to take up the Sparkin offer without breaching fiduciary duties. He has to
show that the business opportunity is not a mature one pursued by
Eastwell actively: Canadian Aero Services Limited v O’Malley (1973) 40
DLR 371. The point is if the business opportunity were intangible,
immature or uncertain at the time when Dan is in a fiduciary position, it
would be unfair to accuse him of breaching fiduciary duties. In other words,
where the business opportunity is so remote that the eventual obtaining of
it cannot realistically be linked to any position of trust and confidence that
Dan is in regarding that opportunity, there is no breach of fiduciary duties
on his part.
Maturing business opportunity
Whether or not a business opportunity is sufficiently mature is a matter of
degree. Although Eastwell has already got in place the Internet shopping
facility and organic products sales division, it has been unsure whether it
should develop them together as the way forward. Neither has Eastwell
actively pursued this business opportunity because the board failed to
come to any consensus in its past two meetings. In short, the business
opportunity is an immature one and is at best at an ‘embryonic’ stage when
Dan was approached by Sparkin in May: Kishimoto.
This argument will have added force if Dan, after resigning from Eastwell,
has to take a prolonged fresh initiative on his part or a long time to obtain
the business opportunity, Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD
296, which seems to be the case here. A market leader like Sparkin is not
prepared to offer Dan a 40% premium on his current salary unless Dan is
willing to expend a lot of his own effort in taking charge of and completing
the project.
Rejection of business opportunity by Eastwell
Dan might also be able to accept Sparkin’s offer without breaching
fiduciary duties if the board, after due consideration, rejected the business
opportunity in the company’s best interests. Then the business opportunity
ceases to be one which Dan has acquired by reason of his office as
director of Eastwell. It is open to Dan to acquire the business opportunity
for himself: Peso-Silver Mines Limited v Cropper (1966) 58 DLR (2d);
Queensland Mines Limited v Hudson (1978) 52 ALJR 399.
6
This argument has at least two weaknesses. First, judges are asked to
determine whether the board’s decision to reject the business opportunity
is bona fide, but they are ill-equipped to determine directors’ motives:
Regal Hastings. Second, judges are not businessmen; they cannot tell
whether the board’s decision is in the business interests of Eastwell.
Advice to Dan
The above analysis shows that only the argument of ‘immature business
opportunity’ can help Dan make his case. However, given the traditional
strictness with which the courts view compliance with the twin duties of
non-conflict and not-to-profit (described as ‘inflexible’ by Lord Herschell in
Bray v Ford [1896] AC 44 at 51; ‘fundamental’ by Lord Upjohn in Phipps at
123), Dan should be advised that his chance of accepting Sparkin’s offer
without breaching fiduciary duties is slim and if the case came to court, he
would be liable to account for any profit made from the contract.
Q1
(b) Discuss the corporate governance procedures under the Listing
Rules and the Code on Corporate Governance Practices that the
board should observe if a director is caught in a conflict of interest
situation.
Ans (b) Caught in a conflict of interest situation, Dan can resolve the matter by
seeking the board’s approval of accepting the Sparkin offer at the board
meeting on 4 July (note: this is not a case of Dan having an interest in one
of Eastwell’s contracts, so disclosure under section 162 of the Companies
Ordinance and regulation 86 of Table A is inapplicable). Better still, Dan
should disclose to and obtain approval by members in a general meeting.
Arrangements before the July 4 meeting
Reasonable notice should be given to all directors so that they can attend
the meeting: paragraph A.1.3 of the Code on Corporate Governance
Practices (Code or Hong Kong Code). Listing rule requirements, i.e. Rule
13.44 and note 1 to Appendix 3 on the quorum and voting prohibitions for
such meetings should be complied with.
In the meeting
As the Sparkin offer involves a possible conflict of interest on the part of a
director, namely Dan, the discussion of it in the meeting should not be
7
dealt with by way of circulation of written resolutions or by a committee of
the board: paragraph A.1.8 Independent non-executive directors who have
no material interest in such a transaction should be present at this board
meeting to consider this matter: paragraph A.1.8. Arrangements should be
made to encourage active participation of those present at the board
meeting, either in person or through other electronic means: paragraph
A.1.1 of the Code.
Dan has to disclose fully and frankly all material facts about the Sparkin
offer: New Zealand Netherlands ‘Oranje’ Incorporated v Kuys [1973] 1
WLR 1126. He shall not form part of the quorum and vote on the matter
as he has a material and direct interest in it. Minutes of the meeting
should record in sufficient detail his reasons for not voting as well as all the
other matters considered and decisions reached, including concerns or
dissenting views expressed by directors: paragraph A.1.6 of the Code.
Q1
(c) Advise the board of any corporate governance implications under the
Code of Corporate Governance Practices by letting Albert continue
to perform the roles of Chairman and CEO concurrently. If Albert is to
continue with both roles, discuss the actions that the board can take
to prevent any possible breach of the Listing Rules.
Ans (c)
Roles performed by Chairman
The Chairman and the CEO have different job functions. The Chairman is
pivotal in creating the conditions for overall board and individual director
effectiveness, both inside and outside the boardroom. He leads and runs
the board, which is accountable to shareholders.
Specifically, an effective Chairman:
•
sets the agenda, style and tone of board discussions to promote
effective decision-making and constructive debate;
•
promotes effective relationships and open communication, both inside
and outside the boardroom, between non-executive directors and the
executive team;
•
ensures that directors receive adequate and reliable information in a
complete and timely manner;
•
promotes the highest standards of corporate governance and ensures
that good corporate governance practices and procedures are
8
established; and
•
provides coherent leadership for the company, including representing
the company and understanding the views of shareholders and
ensuring that their views are communicated to the board as a whole.
