ISEQ Corporate Governance Review 2009 - Business Risk Services
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ISEQ Corporate Governance Review 2009 Business Risk Services
Grant Thornton Corporate Governance Review Contents Introduction 1 Executive summary 3 1. Corporate governance 9 2. Non-executive directors 11 3. Board and committees 15 4. Audit committee and auditors 19 5. Remuneration committee 23 6. Nomination committee and appointments 27 7. Internal control and risk management 29 8. Shareholder relations 33 9. Corporate responsibility 35 Methodology 37 Appendix 39 About Grant Thornton 41
4 January 2008
Grant Thornton Corporate Governance Review
Introduction
We are pleased to present our 2009 Corporate 1 the Code should be enforceable by incorporating
Governance Review. The report examines the into legislation key provisions, such as the
degree to which companies listed on the main requirement for independent audit committees,
index of the Irish Stock Exchange (ISEQ) comply and backing them with a framework of effective
with the disclosure provisions of the Financial sanctions for non-compliance;
Reporting Council’s Combined Code on Corporate
Governance (the ‘Code’). Compliance with the 2 the Chairman and Chief Executive need to be held
Code is not enforced by legislation. However, it directly accountable for ensuring good corporate
is a condition of listing on the ISEQ and generally governance and transparency in corporate
accepted as best practice for all listed companies. reporting;
In a period of unprecedented economic turmoil 3 given the importance of the role of the
marked by company failures and financial scandals, it independent directors in listed companies, there
is clear that companies are doing enough to comply should be a limit to the number of boards of listed
with the provisions of the Code whilst paying or public entities on which individuals can sit.
lip-service to the spirit and values exemplified by Independent directors should also be required to
good corporate governance. Best-in-class standards demonstrate that they have the time commitment
in corporate governance demand a genuine and skills necessary to carry out their role on a
commitment at board level to the promotion of board.
a corporate culture that values and promotes full
transparency in corporate reporting. It is vital that shareholders, regulators and
independent directors demand a higher standard of
The governance problems in both DCC and Anglo corporate Ireland, ensuring that even the most high
Irish Bank serve to highlight not only the damage profile of leaders are questioned on their companies
that can accrue to individual companies who fail adherence to the rules and spirit of financial
to meet this standard, but also the damage to the reporting and corporate governance standards. Those
reputation of Ireland as a transparent environment leaders should also be held accountable where there
and attractive place to do business. Recent events are clear breaches or failures in corporate governance
have shown that failure to meet the expectations of standards.
the global markets will ultimately destroy the trust of
international investors in Irish listed companies.
There are some specific recommendations which we
would like to see implemented to ensure that, as far Paul Raleigh
as it is possible, companies listed on the ISEQ adhere Managing Partner - Grant Thornton
to the highest international standards:
February 2009 12 January 2008
Grant Thornton Corporate Governance Review
Executive summary
The results of our detailed research, coupled with our December 2008 he indicated his intention to resign
observations on the current corporate governance from Allied Irish Banks.
challenges, have highlighted the following areas of
concern. These circumstances raise the question as to whether
an independent director can be effective in terms of the
Running an effective board time they are able to commit to each company, when
they act for a number of listed companies at the same
The overstretched independent director time.
The Code does not state that there should be a limit on
the number of simultaneous independent directorships Chairman and Chief Executive Officer are the same
one holds, but a point worth noting from the recent The Code frowns upon the practice of the same person
resignation by Sean Fitzpatrick from several listed taking both the roles of Chairman and the Chief
companies, is the number of directorships he held. Executive Officer1 (CEO). This attracted considerable
publicity in 2008 when Jim Flavin, who had occupied
Following his resignation as Chairman of Anglo Irish both roles in DCC, had to resign from the board
Bank, he also had to resign from four other Irish listed following public pressure. Sir Stuart Rose of Marks &
companies, namely Aer Lingus where he was the Spencer plc is another well known example of someone
Senior Independent Director on the board, and Smurfit currently occupying both roles in spite of adverse media
Kappa where he was Chairman. He was also one of the attention.
independent directors on Gartmore Irish Growth Fund
and Greencore Group. On the Irish listed market, Dragon Oil had the same
individual acting as Chairman and CEO up to late
Other examples of high profile individuals who held September 2008 while the role of Chairman and CEO
concurrent directorships during 2008 include Kieran of Grafton Group is occupied by the same person.
McGowan, who was an independent director of four
Irish listed companies, appointed to CRH in 1998, Elan We would question whether the Code should allow
Corporation in 1998, Irish Life & Permanent in 1999 exceptions to this provision, especially in the current
and United Drug in 1999. He resigned from Irish Life economic climate, when the old adage may prove true –
& Permanent in November 2008. ‘two heads are better than one’.
Bernard Somers was also an independent director Chief Executive Officer becoming Chairman
of four companies during 2008, namely Allied Irish A number of Irish listed companies have breached the
Banks (2006), DCC (2004), Independent News and provision2 in the Code advising that a former CEO
Media (1997) and Irish Continental Group (2004). In should not be allowed to serve as Chairman of the same
company. This provision is based on the rationale that
1
Code Provision A.2.1 states ‘The roles of the chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the
chairman and chief executive should be clearly established, set out in writing and agreed by the boards.”
2
Code Provision A.2.2 states ‘A chief executive should not go on to be chairman of the same company. If exceptionally a board decides that a chief executive should
become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next
annual report’.
