- 20 Marks
AAA – L3 – Q5 – Corporate Governance
Question
Memo
From: A N Accountant
To: Wickman & Co
Date: November 20X8
Subject: Corporate Governance in BEM plc
As requested, I write to explain where your client BEM plc (BEM) does not appear to be following appropriate corporate governance codes and to recommend changes to ensure that the principles of good corporate governance are being followed.
Answer
Chief Executive Officer (CEO) and Chairman
Mr Smyth is both CEO and chairman of BEM. The Corporate Governance Code for Listed Companies 2020 indicates that the person responsible for running the company (the CEO) and the person responsible for controlling the board (the chairman) shall be different people. This is to ensure that no one individual has unrestricted powers of decision.
I recommend that Mr Smyth is either the CEO or the chairman and that a second individual is appointed to the other post to ensure that Mr Smyth does not have too much power in BEM.
Composition of the board
The current board ratio of executive to non-executive directors is 5:2. This means that the executive directors can dominate the board proceedings. The Corporate Governance Code for Listed Companies 2020 states that there shall be a balance of executive directors, non-executive directors and independent non-executive directors with non-executive directors making up the majority of the board so this cannot happen. A minimum of two non-executive directors is also required.
I recommend that the number of executive and non-executive directors is amended to help ensure no one group dominates the board. This will mean appointing more non-executive directors to BEM.
Director appointment
At present, Mr Smyth appoints directors to the board, giving him absolute authority over who is appointed. This makes the appointment procedure and qualities directors are being appointed against difficult to determine. The Corporate Governance Code for Listed Companies 2020 states that appointment procedures should be formal and transparent so that the suitability of directors for board positions can be clearly seen. This shall be overseen by a nominating committee.
I recommend that a nominating committee is established to ensure there is no bias in board appointments. BEM’s appointment policy shall be published on the company website.
Board pay
At present, board members’ pay is set by Mr Smyth. This process breaches The Corporate Governance Code for Listed Companies 2020 because the remuneration structure is not formal and transparent, and Mr Smyth sets his own pay. Mr Smyth could easily be setting remuneration levels based on his own judgements without any objective criteria.
I recommend that a remuneration committee is established comprising a majority of non-executive directors. Board members serving on the remuneration committee shall be excluded from decisions about their own remuneration. The remuneration committee will set remuneration levels for the board, taking into account industry practices and the performance of the company and board members. Remuneration shall also be linked to performance, to encourage a high standard of work.
Internal control
The Corporate Governance Code for Listed Companies 2020 states that the Board is responsible for maintaining a sound system of internal control and monitoring adherence to internal controls on a day to day basis.
However, the system of internal control in BEM does not appear to be monitored correctly. While external auditors will review the system of internal control, this review is based on their audit requirements and cannot be relied on to monitor the entire system. The system may therefore still contain deficiencies.
I recommend that some more formal review of internal control is carried out, perhaps by establishing an internal audit function, as noted below. The relationship with the company’s auditors must also be reviewed so that the work of the Board and the auditors regarding internal control is understood by both parties.
Internal audit
BEM does not have an internal audit function. The Corporate Governance Code for Listed Companies 2020 requires BEM to have an internal audit function.
I recommend that an internal audit function is established, reporting to the audit committee.
Financial statements
There appears to be acceptable disclosure in the financial statements regarding the past results of the
company. However, the board should also provide an indication of how the company will perform in the future in the Chairman’s statement. This is partly to enable investors to assess the value of their investment in the company.
I therefore recommend that the annual financial statements of BEM include some indication of the future operations of the company.
Audit committee
There is no mention in the report of an audit committee. Good corporate governance implies that there is some formal method of monitoring external auditors as well as checking that the reports from the external auditors are given appropriate attention in the company. All listed companies in Ghana are required to have an audit committee.
I recommend that an audit committee is established – made up from a majority of non-executive directors. The committee will receive reports from the external and internal auditors (as mentioned above) and ensure that the board takes appropriate action on these reports.
- Topic: Regulatory environment
- Uploader: Salamat Hamid