Roles performed by CEO
The CEO, on the other hand, develops an effective management team,
develops and recommends strategy, business plans and budgets and is
responsible for corporate activities to achieve corporate strategy and
plans. He runs and leads the company and is accountable to the board.
Although other executives might also be directors of the company, it is the
CEO who is answerable to the board for the way the business is being run
and for its performance.
Advantages of holding both roles
Given the important respective roles that Chairman and CEO perform for
the company, it is essential for the proper functioning of the company that
they should be able to work well together. If not, the company cannot run
its business. However, conflicts do arise, particularly if the Chairman and
CEO have forceful yet different personalities. It therefore makes business
sense to combine the two roles in the same person.
There are other advantages such as:
•
A dynamic company like Eastwell (annual growth of 10% per year in
the past three years) needs a strong leader to provide overall
leadership and vision; and
•
Companies in the US have long combined the two roles in the same
person, but this has not harmed their business performance at all.
Advantages of separation of roles
However, if Albert performs the roles of both Chairman and CEO, it is
possible that he may dominate the decision-making process in Eastwell,
signs of which can be found in the way he championed the cause of GTH.
Further, given Albert’s status in Eastwell, it is unlikely that Ben, Charles
and Dan will stand up to him when they disagree with Albert on Eastwell’s
policies and future direction. Accordingly, with no credible opposition,
Albert will be tempted to control and run the company for his own personal
9
benefit rather than in the interests of the shareholders and other
stakeholders.
For the above reasons, it is difficult to create an environment of greater
accountability if the roles of Chairman and CEO are combined. Separating
the two roles will therefore reduce the possibility of these problems arising.
In addition, separation of the two roles will improve the corporate
governance standards of Eastwell to meet SEHK’s requirements in the
following manner:
•
A good corporate governance structure requires the Chairman and
CEO to perform distinct roles (see their different roles above), and
different mixes of ability and experience are required to perform these
two roles differently. The two positions must be held by two individuals
in order to provide a better balance of power on the board as well as to
keep an appropriate check over each other’s performance. The CEO
has the authority to take action while the Chairman has the authority to
monitor such actions and provide direction.
•
A separate Chairman provides a more effective channel for the board
to express its views on management and to provide the CEO with
guidance and feedback on his performance.
•
Long-term goals may come into conflict with short-tem ones. It is
difficult for one individual to manage both types of goal for Eastwell,
especially when the company is estimated to grow beyond a certain
size.
Advice to the board
All in all, the advantages of separation outweigh that of non-separation.
Hence, paragraph A.2.1 of the Code, which is set out in Appendix 14 of the
Listing Rules, provides that the two roles should be separate and not be
performed by the same individual, and that the division of responsibilities
between the Chairman and CEO should be clearly established and set out
in writing.
While the combination of the two roles is not in itself wrong, corporate
governance is all about the systems by which a company is controlled and
managed. The splitting of the two roles is a measure which helps to avoid
any possible abuse of powers.
10
Non-separation is possible
However, there may be circumstances under which it may be appropriate
for the same person to be both Chairman and CEO. An example of this is
in times of financial difficulties, when an all-powerful leader should be
appointed to turn the company around.
Other relevant justifications could be:
(i)
(ii)
accountability and independent decision making have not been
compromised with combined roles; and
there is a sufficient number of INEDs to make their voices heard
during board discussions and thus enable the board to benefit from
objective judgment.
If Eastwell could manage to put in place measures to ensure accountability
and find a sufficient number of INEDs to counteract Albert’s influence on
the board, it might consider letting Albert continue with both roles. The
best way to do this would be to secure shareholders’ endorsement by
including the proposal as part of the resolutions to put to members’ vote in
the next general meeting.
As for the possible breach of the Listing Rules, the Code contains two
levels of recommendations: code provisions (CP) and recommended best
practices (RBP). CPs are principles that listed companies are expected to
follow while the RBPs are for guidance only. Paragraph A.2.1 is a CP.
Since Eastwell aspires to be a listed company, it is expected to follow what
other listed company do, i.e. comply with CPs and state in their interim
reports and annual reports that they have complied with the CPs for the
relevant accounting period.
However, like other listed companies, Eastwell may choose to deviate from
paragraph A.2.1. In doing so, it must set out considered reasons in its
interim reports and annual reports. In the case of the RBPs, listed
companies are encouraged, but are not required, to state whether they
have complied with them and give considered reasons for any deviation.
Q1
(d) Critically analyse, in the context of corporate governance, whether or
11
not the board should award GTH the contract to review Eastwell’s
internal control systems. If you agree that the board should give the
contract to GTH, discuss the factors that the board should consider
to ensure GTH’s objectivity and independence.
Ans (d) Benefits of incumbent auditors performing non-audit services
In its ‘Code of Ethics for Professional Accountants’ (HKICPA Code), the
Hong Kong Institute of Certified Public Accountant considers it beneficial
that auditors should provide non-audit services to their clients because
This will often result in the assurance team obtaining information
regarding the assurance client's business and operations that is
helpful in relation to the assurance engagement. The greater the
knowledge of the assurance client's business, the better the
assurance team will understand the assurance client's procedures
and controls, and the business and financial risks that it faces.
Accordingly, it may be in Eastwell’s interests to hire GTH to review its
internal control systems because the auditors, having already obtained a
thorough understanding of the company's operation and business through
audits in the past 15 years, will be able to issue a report very quickly and
might expedite the company’s listing application.
Threats to GTH’s objectivity
However, since the proposed fee for the internal control review would
exceed half of the total amount of the firm’s audit fees for the last year,
GTH’s objectivity and independence may be compromised as it may not
be prepared to tell the truth in order to maintain a cordial relationship with
Eastwell. The purpose of doing so would be to win more non-audit work in
the future and thus earn substantial non-audit fee income.