February 2009 3a former executive of a company cannot be sufficiently We also raise the question as to whether the passive
independent to serve as an effective chairman. approach to policing the Code is sustainable given
the consequences for shareholders and the wider
Seven companies listed on the ISEQ note that their stakeholder group evidenced by recent governance
chairmen, at the date of the last annual report, were scandals.
former chief executive officers. These are Grafton
Group (current chairman appointed in 1985), C&C The Anonymous ‘SID’
Group (2002), Icon (2002), Kingspan (2005), Real The main objective of corporate governance is to
Estate Opportunities Ltd. (date not disclosed), Anglo protect shareholder interests and this is achieved
Irish Bank (2005) and Aminex (2007). Although primarily by having an effective board. The
Sean Fitzpatrick was chairman of Anglo Irish Bank performance and remuneration of the board is normally
at the date of the company’s last annual report, he subject to scrutiny by non-executive directors who are
subsequently resigned on 18 December 2008. During led by the Senior Independent Director (SID). The SID
2008, Sean Fitzpatrick fulfilled the role of chairman of is normally named in the annual report accompanied
Anglo Irish Bank Corporation, until his resignation on by a personal biography and a photograph. Quite often
18 December 2008. He had been CEO up to 2005. the SID will be a senior business person with sufficient
gravitas to command the respect of his or her peers.
It is not possible to determine whether this list is
exhaustive as the absence of a disclosure in relation to One of the encouraging findings from this year’s survey
this provision is not sufficient to indicate compliance. is that the majority of Irish corporates have a SID but,
surprisingly two companies, namely Kerry Group and
The fact that this practice has been widespread for some Icon, did not mention the name of their SID.
time ensures that there is little to encourage companies
to comply. Nonetheless, compliance with this provision In response to our enquiry, Kerry Group said it ‘does
is an important aspect of board independence and not have a Senior Independent Director. The Board
should be adhered to by all listed companies. is of the opinion that the non-executive directors as
a group are of sufficient calibre and number to bring
Independence and beyond strength and independence to the Board and hence has
According to the Code3, disclosure should be made not nominated any one non-executive director to be a
where an independent director’s ‘independence’ may Senior Independent Director.’ Icon did not reply. We
appear to be compromised by one or more factors would question whether this is adequate disclosure for
listed in the Code. One of these factors is where an the wider stakeholder audience.
independent director serves on a company’s board
for more than nine years. For example, CRH and Audit Committees
Independent News & Media have independent The Code4 requires companies to name the members
directors who have spent more than nine years on the of their audit committees who have recent and relevant
board. financial expertise. Just over one in three companies
(34%) do not specifically name the financial expert on
The Code makes it clear that a director may be the audit committee.
considered independent notwithstanding their long
service. Both companies defend the position of their This year’s review shows that Datalex is the only
directors (in accordance with the Code’s provisions) company that does not specifically identify anyone as
and make various disclosures about this issue. having recent and relevant financial experience nor do
they invoke the default option of claiming collective
Given the recent turmoil in the markets, and the rapidly experience.
changing economic environment, we question whether
this aspect of the Code, continues to be appropriate. Twelve other companies include biographical details
There is an argument that fresh blood is needed in their financial report with the names of the audit
regularly on company boards to ensure a robust and committee members and details of their qualifications
up-to-date approach to the issues of the day. (e.g. member of a professional accounting, legal,
banking or insurance body). However, they fail to
3
Code Provision A.7.2 ‘Serving more than nine years could be relevant to the determination of a non-executive director’s independence (as set out in provision A.3.1)’.
Code Provision A.3.1 states ‘The boards should identify in the annual report each non-executive director it considers to be independent. The board should determine
whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect,
the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances
which may appear relevant to its determination’.
4
Combined Code C.3.1 states ‘The board should establish an audit committee of at least three, or in the case of smaller companies two, members, who should all be
independent non-executive directors. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience’.
4 February 2009specify whether or not individuals are deemed to be of somewhat vague rules, where ‘compliance’ can
suitably financially experienced. be achieved by doing the bare minimum to enable a
company to truthfully disclose that they have followed
It is noteworthy that some audit committees of FTSE the recommendations. Not surprisingly, this results in
350 listed companies in recent years have not only one compliance with the letter of the guidance, but not its
but two financial experts specifically named as having spirit, which is clearly not an acceptable approach in a
recent financial expertise on the audit committee. This principles-based regulatory regime.
goes beyond the strict requirement of the Code and is
an interesting development. We would encourage Irish The ‘comply and explain’ approach is based on the
plcs to look to this as the benchmark. premise that companies need to explain how they are
non-compliant with corporate governance principles
Describe and disclose and guidelines; the ‘either/or’ approach implies that,
where they are compliant, companies do not need to
Principles-based reporting expend any effort on explaining what measures they
A recurring trend visible throughout the detailed results have taken to reach that compliance.
of our review is the tendency for companies, even
when they have taken some steps towards compliance, In fact, not only have many companies in our survey
to disclose the minimum necessary. This trend is availed of this implicit option to give no details of
noticeable in relation to, for example: their compliance measures in many regards, but there
• the existence of financial expertise on the audit are numerous cases where they have also failed to
committee, as noted above and in section 4.2 explain instances of non-compliance. We believe that
below; the ‘comply or explain’ approach has largely failed to
• the monitoring and review of the effectiveness of achieve its objectives, and that allowing companies
internal audit (section 4.5); and discretion as to the level of detail in the existence of
• disclosures on significant failings and weaknesses disclosures and explanations is no longer appropriate.
