Company is an artificial juridical person. The company operates through directors who are its brain, eyes, ears etc.. They are entrusted with the job of managing the affairs of the company by its owners - shareholders. Thus the relationship between shareholders and directors are of principal and agent respectively, hence , the agency problem, agent may not perform his duties to the advantage of his principal. What should be done to eliminate such an eventuality? Here is an excerpt from "The Combined Code on Corporate Governance 2008".
A.1 The Board
Main Principle
Every company should be headed by an effective board, which is collectively responsible for the success of the company.
Supporting Principles
The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.
All directors must take decisions objectively in the interests of the company.
As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, executive directors, and in succession planning.
A.3 Board balance and independence
Main Principle
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.
Supporting Principles
The board should not be so large as to be unwieldy. The board should be of sufficient size that the balance of skills and experience is appropriate for the requirements of the business and that changes to the board’s composition can be managed without undue disruption.
To ensure that power and information are not concentrated in one or two individuals, there should be a strong presence on the board of both executive and non-executive directors.
The value of ensuring that committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees.
No one other than the committee chairman and members is entitled to be present at a meeting of the nomination, audit or remuneration committee, but others may attend at the invitation of the committee.
A.4 Appointments to the Board
Main Principle
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
Supporting Principles
Appointments to the board should be made on merit and against objective criteria. Care should be taken to ensure that appointees have enough time available to devote to the job. This is particularly important in the case of chairmanships.
The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board.
C.1 Financial Reporting
Main Principle
The board should present a balanced and understandable assessment of the company’s position and prospects.
Supporting Principle
The board’s responsibility to present a balanced and understandable assessment extends to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements.
C.2 Internal Control
Main Principle
The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.
C.3 Audit Committee and Auditors
Main Principle
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.
D.1 Dialogue with Institutional Shareholders
Main Principle
There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
Supporting Principles
Whilst recognising that most shareholder contact is with the chief executive and finance director, the chairman (and the senior independent director and other directors as appropriate) should maintain sufficient contact with major shareholders to understand their issues and concerns.
The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient.
D.2 Constructive Use of the AGM
Main Principle
The board should use the AGM to communicate with investors and to encourage their participation.
E.2 Evaluation of Governance Disclosures
Main Principle
When evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention.
Supporting Principle
Institutional shareholders should consider carefully explanations given for departure from this Code and make reasoned judgements in each case. They should give an explanation to the company, in writing where appropriate, and be prepared to enter a dialogue if they do not accept the company’s position. They should avoid a box-ticking approach to assessing a company’s corporate governance. They should bear in mind in particular the size and complexity of the company and the nature of the risks and challenges it faces.
E.3 Shareholder Voting
Main Principle
Institutional shareholders have a responsibility to make considered use of their votes.
Supporting Principles
Institutional shareholders should take steps to ensure their voting intentions are being translated into practice.
Institutional shareholders should, on request, make available to their clients information on the proportion of resolutions on which votes were cast and non-discretionary proxies lodged.
Major shareholders should attend AGMs where appropriate and practicable. Companies and registrars should facilitate this.
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