The Enron case is a good example of an auditor currying favour with its
client in this way. The firm of Arthur Andersen, Enron’s auditor, was
suspected to have been reluctant to question Enron’s accounts because
this would risk losing not just the audit work but also the substantial
non-audit income earned by the firm's consultancy arm. (Or similar other
example)
Accordingly, you should advise the board that non-audit services may
12
pose a threat to GTH’s objectivity and independence. You must emphasise
to the board that even perceived threats can arouse doubts among the
company's stakeholders and regulators. The Accountants' Code also
requires GTH to consider whether its provision of a non-audit service to
Eastwell would create a threat to the actual or perceived independence.
Role of audit committee
Eastwell’s audit committee is tasked with developing and implementing
policies to ensure that the provision by GTH of such non-audit services
does not pose a risk to its objectivity and independence: paragraph C3.3 of
the Code.
As per paragraph C.3.3 note 4 of the Code, the Chairman of the audit
committee may refer to the ‘Principles of Auditor Independence and the
Role of Corporate Governance in Monitoring an Auditor's Independence’
issued by the technical committee of the International Organisation of
Securities Commissions in October 2002 and ‘A Guide for Effective Audit
Committees" published by HKICPA in February 2002 for guidance.
To ensure that the provision of non-audit services does not impair GTH's
independence or objectivity, paragraph C.3.3 note 3 of the Code suggests
the audit committee consider:
•
•
the nature of the non-audit services and fee levels;
whether GTH has the necessary skills and experience to perform the
services satisfactorily; and
•
whether there are safeguards in place to ensure that there is no threat
to objectivity and independence in the conduct of the internal control
review.
Specific factors to ensure GTH’s objectivity and independence
•
Whether GTH’s audit team has the ability to apply a proper degree of
professional scepticism in auditing the financial statements.
•
Whether the internal control review service is provided by the partners
and staff of GTH who have any involvement in the audit of Eastwell’s
financial statements.
•
Whether the objective of the proposed engagement appears to be in
conflict with the objectives of the financial audit.
•
Whether the Company Secretary and the whole audit committee are
13
appropriately informed on a timely basis of all significant facts and
matters that bear upon the auditor's objectivity and independence.
•
Whether fees for the internal control review service are calculated on
the contingent fee basis which involves in a future audit judgement
relating to a material balance in the financial statement of the company
which may result in the risk of aligning the firm's interest closely with
the company (i.e. self-interest threat).
•
Whether the company’s senior management is capable of making
independent management judgements and decisions on the basis of
the recommendations provided by the GTH’s internal review team
supported by objective and transparent analyses and whether the
company's management will be given the opportunities to decide
between reasonable alternatives.
•
The audit committee as a whole has to form an opinion that the level
and scope of non-audit services does not impair the objectivity of GTH
and that there is a clear benefit obtained from the engagement before
seeking the approval from the board.
14
SECTION B
(Answer THREE questions from this section)
Q2. One of the internal auditors of Roy Group Limited (Roy Group) has discovered
an accounting error in the company’s books – $0.5 million in revenue
expenditure was falsely reported as capital spending, which increased the
company’s profits
erroneously.
The internal auditor reported his concerns to the head of internal audit then to
the company’s external auditors and finally to the audit committee, but all to no
avail.
The new Chairman of the audit committee realises that it is the time to propose
to
the board that published internal procedures for dealing with whistleblowers be
adopted.
REQUIRED:
You are the Company Secretary of Roy Group. Prepare a proposal on a
whistle blowing policy and its related procedures for the new Chairman of
the audit committee.
Ans Rationale of publishing an internal whistle-blowing policy
Whistle-blowing is a tool in combating malpractice and uncovering misconduct
or significant risks within the company. It aims to deter malpractice by
increasing the possibility of detection and punishing perpetrators. Serious
malpractice or misdemeanours could damage the company causing financial
loss, severe penalties or damage to the company’s reputation.
A properly implemented whistle-blowing policy helps promote the internal
control and risk management system and thereby enhances corporate
governance within a company and indirectly minimises costs by reducing fraud,
corruption and other malpractice. It can also enhance trust of shareholders,
customers, suppliers, creditors and staff and enhance the company’s
reputation. The company should commit to developing an open culture in
which employees report their legitimate concerns without fear of penalty. In
order to avoid any threat against an honest employee who makes an allegation,
the company should establish a fair system for dealing internally with
accusations from whistleblowers. The company should take malpractice or
misconduct seriously. The policy should be clearly explained and made known
to all employees.
15
Under the UK Combined Code and the recommended best practice of the Hong
Kong Code, the audit committee should review arrangements by which staff of
the company may, in confidence, raise concerns about possible improprieties in
matters of financial reporting or other matters. The audit committee’s objective
should be to ensure that arrangements are in place for the proportionate and
independent investigation of such matters and for appropriate follow-up action.
A well-drafted whistle-blowing policy should include at least the following:
•
A statement which says that the company takes any genuine
whistle-blowing and the allegations of whistle-blowers seriously. On the
basis of a culture of ethical conduct, the company should be prepared to
encourage whistle-blowing.
•
Examples of misconduct to which the whistle-blowing policy is applicable
and the level of proof regarded as sufficient to justify whistle-blowing, or
alternatively to indicate to employees what it would regard as a failure in the
system.
•
A statement that the identity of the whistle-blower and the details of the
report will be kept confidential and that there should be respect for
individuals who blow the whistle.
•
Its policy about disciplining employees found to have been malicious in
making allegations. The consequence of false or malicious accusations, e.g.
that these may lead to disciplinary action or dismissal, should be stated.