in internal control, as recommended by the Revised
Turnbull Guidance (section 7.6). The only acceptable answer appears to be to adopt
a hybrid approach where important corporate
In each case, although the majority of companies governance principles are incorporated into legislation.
declare themselves compliant, the disclosures generally This approach can make compliance requirements
lack sufficient detail to allow shareholders to make their more explicit, and also provides for true enforceability
own assessment of the level of compliance. Whilst this and strong sanctions for non-compliance. Despite
may in some cases indicate that the level of compliance the incorporation of the Code into the ISE’s Listing
is in fact rudimentary, this is not always the case. For Rules at present, the only real sanction available to
example, the Turnbull Guidance on internal control shareholders dissatisfied with a company’s corporate
requires disclosure of the process taken in reviewing the governance is to sell their shares.
system of internal controls; whilst it may be possible
to assume that many companies simply do not have a The incorporation of corporate governance principles
formal process for this, those Irish companies that are into legislation was attempted in the US with the
compliant with the Sarbanes-Oxley Act certainly do passing of the Sarbanes-Oxley Act in 2002. The
have such processes, and yet they have failed to disclose approach to the implementation of one particular
details of this in their annual reports prepared with Irish provision of this act, section 404, and the requirement
investors in mind. to assess and certify internal controls, is regarded
by many as having cost far more than it achieved in
In practice, these disappointing results seem to stem benefits to companies or shareholders but this has
from a fundamentally misdirected approach to overshadowed the success of other sections of the act in
compliance with the ‘principles-based’ regulatory imposing independence and a stronger audit committee
regime that exists in Ireland. on boards of public companies. Ireland should heed this
experience.
The principles-based approach, encapsulated primarily
in the principles and provisions of the Code, is The approach to reforming principles-based reporting,
dependent for its success on companies embracing therefore, requires that:
these principles and incorporating the rationale behind • the government must ensure that it enacts
them into the way they structure and operate their legislation to enforce those corporate governance
organisations. However, the approach actually taken measures that can be codified in legislation.
generally seems to be to treat the principles as a set • companies must embrace the spirit of principles-
February 2009 5based reporting and provide more meaningful and a means of augmenting periodic reporting, has been
comprehensive disclosures on matters that are of somewhat overshadowed by recent events. In reality,
relevance and importance to investors. those recent events should highlight the need for a
• regulators, investors and other stakeholders must communications approach that produces smaller
increase their pressure on companies to report volumes of reporting, but more information that is of
appropriately and discharge their duties fully. relevance to shareholders and is communicated to them
as soon as it becomes relevant, rather than in the next
Future trends periodic report. This approach will also help alleviate
what many commentators consider to be the biggest
Managing the regulatory burden failing of the periodic reporting system—that it forces
Global approaches to corporate governance over the the board to focus on measures that maximise short-
past two decades have been characterised by cycles term profitability in order to meet analysts’ and the
of scandal and regulatory response. The failures of market’s earnings expectations, at the expense of the
Polly Peck and Robert Maxwell’s companies provided long-term benefit of the organisation.
impetus for the Cadbury Report in 1992. The collapse
of Barings Bank underscored the importance of Incentives for good governance
the Hampel Committee’s Combined Code in 1998 Research by the Association of British Insurers5 has
and corporate fraud at Enron and other companies shown a correlation between good governance and
prompted the enacting of the Sarbanes-Oxley Act in good share performance, relative to other companies
2002. and the market. However, this does not imply that
good governance causes good performance, just that
The ‘credit crunch,’ the collapse or near-collapse they tend to occur in the same companies.
of financial institutions and scandals in individual
companies such as Anglo Irish Bank or Satyam in The problem in rewarding good governance is that the
India have yet to produce a new cycle of regulation. only way shareholders have to punish bad governance,
Nonetheless, boards must anticipate that public short of US-style shareholder activism, is simply to sell
pressure on politicians to react to the crises will result their shares. However, the multitude of other reasons to
in such new regulation in due course. The prudent buy or sell shares means that any purchases or sales as a
approach for companies is to take a pre-emptive result of governance measures are lost in the ‘noise’ of
approach to compliance, by taking steps to address other market movements.
the arguments for additional regulation before the
regulation is proposed. This factor, coupled with the relative lack of regulatory
sanctions for poor corporate governance, means that
In particular, the low market capitalisation of quoted there is little downside to not being compliant, and little
companies—less than reported net asset values in many to be gained directly from good governance. The mixed
cases—implies that investors are concerned about two results from our analysis support this view.
particular issues; asset valuation and risk management.
This should be addressed urgently by greater However, we believe that this situation will change in
transparency in these processes, and by companies the coming year—in a market where most companies
disclosing, now and in their annual reports, what they are performing poorly, any means of standing out
are doing to address these issues. Since no individual from the crowd can prove valuable. We believe that
company is likely to want to take the initiative on its a company that is prepared to distinguish itself in its
own, this increased transparency should be introduced approach to corporate governance may be able to
on a sectoral basis, starting with financial services. outperform its peers.
Shareholder communications Restoring confidence
The speed with which the financial crisis has overtaken Ultimately, the major benefit of increasing the level
companies and the economy has again emphasised of compliance and corporate governance in Irish
the limitations of the traditional quarterly and annual companies is the potential for this to contribute to
cycles of shareholder communication. This traditional restoring international confidence in Ireland as a
approach represents a heavy periodic reporting suitable place to invest and do business. This ought to
burden for companies, and yet often fails to provide be one of the most important goals for our government
shareholders with relevant, concise, timely, meaningful over the coming year, and the boards of Irish companies
and complete information. Debate in the financial have a crucial role to play in supporting this.
services industry, regarding continuous reporting as
5
‘Research published in 2008 from the Association of British Insurers (ABI), shows that companies with the best corporate governance records have produced returns
18% higher than those with poor governance. The research also shows that shareholders investing in a poorly governed company suffer from low returns. e100 invested in
a company with good corporate governance, leads to an average return of e120 but if invested in the worst governed companies the return would have been just e102.’
6 February 2009Grant Thornton Corporate Governance Review
Survey results
This report was compiled in the last quarter of 2008,
based on publicly available data for 39 listed Irish
plcs. The population of companies in our review has
increased from our previous review in February 2008
which included 32 companies.
For more information on the methodology please turn
to page 37.
February 2009 78 February 2008
Grant Thornton Corporate Governance Review
1. Corporate Governance
1.1 Do they claim full compliance with the Code?
Guidance: “The existing Listing Rules require listed companies to make a disclosure statement in two
parts in relation to the Code. In the first part of the statement, the company has to report how it applies
the principles in the Code.” (Preamble: Code on Corporate Governance)
All but one company claimed compliance with the
Statement of Compliance with the Code
Code with 20 companies claiming full compliance
and 18 companies complying with exceptions. This No Mention 3%
is a major improvement on the 10 companies that Compliant with
claimed full compliance in our 2008 report. Exceptions 46%
Fully Compliant 51%
1.2 If not compliant, to what degree do they explain their reason for non-compliance?
Guidance: “In the second part of the statement the company has either to confirm that it complies
with the Code’s provisions or – where it does not – to provide an explanation.” (Preamble: Code on
Corporate Governance)
There was only one company that did not claim
Reason for non-compliance
compliance with the Code and it did not mention
any reasons for its non-compliance. No Mention 3%
Fully Compliant 97%
February 2009 9Grant Thornton Corporate Governance Review
2. Non-executive directors
The board should include a balance of executive and non-executive directors (and, in particular,
independent non-executive directors) such that no individual or small group of individuals can
dominate the board’s decision taking. (Combined Code A.3)
We have asked two additional questions in this year’s study (Questions 2.5 and 2.6), due to their significance
in the current economic environment.
2.1 Is at least half of the board comprised of independent non-executive directors?
Guidance: “Except for smaller companies6, at least half the board, excluding the chairman, should
comprise non-executive directors determined by the board to be independent. A smaller company
should have at least two independent non-executive directors.” (Combined Code A.3.2)
34 companies are fully compliant (compared
Board Balance
to 27 companies in the prior year). In 2008 the
remaining five companies were non-compliant. Non-compliant 8%
In 2009 the balance of the five companies is Compliant
split between two which were compliant with with exceptions 5%
exceptions and the remaining three companies Fully compliant 87%
were non-compliant with explanation.
6
A smaller company is one that has a lower market capitalisation than the smallest FTSE 350 company throughout the year immediately prior to the reporting year.
February 2009 112.2 How well do companies describe the consideration of independence?
Guidance: “The board should identify in the annual report each non-executive director it considers to be
independent. The board should determine whether the director is independent in character and judgment
and whether there are relationships or circumstances which are likely to affect, or could appear to affect,
the director’s judgment.
The board should state its reasons if it determines that a director is independent notwithstanding the
existence of relationships or circumstances which may appear relevant to its determination, including if
the director:
• has been an employee of the company or group within the last five years;
• has, or has had, a material business relationship with the company within the last three years;
• has received or receives additional remuneration apart from director’s fee, company’s share option,
performance-related pay scheme, company’s pension scheme;
• has close family ties with any of the company’s advisers, directors or senior employees;
• holds cross-directorships or has significant links with other directors;
• represents a significant shareholder; or
• has served on the board for more than nine years from first election.”
(Combined Code A.3.1)
There is a mixed response here as 20 companies
Independent Non-Executive Directors
were fully compliant (compared to 26 in 2008),
16 were compliant with exceptions, two were No mention 3%
non-compliant with an explanation and one Non-compliant
company did not make any comment on its with explanation 5%
board’s independence. Compliant
with exceptions 41%
Fully compliant 51%
2.3 Is it disclosed that the terms and conditions of appointment of non-executive directors are
available for inspection?
Guidance: “The terms and conditions of appointment of non-executive directors should be made
available for inspection7.” (Combined Code A.4.4)
In 2009, only 24 companies out of 39 were Letter of Appointment
fully compliant (compared to 22 from a
No mention 26%
total population of 32 in 2008). In 2009 five
companies were non-compliant with an Non-compliant
with explanation 13%
explanation. 10 companies did not mention
where their board’s terms of reference could Fully compliant 61%
be obtained (broadly the same as the eight in
our last review in 2008). It is possible that some
of these companies have terms of reference
available, but it should be clearly stated how
and where they may be accessed.
7
The terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company’s registered office during
normal business hours and at the AGM for 15 minutes prior to the meeting and during the meeting. (Footnote to Combined Code A.4.4)
12 February 20092.4 Led by the senior independent director, do the non-executive directors meet without the
chairman at least annually to appraise the chairman’s performance?