•
Reporting channels
Although it will often be necessary to involve senior executives in the
investigation of allegations, the channel for complaints should not be
open to senior executive management or the board only.
One possible arrangement would be for allegations to be made to the
Company Secretary, who would then notify the senior non-executive
director. This director, or a committee of non-executive directors, could
then decide how the allegation should be investigated.
•
Investigation procedures
An allegation might be investigated on behalf of a company by a firm of
solicitors on the ground of possible criminal activity involved or a
misdemeanour that could expose the company to heavy civil liability.
The firm of solicitors tasked with the investigation should not have a
close relationship with the company, so that the investigation can be
seen to be independent.
16
•
Statement of acknowledgement and recognition of the importance of
whistle-blowing.
Other matters to consider during implementation
(1)
Confidentiality
As the whistle-blower does not enjoy any statutory protection against
redundancy, demotion or any other kind of penalty by his employer nor is he
entitled to bring a legal action against his employer in respect of any
victimisation as a result of the whistle-blowing, effective policy and procedures
should be in place to prevent reprisals against the whistle-blower. Employees
should be assured no whistle-blowers will be victimised. Confidentiality is also
crucial for protection of sensitive information and evidence which, if leaked, may
make it difficult to prove the case against the perpetrators.
(2)
Level of proof required
It would be useful for the company to provide some examples of misconduct or
guidance on the level of seriousness and evidence which are expected from the
intended whistle-blower. Employees should be reminded to take great care
when checking the accuracy of the information before it is provided to the
company. The company should assure its employees that even if they provide
wrong information, so long as this act is unintentional and in good faith, it will
not result in any disciplinary action against them. This will encourage
employees to raise any legitimate concerns without fear of punishment.
(3)
Malicious allegation
The company should make clear in the policy that any whistle-blowing involving
malicious or wrongful accusations will result in discipline or even dismissal of
the whistle-blower to ensure that there will be no abuse of the mechanism.
(4)
Reporting channels
Appropriate reporting lines and relevant procedures should be devised based
on the company’s own structure and should be set clearly in the whistle-blowing
policy so that the whistle-blower knows to whom he should make his report. It
may be necessary to set different reporting lines for different scenarios. For
example, a report of a misconduct concerning a fellow staff member could be
made to the department head.
17
One possible arrangement would be for allegations to be made to the Company
Secretary or head of internal audit, who would then arrange for the senior
non-executive director to be notified. He or she could then decide how the
allegation should be investigated. The person to whom whistle-blower should
go should be readily accessible. The company should also indicate how the
employee may, if necessary, take the complaint to an outside body for
investigation. The allegation may be investigated by either a firm, which is on
behalf of the company, or by a firm of solicitors. In order to make the allegation
independently, the assigned solicitors should not have close relationship with
the company or the board of directors.
(5)
Investigation procedures
The employees should be kept informed of the actions and procedures to be
taken after their report is made, e.g. the investigation procedures, approximate
time that the investigation will take and whether the whistle-blower will be
notified of the progress of investigation.
(6)
Recognition of whistle-blowing
The company should acknowledge and recognise the courage and contribution
of whistle-blowers who are essentially participating in the promotion of
corporate governance in the company.
(7)
Gather employee support
The rules on whistle-blowing procedures should be published and made easily
available to all employees. Employees’ confidence in the procedures is crucial
for successful implementation. Getting the employees involved in the
establishment and continuous monitoring of the procedures by way of
appointment of an employee representative may be valuable in building up this
confidence. The employees must also be convinced that the whistle-blowing
system has the wholehearted support of the board.
(8)
Constant review
The company should establish procedures to review the effectiveness of the
whole arrangement and system regularly. It is recommended best practice that
the audit committee should be required to review the arrangements and to
ensure that proper arrangements are in place for the fair and independent
investigation of these matters and for appropriate follow-up action: paragraph
C.3.7 of the Code. The UK Combined Code has a similar provision.
18
Q3. Your friend has recently agreed to act for the first time as the Company
Secretary of a listed Hong Kong company.
Among the areas that your friend was asked to come to grips with is directors’
and officers’ insurance (D&O insurance). He does not know much about it but
was told that D&O insurance, which also covers company secretaries, can
promote good corporate governance in the company.
Your friend is also required to plan and design a directors’ induction
programme, which, in his view, is an expensive exercise in terms of cost and
management time.
REQUIRED:
Q3
(a) Brief your friend about D&O insurance and explain the role of these
policies in promoting good corporate governance.
Ans (a) Brief outline of D&O insurance
Different insurers have different insurance policy provisions with varying
degrees of coverage and terms. There is therefore no specimen policy.
D&O insurance covers a claim alleging a wrongful act of the officers for
the: (i) company liability to indemnify the directors and/or officers against
any liability and defence cost; and the (ii) personal liability of the directors
and/or officers against any liability and defence cost. It can be extended
to cover company securities liability to defend or pay any claims from
shareholders for the loss in value of their shares. A wrongful act must be
something done in the capacity of director or officer. A claim is usually
defined narrowly requiring the evidence of written demands or legal
proceedings by third parties. It is a policy condition for the company to
immediately notify the insurer of any facts or circumstances that have or
may give rise to a claim.
The policy normally covers directors (executive or non-executive) for
personal liability, officers (including usually senior managers, auditors, the
Company Secretary or other named persons) for personal liability, and the
insured company for company liability. Usually the company itself, parent
19
and/or subsidiary companies may be covered as the ‘insured company’.