Guidance: “Led by the senior independent director, the non-executive directors should meet without the
chairman present at least annually to appraise the chairman’s performance.” (Combined Code A.1.3)
This year 30 companies claimed full compliance
Chairman Appraisal
with this provision regarding the appraisal of
the chairman’s performance, compared to 24 in No mention 13%
2008. Reviewing the chairman’s performance is Non-compliant
one of the most important duties of the Senior with explanation 5%
Independent Director under the Code. Five Compliant
with exceptions 5%
companies that did not comply did not mention
how the chairman’s performance was reviewed. Fully compliant 77%
Two were compliant with exceptions and two
were non-compliant with an explanation.
2.5 Is the board supplied in a timely manner with appropriate information to enable it to
discharge its duties?
Guidance: “The chairman is responsible for ensuring that the directors receive accurate, timely and
clear information. Management has an obligation to provide such information but directors should seek
clarification or amplification where necessary”. (Combined Code A.5)
This question is new in the 2009 report. Information in Timely Manner
26 companies claim full compliance, and a
No mention 13%
further seven are compliant with exceptions.
There was one company that was non- Non-compliant
with explanation 3%
compliant with an explanation and five
companies did not mention how they provided Compliant
with exceptions 18%
their board with timely information.
Fully compliant 66%
We would encourage all companies to
improve their compliance in this area as it
is vital to a company’s survival in times of
negative economic pressure to have speedy
communication of financial data.
February 2009 132.6 Do all directors receive induction on joining the board and regularly update and refresh their
skills and knowledge?
Guidance: “The chairman should ensure that the directors continually update their skills and the
knowledge and familiarity with the company required to fulfil their role both on the board and on
board committees. The company should provide the necessary resources for developing and updating its
directors’ knowledge and capabilities.” (Combined Code A.5)
This is a new question in 2009. 31 companies Induction Training
claim full compliance with this requirement.
No mention 13%
Five companies made no mention of induction
training and three complied with exceptions. Compliant
with exceptions 8%
The Higgs report issued in January 2003 Fully compliant 79%
recommended, among other changes, that
directors “undertake appropriate induction
and regularly update and refresh their skills,
knowledge and familiarity with the company”
and this has been incorporated into the Code as
principle A.5 and provision A.5.1.
14 February 2009Grant Thornton Corporate Governance Review
3. Board and committees
Every company should be headed by an effective board, which is collectively responsible for the
success of the company. (Combined Code A.1)
3.1 Is there a statement of how the board operates and how its duties are discharged effectively?
Guidance: “The annual report should include a statement of how the board operates, including a high
level statement of which types of decisions are to be taken by the board and which are to be delegated to
management.” (Combined Code A.1.1)
37 companies in this year’s review fully complied Board Operations and Duties
with the requirement to state how the board
Non-compliant
operates compared to 31 in 2008. There was with explanation 3%
one company which was compliant with an
Compliant
exception and another was non-compliant with an with exceptions 3%
explanation.
Fully compliant 94%
3.2 Does the report identify the chairman, chief executive, senior independent director, members
and chairs of the nomination, audit and remuneration committees?
Guidance: “The annual report should identify the chairman, the deputy chairman, the chief executive, the
senior independent director and the chairmen and members of the nomination, audit and remuneration
committees.” (Combined Code A.1.2)
35 companies complied fully with the Code with Board Members
regards to identifying the chairman, chief executive,
Non-compliant 8%
senior independent director and members and
chairs of the nomination, audit and remuneration Compliant
with exceptions 3%
committees. One company complied with an
exception and a further three companies were non- Fully compliant 89%
compliant as they failed to reveal the names above.
February 2009 153.3 Is the number of meetings of the board and overall attendance disclosed?
Guidance: “The annual report should also set out the number of meetings of the board and those, (audit,
remuneration, nomination) committees and individual attendance by directors.” (Combined Code A.1.2)
This requirement was fully satisfied by 38 Board Meetings
companies – only one company did not mention
No mention 3%
the number of board and committee meetings it
held during the year. Fully compliant 97%
3.4 Are the roles of chairman and chief executive exercised by different individuals?
Guidance: “The roles of chairman and chief executive should not be exercised by the same individual. The
division of responsibilities between the chairman and chief executive should be clearly established, set out in
writing and agreed by the board. (Combined Code A.2.1)
36 companies fully complied with the requirement Chairman & Chief Executive
to separate the roles of the chairman and chief
Non-compliant
executive compared to 28 last year. There were with explanation 8%
three companies that were non-compliant and gave
Fully compliant 92%
an explanation.
3.5 Is the role of chairman filled by a former chief executive of the same company?
Guidance: “A chief executive should not go on to be chairman of the same company. If, exceptionally, a
board decides that a chief executive should become chairman, the board should consult major shareholders
in advance and set out its reasons to shareholders at the time of appointment and in the next annual report.”
(Combined Code A.2.2)
In contrast to the other questions in this survey, it is not possible to determine whether a company is compliant by
reference solely to current circumstances; it is necessary to determine whether the current chair has occupied the
role of chief executive at any stage in the past. Thus, the absence of a disclosure in relation to this provision is not
sufficient to indicate compliance. Consequently, it is not possible to provide an exhaustive list of non-compliant
companies and so we have not prepared a chart of results for this question.
However, there are seven companies in the population under review whose most recently disclosed chair had
previously been CEO. These companies are listed in the executive summary.
16 February 20093.6 How is the performance of the board, committees and individual directors evaluated?
Guidance: “The board should state in the annual report how performance evaluation of the board, its
committees and its individual directors has been conducted.” (Combined Code A.6.1)
35 companies complied fully with the requirement Board Performance
to explain how performance evaluation of the
No mention 3%
board, its committees and its individual directors
was conducted. In percentage terms, this compares Non-compliant
with explanation 3%
very favourably with 2008 when only 24 companies
in that review fully complied. Of those that did not Compliant
with exceptions 5%
fully comply, two companies complied with an
explanation one company was non-compliant with Fully compliant 89%
an explanation and one company did not make any
mention of how board performance was evaluated.
3.7 Is it disclosed that the terms of reference for board committees are available for inspection?
Guidance: “The terms of reference of the audit committee, including its role and the authority delegated to it
by the board, should be made available8.” (Combined Code C.3.3)
“The remuneration committee should make available its terms of reference, explaining its role and the
authority delegated to it by the board.” (Combined Code B.2.1)
“The nomination committee should make its terms of reference available, explaining its role and the authority
delegated to it by the board.” (Combined Code A.4.1)
33 companies fully complied by clearly stating where but they were not cross-referenced to their annual
their terms of reference for the audit, remuneration and report. Another mentioned extracts from its terms of
nomination committees were available for inspection. reference in their annual report but they did not give
One company was non-compliant with an explanation any further details as to where the full copy of the terms
which, at the time of publishing their annual report in of reference might be obtained.
Spring 2008, stated that they would make their terms
available shortly. However, as of early January 2009, There were three companies that did not mention
we have not been able to locate the terms of reference in where their terms of reference were located. We have
spite of contacting the company for a copy. contacted all three for further details and two have since
supplied us with their terms of reference.
Two companies were non-compliant. One of the
companies websites contains the terms of reference
Terms of Reference
No mention 8%
Non-compliant 5%
Non-compliant
with explanation 3%
Fully compliant 84%
8
The requirement to make the information available would be met either by including the terms of reference on the company’s website, or by making it clear that the
terms of reference are available on request.
February 2009 1718 January 2008
Grant Thornton Corporate Governance Review
4. Audit committee and auditors
The board should establish formal and transparent arrangements for considering how they should apply
the financial reporting and internal control principles and for maintaining an appropriate relationship with
the company’s auditors. (Combined Code C.3)
4.1 Are all members of the audit committee independent non-executive directors?
Guidance: “The board should establish an audit committee of at least three members9 who should all be
independent non-executive directors.” (Combined Code C.3.1)
This is one of the three questions in the review that Audit Committee
scored 100% in 2009. All companies complied with
Fully compliant 100%
the requirement to have independent non-executive
directors on their audit committees. This compares
with 24 companies in our previous review in 2008.
4.2 Does the audit committee have at least one member with recent and relevant financial
experience?
Guidance: “The board should satisfy itself that at least one member of the audit committee has recent and
relevant financial experience.” (Combined Code C.3.1)
26 companies fully comply with the requirement Recent and Relevant financial experience
to identify one member of the audit committee
that has recent and relevant financial experience. 12 No mention 3%
companies were graded as ‘non-compliant with an Non-compliant 31%
explanation’ because, while many of them listed the
Fully compliant 66%
names and professional qualifications of their audit
committee members, they did not specify whether
the board was happy that their financial expertise
was recent and relevant. One company did not
include sufficient detail in the biographies of their
audit committee members to assess whether their
experience was recent and relevant so they were
scored as ‘no mention’.
9
Two members for smaller companies.
February 2009 194.3 Do the terms of reference of the audit committee include the following responsibilities?
Guidance: “The main role and responsibilities of the audit committee should be set out in written terms of
reference and should include:
• To monitor the integrity of the financial statements of the company
• To review the company’s internal financial controls
• To monitor and review the effectiveness of the company’s internal audit function
• To make recommendations to the board in relation to the appointment, re-appointment and removal of
the external auditor and to approve the remuneration and terms of engagement of the external auditor
• To review and monitor the external auditor’s independence and objectivity and the effectiveness of the
audit process
• To develop and implement policy on the engagement of the external auditor to supply non-audit
services”
(Combined Code C.3.2)
32 companies complied fully with this requirement. Responsibilities within the Terms of Reference
One was compliant with an exception. The
No mention 8%
remaining six companies were split equally between
non-compliant and no mention. Non-compliant 8%
Compliant
Companies could have scored higher in this with exceptions 3%
question if they had made their terms of reference Fully compliant 81%
more readily available – see question 3.6.
4.4 Do they have an internal audit function or equivalent?
Guidance: “Where there is no internal audit function, the audit committee should consider annually whether
there is a need for an internal audit function, and the reasons for the absence of such a function should be
explained in the relevant section of the annual report.” (Combined Code C.3.5)
33 companies disclosed the existence of an internal Internal Audit Function
audit function, compared to only 22 in the 2008
No mention 3%
review. In 2009, five companies were ‘non-
compliant with an explanation’ and one did not Non-compliant
with explanation 13%
mention whether it had an internal audit function
or not. Fully compliant 84%
20 February 20094.5 Does the audit committee monitor and review the effectiveness of internal audit activities?
Guidance: “The audit committee should monitor and review the effectiveness of the internal audit activities.”
(Combined Code C.3.5)
33 companies disclosed full compliance with this Internal Audit Review
provision in 2009. 26 fully complied last year.
No mention 3%
In 2009, five companies were non-compliant with
an explanation and one company made no mention Non-compliant
with explanation 13%
of this topic.
Fully compliant 84%
4.6 If the auditor provides non-audit services, is there a statement as to how the auditor’s
objectivity and independence is safeguarded?