However associated companies may not be included unless especially
arranged with the insurer. Directors or officers seconded to work in an
associated or unrelated company should be covered either under the main
or the associated/unrelated company’s policies. The insurance can be
extended to cover former directors and officers and to directors and
officers sitting on boards outside the insured group at the request of the
company.
There is no fixed rule or formula for companies in determining the
appropriate level of insured amount. Some academic studies suggest that
amount varies with corporate size, return on assets, leverage ratio and
level of business activity in the US.
Most policies are insured on a claims-made basis, and normally claims
first brought against the insured during the policy period are covered.
Depending on the negotiation skills of the company cecretary, many D&O
insurance policy allows a grace period for claims to be made. Common
exclusions are: fraudulent, criminal or willfully reckless, malicious or
dishonest acts, libel and slander.
Role in promoting corporate governance
Directors can be made liable for negligence or for a breach of duty or trust
in relation to their company. The risk of facing legal action or incurring
personal liabilities might therefore deter individuals from becoming
directors. This is particularly the case with non-executive directors who
cannot usually be expected to know as much about the company and its
business as their executive director colleagues. A non-executive director
could potentially be accused of negligence or breach of duty for reasons
he might not have been fully aware of at the time. D&O insurance
protects directors against the potential risk of personal liability.
D&O insurance is not a mandatory requirement for companies in Hong
Kong. It is however a recommended best practice under Appendix 14 of
the Listing Rules that “company should arrange appropriate insurance
cover in respect of legal action against its directors”: paragraph A.1.9. of
the Code. The primary protection function of D&O insurance is therefore
increasingly important in protecting the company, the directors and officers
20
from personal liability and defence costs. The provision of D&O insurance
will be expected by capable and competent directors and officers so as to
reduce their exposure.
Q3
(b) Advise him on the significance of director induction programme and
suggest the content of a typical induction programme.
Ans (b) The significance of director induction
An effective board is crucial for the success of a company and in creating
shareholder value. A director is collectively responsible with fellow board
members for leadership and control of the company, by directing as well
as supervising its affairs.
The primary objective of director induction is to provide new directors with
necessary information so that they can become effective as soon as
possible in their new role. This need has become even more acute in
light of the demand for better corporate governance worldwide and
increasing expectations of directors from shareholders, regulators as well
as other stakeholders.
The Hong Kong Code requires that each newly appointed director of the
company should receive a comprehensive, formal and tailored induction
on the first occasion of his appointment, and subsequently such briefing
and professional development as is necessary, to ensure that he has a
proper understanding of the operations and business of the company and
that he is fully aware of his responsibilities under statute and common law,
the Listing Rules, applicable legal requirements and other regulatory
requirements and the business and governance policies of the company:
paragraph A.5.1 of the Code. The Chairman of the board should lead the
induction process. This is in line with the spirit of the Code: under
paragraph A.2.3 of the Code, a Chairman is to be responsible for ensuring
that directors receive adequate information, which must be complete and
reliable, in a timely manner. The Company Secretary plays an important
role in facilitating the induction process.
Contents of induction programmes
Induction programmes may include training and development activities
ranging from an informal chat over dinner to more structured programmes.
21
Specifically, it may include:
•
•
•
•
visits to key company sites
product presentations
meetings with board members and management staff
meetings with major shareholders, external advisers of the company
and suppliers
• meetings with internal and external auditors
There should also be an assessment of any specific training requirements
for the new director and provision of suitable training programmes.
A comprehensive but phased induction pack is essential material and this
should be provided to the new director as soon as he or she is appointed
and prior to the first board meeting.
Essential information to be provided to the directors as soon as
practicable following their appointment and prior to the first board meeting:
Material relating to the directors' duties under legal and regulatory
requirements and the company's policies
•
Brief outline of statutory duties and responsibilities of directors,
ongoing obligations under the Companies Ordinance, Listing Rules
and Hong Kong Code.
•
Up-to-date copy of the company's memorandum and articles of
association or bye-laws.
•
Company's guidelines on matters reserved for the board, policy for a
director to include additional matters in the agenda for regular board
meetings, policy for obtaining independent professional advice for
directors and other standing orders.
•
•
•
•
Company's procedures regarding directors' share dealings.
Company's internal control system and risk management procedures.
Company's policies on ethics and whistle-blowing.
Minutes of board meetings held during the last 12 months together with
board papers and reports submitted to the board during these
meetings.
•
Financial calendar, schedule of dates of board meetings and board
committee meetings and other key events including annual/interim
results announcements and AGM.
22
•
Description of board procedures covering details such as when board
papers are sent out and location of meeting, etc.
•
Details of board sub-committees together with terms of reference and,
where the new director will be joining a committee, copies of the
minutes of meeting of that committee during the last 12 months.
•
Brief biographical and contact details of all directors (including any
declarations of interest), Company Secretary and other key executives.
•
Details of the company's advisers, e.g. auditors and legal advisers
(including contact details of partner-in-charge).
•
Guidance notes on Directors Duties and Responsibilities and
Corporate Governance published by the HKICS
Material relating to the company's organisation, business and operations
•
Company's mission statement, corporate values, company's products
and services, organisation and group structure chart, list of major
subsidiaries, associated companies and joint ventures, annual reports.
•
Current strategic/business plan, market analysis and budgets for the
year with revised forecast, three/five year plan (where available).
•
•
Details of any major litigation undertaken or against the company.
Summary details of the company's principal assets, liabilities, major
competitors and significant contracts.
•
Summary of major events such as mergers, divestments, introduction
of new products, diversification into new areas, restructuring over the
past three years.
•
Summary details of major group insurance policies including D&O
liability insurance (e.g. the form and amount of insurance coverage).
Other material to assist the new director to develop his knowledge of the
company
•
•
•
Brief history of the company.
Minutes of any general meetings held in the past three years.