Guidance: “The annual report should explain to shareholders how, if the auditor provides non-audit services,
auditor objectivity and independence is safeguarded.” (Combined Code C.3.7)
38 companies complied with the requirement to Non-Audit Services
assess how auditor objectivity and independence
Compliant
is safeguarded where the auditor provides non- with exceptions 3%
audit services. In 2008, 22 companies were fully
Fully compliant 97%
compliant.
There was one company which was deemed
‘compliant with an exception’. They mentioned
the audit and non-audit services (principally tax
and company secretarial advice) provided by
their auditors but did not explicitly state how
they assessed that their auditor had maintained its
independence and objectivity.
4.7 Is there a separate section of the annual report which describes the work of the audit
committee?
Guidance: “A separate section of the annual report should describe the work of the committee in discharging
those responsibilities.” (Combined Code C.3.3)
This is the second of the three questions in the Work of the Committee
review that scored 100%. All companies complied
Fully compliant 100%
with this requirement and scored full marks.
February 2009 21Grant Thornton Corporate Governance Review
5. Remuneration committee
There should be a formal and transparent procedure for developing policy on executive remuneration and
for fixing the remuneration of individual directors. No director should be involved in deciding their own
remuneration. (Combined Code B.2).
5.1 Are there at least three members of the remuneration committee, all of whom are independent
non-executive directors?
Guidance: “The board should establish an audit committee of at least three members10 who should all be
independent non-executive directors.” (Combined Code B.2.1)
37 companies were fully compliant with the Remuneration Committee
requirement to have a remuneration committee
Non-compliant 3%
with at least two or three members who should
all be independent non-executive directors. 24 Compliant
with exceptions 3%
companies were fully compliant in 2008. In
2009, one company was deemed ‘compliant Fully compliant 94%
with an exception’ because they did not have the
requisite minimum of at least two independent
non-executive directors on their remuneration
committee, and one company was rated ‘non-
compliant’ because, to quote their annual report,
‘the Board did not consider it appropriate to
appoint a remuneration committee’.
10
Two members for smaller companies.
February 2009 235.2 Does the chairman sit on this committee and if so does he/she chair it?
Guidance: “As the company chairman is not considered to be an independent non-executive director for
the purposes of this provision, this means that if a company wishes the chairman to be a member of the
committee it needs to provide an explanation to shareholders in the annual report.” (Note 13, Amendments
to the 2003 Combined Code)
35 companies complied with this requirement Chairman on Remuneration Committee
in 2009. 15 were compliant in 2008. In 2009, one
Non-compliant 8%
company is deemed to be ‘non compliant with an
explanation’ because, whilst the chairman is non- Non-compliant
with explanation 3%
executive, under the Code he is deemed not to be
independent when he sits on this committee. A Fully compliant 89%
further three companies were non-compliant.
5.3 Is it stated that the board sets the remuneration for the non-executive directors?
Guidance: “The board itself or, where required by the Articles of Association, the shareholders, should
determine the remuneration of the non-executive directors within the limits set in the Articles of Association.
Where permitted by the Articles, the board may however delegate this responsibility to a committee which
might include the chief executive.” (Combined Code B.2.3)
26 companies complied with this part of the Code Remuneration of Non-Executive Directors set by the Board
in 2009. 19 were fully compliant in 2008. In 2009,
Non-compliant 10%
one company was compliant with an exception.
Eight were non-compliant with an explanation, Non-compliant
with explanation 21%
while a further four companies were non-compliant
Compliant
with this provision. with exceptions 3%
Fully compliant 66%
24 February 20095.4 Does the company state the potential maximum remuneration available including performance
- related elements?
“Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required
to run the company successfully, but a company should avoid paying more than is necessary for this purpose.
(Combined Code B.1)
Guidance: “The performance-related elements of remuneration should form a significant proportion of the
total remuneration package of executive directors and should be designed to align their interests with those of
shareholders and to give these directors keen incentives to perform at the highest levels.”
(Combined Code B.1.1)
35 companies were fully compliant with the Non-Executive Remuneration
requirement to disclose the potential maximum
Compliant
remuneration payable in 2009, in contrast to the 19 with exceptions 10%
companies that were fully compliant in 2008. Fully compliant 90%
The remaining four companies in 2009 complied
with exceptions.
The improvement this year was attributed to the
additional companies that discussed performance-
related pay schemes operated by the company
and also gave more detail about remuneration
arrangements for directors and senior management
with details of their competitiveness relative to
other companies. They also explained how the
remuneration packages are designed to attract,
retain and motivate people of the highest calibre,
who are expected to perform to the highest
standards.
February 2009 25Grant Thornton Corporate Governance Review
6. Nomination committee
and appointments
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the
board. (Combined Code A.4)
6.1 Are the majority of members of the nomination committee non-executive directors and is the
chairman either chairman of the board or a non-executive director?
Guidance: “A majority of members of the nomination committee should be independent non-executive
directors. The chairman or an independent non-executive director should chair the committee, but the
chairman should not chair the nomination committee when it is dealing with the appointment of a successor
to the chairmanship.” (Combined Code A.4.1)
34 companies were compliant in 2009. Nomination Committee
27 companies were compliant in 2008. In 2009, one
Non-compliant 10%
company was non-compliant with an explanation
and four companies were non-compliant. Non-compliant
with explanation 3%
Fully compliant 87%
February 2009 276.2 Is there a description of the work of the nomination committee, including the process it has
used in relation to board appointments?
Guidance: “A separate section of the annual report should describe the work of the nomination committee,
including the process it has used in relation to board appointments. An explanation should be given if neither
an external search consultancy nor open advertising has been used in the appointment of a chairman or non-
executive director.” (Combined Code A.4.6)
33 companies fully complied with the requirement Work of the Nomination Committee
to describe the work of the nomination committee
No mention 5%
in 2009, compared to 27 companies were fully
compliant in 2008. Two companies were compliant Non-compliant 3%
with exceptions, one was compliant with an Non-compliant
explanation and one was non-compliant. Two with explanation 3%
companies did not mention the work of the Compliant
nomination committee. with exceptions 5%
Fully compliant 84%
28 February 2009Grant Thornton Corporate Governance Review
7. Internal control and risk
management
The board should maintain a sound system of internal control to safeguard shareholders’ investment and
the company’s assets. (Combined Code C.2).
7.1 Is there a statement that a review of the effectiveness of the group’s internal controls has been
undertaken at least annually?
Guidance: “The board should, at least annually, conduct a review of the effectiveness of the group’s system of
internal controls and should report to shareholders that they have done so.” (Combined Code C.2.1)
There was 100% compliance with this provision Review of the Group's Internal Controls
which was also well adhered to in 2008. Once
Fully compliant 100%
we go past this basic level of compliance with
this section of the Code, the level of detail varies,
especially when companies are required to disclose
the corrective action that they have taken, or are
currently taking, to remedy any significant failings
or weaknesses.
A trend appears to be emerging which indicates that
this section of the report contains both the highest
(Question 7.1) and the lowest scored questions
(Question 7.6) in the review last year and this year.
7.2 Is there a statement that this review covers all material controls including financial, operational
and compliance controls and risk management systems?
Guidance: “The review should cover all material controls, including financial, operational and compliance
controls and risk management systems.” (Combined Code C.2.1)
31 companies complied fully with this provision Material Controls Review
of the Code in 2009. Only 14 companies were
Non-compliant
compliant in 2008. One company complied with an with explanation 18%
exception while seven were non-compliant with an
Compliant
explanation. with exceptions 3%
Fully compliant 79%
We would urge all companies to continue this
positive trend in reviewing all material controls,
including financial, operational and compliance
controls, and risk management systems as part of
good corporate governance and risk management.
February 2009 297.3 Is there a statement that there is an ongoing process for identifying, evaluating and managing
the significant risks faced by the company?
Guidance: “In its narrative statement on how the company has applied Code provision C.2.1, the board
should, as a minimum, disclose that there is an ongoing process for identifying, evaluating and managing the
significant risks faced by the company, that it has been in place for the year under review and up to the date of
approval of the annual report and accounts.” (Revised Turnbull Guidance, paragraph 35)
36 companies were fully compliant in 2009. Ongoing Risk Process
22 companies were compliant in 2008. In 2009, one
Non-compliant 3%
company was non-compliant and two companies
were compliant with an explanation. Compliant
with exceptions 5%
Fully compliant 92%
7.4 Is there information to assist the understanding of the company’s main features of its risk
management and internal control process?
Guidance: “The board may wish to provide additional information in the annual report and accounts to assist
understanding of the company’s risk management processes and system of internal control.”
(Revised Turnbull Guidance, paragraph 36)
33 companies complied fully with this part of the Risk Management & Internal Control
Code in 2009. 30 companies were compliant in
Non-compliant 3%
2008. In 2009, one company was non-compliant
and five companies were non-compliant with an Compliant
with exceptions 13%
explanation.
Fully compliant 84%
30 February 20097.5 Is there a summary of the process the board/committee has applied in reviewing the
effectiveness of the internal control system?
Guidance: “In relation to Code provision C.2.1, the board should summarise the process it has applied in
reviewing the effectiveness of the system of internal control.” (Revised Turnbull Guidance, paragraph 38)
38 companies out of 39 complied fully with this Summary of Internal Control Process
requirement. 30 companies were compliant in
Compliant
2008. In 2009, one company was compliant with an with exceptions 3%
explanation.
Fully compliant 97%
7.6 Does the company disclose that any necessary actions have been or are being taken to remedy
any significant failings or weaknesses?
Guidance: “In relation to Code provision C.2.1, the board should summarise the process it has applied in
reviewing the effectiveness of the system of internal control and confirm that necessary actions have been or
are being taken to remedy any significant failings or weaknesses identified from that review.”
(Revised Turnbull Guidance, paragraph 36)
This is the least well answered question in this year’s Disclosure in this area appears to be where companies
review, with 14 companies making no mention of how do not embrace the spirit of the Code. There is a
they have dealt with any necessary action to rectify any reluctance to admit that they uncovered any failings
significant failings or weaknesses or even to say which or weaknesses during their internal control review. At
ones were apparent. 19 companies did comply, a further least some of the companies in this review are already
two companies were compliant with an explanation. Sarbanes Oxley compliant, which means that their
Four companies were non-compliant. internal controls and reporting systems have been
rigorously tested and certified. Yet they fail to make
We would encourage more companies to discuss any any reference to this in their annual reports from a
issues they may have encountered during the period Combined Code point of view.
under review regarding internal controls. While it is
understandable that companies may not wish to discuss Companies should be encouraged to go above and
their weaknesses, it is a requirement of the Code to say beyond the minimum requirements of the Code and
more than they currently do. disclose any weaknesses they find in their annual report
as this is the area in our study with the lowest scores.
Internal Control Weakness
No mention 36%
Non-compliant 10%
Compliant
with exceptions 5%
Fully compliant 49%
February 2009 31You can also read