Company's investor relations policy.
•
Expenses policy and method of reimbursement.
23
Q4. John was recently chosen to be the Chairman of the board of Qincy Limited
(Qincy), which is an information technology company listed on the Main Board
of the SEHK in October 2002.
Impressed by the suggestions made in the HKEx Consultation Paper on
Review of the Code on Corporate Governance Practices and Associated Listing
Rules (HKEx Consultation Paper), John, in a recent meeting with Qincy’s top
executives, floated the idea of delegating many of the board committee
responsibilities particularly those of the nomination committee to a corporate
governance committee.
John was also told in the meeting that Qincy had not provided its board
members with any development programme to update their changing
responsibilities and to improve their effectiveness.
REQUIRED:
As the Company Secretary:Q4
(a) Write a report to John suggesting the possible functions,
composition
and meeting procedures of the corporate governance committee.
[Where appropriate, candidates may make reference to the principles
in the Listing Rules, Code on Corporate Governance Practices and
HKEx Consultation Paper]
Ans (a) Functions of corporate governance committee
These are broader than the functions of any of the board committees.
Possible functions and responsibilities of the governance committee may
include:
1. Provide oversight of corporate governance matters and ensure the
corporate governance policies and practices of the company, in
addition to conforming to legal or listing requirement, governance
rules and regulations, promote long-term financial performance;
review the company’s governance guidelines annually and
recommend to the board any changes deemed appropriate for
24
2.
3.
4.
5.
upgrades.
Help to foster ethical behaviour at the top and throughout the
organisation and review the company’s codes of ethics to ensure they
express high standards for ethical behaviour.
Become the board’s performance committee helping directors across
their range of responsibilities to contribute value on a continual basis
to the board and to the corporation.
Make recommendations on board policy and structure, including
policies regarding board independence.
Consider all means of achieving director rotation to and from the
board and committee service and make recommendations to the full
board concerning the size of the board and structure of committees of
6.
the board.
Promote open dialogue with shareholders, and send a clear message
that shareholders’ nominations are welcome and will be treated with
7.
8.
due consideration.
Develop qualification criteria for members of the board.
Develop and disclose a process for identifying and evaluating
nominees for directorships.
9.
Recommend to the board the individuals to constitute the nominees of
the board for election at the next annual meeting of shareholders.
10. Recommend and nominate an individual for the post of director to fill
the unexpired term of any vacancy existing in the board of directors or
created by an increase in the size of the board.
11. Recommend and nominate members and chairs of the board/its
standing committees in consultation with the Chairman of the board.
12. Conduct an annual assessment of the size and composition of the
board of directors and the structure of committees of the board and
from time to time make recommendations to the full board for changes
in the size of the board, identifying missing qualities and
characteristics as appropriate.
13. Recommend to the board a code of business conduct and ethics
applicable to employees, officers and directors of the company and
the process for consideration and disclosure of any requested waivers
of such codes for directors or executive officers of the company. The
corporate governance committee also needs to review and monitor
the company officers’ compliance with this code of conduct.
14. Oversee the annual performance evaluation process of the board of
25
directors. Receive comments from all directors as to the board’s
performance and report annually to the board with an assessment of
its performance.
15. Oversee the orientation of new directors and continue to educate all
members on their responsibilities.
16. Review its own performance annually.
Composition of corporate governance committee
The corporate governance committee shall consist of all the members of
the board who satisfy the independence requirements of the SEHK and
other regulatory requirements. Committee members shall be elected by
the board at the full board meeting of the board. They shall serve until their
successors shall be duly elected and qualified, unless otherwise removed
at any time by the board. The Chairman of the corporate governance
committee shall be designated by the full board or, if it does not do so, the
committee members shall elect a Chairman by vote of majority of the full
committee.
Meeting procedures
The chairperson of the corporate governance committee will preside at
each meeting and, in consultation with the other members of the
committee, will set the frequency and length of each meeting and the
agenda of items to be addressed at each meeting.
The corporate governance committee shall meet as often as may be
deemed necessary or appropriate in their respective judgments, but not
less frequently than twice annually, either in person or telephonically, and
at such times and places as they shall determine.
The chairperson of the committee shall ensure that the agenda for each
meeting is circulated to each committee member in advance of the
meeting. The committee and subcommittee may request any officer or
employee of the company or the company’s outside counsel to attend
meetings or to meet with any members of or consultants to the committee
or subcommittee. A majority of the members shall constitute a quorum.
The committee shall meet periodically in executive session.
Q4
(b) Discuss with John the importance of continuous training and
26
motivation for
responsibilities.
directors
in
helping
them
carry
out
their
Ans (b) Continuous training and motivation for independent directors
The weight of responsibility carried by all directors and the increasing
commitment which their duties require emphasise the importance of the
way in which they prepare themselves for their posts.
The increasing complexity and speed of corporate life, coupled with
heightened demands and expectations on directors, makes it important
that they are intellectually and professionally able to perform the duties
imposed on them. In particular, the audit committee is clearly being
asked to do more.
Given the varying backgrounds, qualifications and experience of directors,
it is highly desirable that they should all undertake some form of internal or
external training; this is particularly important for executive and
non-executive directors with no previous board experience. Courses run
by the Hong Kong Institute of Directors and business schools cover the full
range of board responsibilities.
According to paragraph A.5.5 of the Hong Kong Code, all directors should
participate in a programme of continuous professional development to
develop and refresh their knowledge and skills to help ensure that their
contribution to the board remains informed and relevant. The company
should be responsible for arranging and funding suitable development.
A successful development programme will help the individual become
more effective and work to the benefit of the board as a whole and should
be appropriate for the company, its culture and the individual.
With continuing education, directors can keep abreast of changes in law,
corporate governance, accounting issues, marketing and management
trends, and relevant industry developments.
Development opportunities may be a mixture of formal and informal
initiatives, ranging from technical and operational briefings and updates,
through attendance at seminars and mentoring. Participants would have
27
opportunities to exchange ideas and share experience with other directors
and experts when taking part in these training programmes. As an
incentive for continuing professional development, companies should
reimburse directors for any relevant expenses incurred.
For training to be effective, all development activities will require some
structuring, assessment and feedback. It is recommended that regular
appraisals of the board and board committees should be conducted and
the ongoing training should be devised in accordance with weaknesses or
inadequacies as identified in the appraisals. Training would also help to
improve board effectiveness to strengthen any weakness identified in the
board or board committee appraisals.
Possible measures to motivate the directors, in particular the independent
non-executive directors, to accept the increasing burdens of their office
are:
•
an ongoing, and in light of increasing workload, growing sense of civic
responsibility in serving Hong Kong’s corporate community through the
acceptance of appointments;
•
increased remuneration, in which case care will need to be taken that
the levels of remuneration do not reach a level where independent
directors’ independence is jeopardised by a desire to retain office and
the support of influential shareholders in order to continue to receive
such remuneration; and
•
minimising the liability which directors face for any alleged default in
performance of their duties (e.g. in form of D&O liability cover)
28
Q5
The year-end bonus payment to the global sales director of A Limited is based
on certain pre-determined performance indicators like sales targets and
working capital management (such stock turnover days and trade receivables
days).
During 2009, the company stopped manufacturing a low-margin and
price-competitive product category. As a result, there was a very significant one
time write-off of machinery and equipment as well as obsolete inventory. A
Limited recorded a loss that year.
Despite the loss, A Limited rewarded the global sales director with a substantial
bonus in 2009 for achieving the target performance indicators.
The new Chairman of the remuneration committee joined A Limited less than
three months ago.
REQUIRED:
Brief the new remuneration committee Chairman on:
Q5
(a) The issues in this case; and
Ans (a) Issues that the remuneration committee should seriously note in reviewing
the performance-based remuneration of senior management
The central issue in this case is the inappropriate link between corporate
performance and the incentive payment to the senior executive. The
current predetermined performance targets set for determining the
incentive bonus are badly defined and are not linked to the satisfactory
total annual earnings of A Ltd (whether before interest and taxation; or
before interest, taxation, depreciation and amortization; or after taxation).
The bonus payment scheme is inappropriate because the individual
concerned was rewarded a significant bonus at a time when A Ltd’s
financial performance was poor, which is against the interest of
shareholders.
The
existing
measurement
for determining
performance-based incentives, which is largely based on annual sales,
stock turnover and trade receivable days instead of total earnings net of
29
exceptional provisions or write-off, did not establish a link between
rewards to executives with the benefits accruing to shareholders and so
the interests of directors and shareholders are not in alignment.
The unsuitable measures of performance as the basis for deciding on the
quantum of performance-related payments currently selected enable the
individual executive to succeed in achieving targets that earn high rewards
while the company itself and its shareholders do not obtain a comparable
benefit. When performance measures are based on the short term, i.e.
linked to annual results, this may not be in line with the interests of the
company’s longer-term development and performance.
Since the
company suffered a loss in 2009 even though there was satisfactory
growth in sales, the executive was paid high remuneration during the year
in which the company performed badly. It appears to the investment
community that the executive is being rewarded for failure.
Q5
(b) The issues to be considered in designing performance-related
incentives.
[Candidates should make reference to all relevant principles in The
UK Corporate Governance Code and the Code on Corporate
Governance Practices in Hong Kong.]
Ans (b) The remuneration committee should consider the following corporate
governance principles and practices:
(i)
The UK Combined Code sets out that:
•
Performance-based bonuses/incentives measurement should
be carefully defined, setting annual versus long-term
performance targets (financial and non-financial).
•
The performance-related elements of remuneration should form
a significant proportion of the total remuneration package of
senior executives and should be designed to align their interests
with those of shareholders and to give these executives keen
incentives to perform at the highest levels. If the executive
successfully achieves predetermined levels of performance, he
or she should be rewarded accordingly. The purpose of
performance-related remuneration is to give an executive an
incentive to achieve performance targets. This is why potential
30
performance-related pay should be substantial. It is clearly in
the interests of good corporate governance that executives
should be motivated to perform, but it is equally important that
the performance targets set for each individual executive are (a)
sufficiently challenging, and (b) related to objectives that are in
the interests of the company and its shareholders.
(ii)
Schedule A of the Combined Code sets out the principles for
designing a scheme of performance-related remuneration:
•
The remuneration committee should consider whether the
executives should be eligible for annual bonuses. If so,
performance conditions should be relevant, stretching and
designed to enhance shareholder value. Upper limits should be
set and disclosed. There may be a case for part payment in
shares to be held for a significant period.
•
The remuneration committee should consider whether the
directors should be eligible for benefits under long-term
incentive schemes. Traditional share option schemes should be
weighted against other kinds of long-term incentive scheme. In
normal circumstances, shares granted or other forms of
deferred remuneration should not vest, and options should not
be exercisable, in less than three years. Executives should be
encouraged to hold their shares for a further period after vesting
or exercise, subject to the need to finance any costs of
acquisition and associated tax liabilities.
•
Any new long-term incentive schemes which are proposed
should be approved by shareholders and should preferably
replace any existing schemes or at least from part of a well
considered overall plan, incorporating existing schemes. The
total rewards potentially available should not be excessive.
•
Payouts or grants under all incentive schemes, including new
grants under existing share option schemes, should be subject
to challenging performance criteria reflecting the company’s
objectives. Consideration should be given to criteria which
reflect the company’s performance relative to a group of
comparative companies in some key variables such as total
shareholder return.
•
Grants under executive share option and other long-term
31
incentive schemes should normally be phased in rather than
awarded in one large block.
•
The remuneration committee should consider the pension
consequences and associated costs to the company of basic
salary increases and any other changes in pensionable
remuneration, especially for directors close to retirement.
(iii)
The Hong Kong Code provides that:
•
The remuneration committee is responsible for recommending
for the board’s approval a policy and structure for all
remuneration of directors and senior management and on the
establishment of a formal and transparent procedure for
developing policy on such remuneration: paragraph B.1.3 (a).
The remuneration committee should try to find the elusive
balance between rewarding their directors and top executives
sufficiently, but at the same time structuring the reward package
so as to bring the interests of shareholders and executives into
alignment.
•
The remuneration committee should review and approve
performance-based remuneration. It should consider factors
such as salaries paid by comparable companies, time
commitment and responsibilities of senior management,
employment conditions and desirability of performance-based
remuneration.
•
The remuneration committee should review and approve
performance-based remuneration by reference to corporate
goals and objectives resolved on by the board from time to time.
32
Q6. Chatham Asia Limited (CAL), which is a Hong Kong-incorporated company
which was listed on the Main Board of the SEHK in May 2010, the company is
considering whether it should appoint Mary to be its the Company Secretary.
Alex, the Chairman, has asked you to brief him before the board interviews
Mary next week.
REQUIRED:
Brief Alex on the following:
Q6
(a) The Listing Rules’ requirements that Mary has to meet in order to be
appointed as CAL’s Company Secretary. If CAL were incorporated in
Mainland China, how would the requirements on Mary be different?
Ans (a) Qualifications of a Company Secretary
According to Rule 8.17 of the Listing Rules, the Company Secretary of
CAL must be a person who is ordinarily resident in Hong Kong and who
has the requisite knowledge and experience to discharge the functions of
secretary of a listed company and who:
•
is an ordinary member of The Hong Kong Institute of Chartered
Secretaries, a solicitor or barrister as defined in the Legal Practitioners
Ordinance or a professional accountant: Rule 8.17(2); or
•
is an individual who, by virtue of his academic or professional
qualifications or relevant experience, is, in the opinion of the SEHK,
capable of discharging the functions of a Company Secretary of a
listed company: Rule 8.17(3).
Mainland issuers
If CAL were incorporated in Mainland China, rule 19A.16 of the Listing
Rules states that its Company Secretary need not be ordinarily resident in
Hong Kong as long as he can meet the other requirements of Rule 8.17.
The Note to Rule 19.A.16 also states that if the Company Secretary does
not possess a qualification referred to in Rule 8.17(2) the issuer will have
to satisfy the SEHK that he meets the requirement referred to in Rule
8.17(3). In assessing ‘relevant experience’ the SEHK will normally
consider, among other things, the period of his employment with CAL and
33
his familiarity with the Listing Rules.
Q6
(b) The corporate governance responsibilities that Mary will undertake if
she is appointed.
Ans (b) In general, the corporate governance responsibilities of a Company
Secretary are to ensure that all directors should have access to his advice
and services with a view to ensuring board procedures and all applicable
rules are regulations are followed: paragraph A.14 of the Code.
Specifically, the responsibilities may include:
•
establish an effective working relationship with the Chairman and the
CEO, with accountability to the board (through the Chairman) for all
matters relating to directors’ duties as an officer of the company;
•
ensure the smooth running of the board and board’s committee’s
activities by:
helping the Chairman to set agendas;
preparing papers and presenting these papers to the board and
board committees; and
advising on board procedures and ensuring the board follows them
•
act as a confidential sounding board to the Chairman, non-executive
directors and executive directors on points that may concern them, and
to take a lead role in managing inter-personal issues on the board, e.g.
the exit of directors from the company;
•
act as a primary point of contact and source of advice and guidance
for, in particular, non-executive directors regarding the company and its
activities in order to support the decision-making process;
•
•
act as the conscience of the company;
keep under close review all legislative, regulatory and corporate
governance developments that might affect the company's operations,
and ensure that the board is fully briefed on these and that it has
regard to them when taking decisions;
•
ensure the concept of stakeholders (particularly employees) is in the
board's mind when important business decisions are being taken,
monitoring developments in corporate social responsibility (CSR) and
advising the board in relation to its policy and practices with regard to
CSR;
•
act as an additional enquiring voice in relation to board decisions which
34
particularly affect the company, drawing on his experience and
knowledge of the practical aspects of management including law, tax
and business finance;
•
ensure, where applicable, that the standards and/or disclosures
required by Listing Rules are observed;
•
ensure compliance with the continuing obligations of the Listing Rules
and Takeovers Code, such as ensuring publication and dissemination
of annual reports and interim reports, timely dissemination of
announcements to the market and ensuring that proper notification is
made of directors' dealings in securities;
•
manage relations with investors, particularly institutional investors, with
regard to corporate governance issues and the board practices in
relation to corporate governance;
•
induct new directors into the business and explain their roles and
responsibilities;
•
ensure that the board is fully aware of its responsibility to ensure that it
does not mislead the market by putting out or allowing the release of
misleading information about its financial performance or trading
condition, or by omitting to state information which it should state, or by
engaging in a course of conduct which could amount to misleading the
market;
•
ensure compliance with all statutory filings and regulatory disclosures;
and
•
arrange and manage the annual general meeting and establishing,
with the board’s agreement, the items to be considered at the meeting,
including resolutions dealing with governance matters.
END
35