Corporate governance
What BA4 tests
Corporate governance questions test how a company is directed and controlled, the agency problem between shareholders and directors, the UK Corporate Governance Code and directors' statutory duties under the Companies Act 2006.
The UK Corporate Governance Code
The Code is principles-based and applies to premium listed companies on a 'comply or explain' basis. Its main principles cover board leadership and company purpose; division of responsibilities; composition, succession and evaluation; audit, risk and internal control; and remuneration. Key provisions include a chair who was independent on appointment, a separate CEO and chair, and at least half the board excluding the chair being independent non-executive directors for FTSE 350 companies (at least two independent NEDs for smaller companies). All directors of FTSE 350 companies stand for annual re-election. The audit committee needs at least three independent NEDs (two for smaller companies), with at least one having recent relevant financial experience; the remuneration and nomination committees are also independent-led.
Directors' duties
CA 2006 sections 171-177 require a director to act within powers; promote the success of the company for members as a whole, having regard to employees, suppliers, customers, community, environment and long-term reputation; exercise independent judgement; use reasonable care, skill and diligence; avoid conflicts; not accept benefits from third parties; and declare interests in proposed transactions. These duties are owed to the company, not directly to individual shareholders.
Worked example
A FTSE 350 company has a nine-person board: chair, CEO, three executive directors and four independent NEDs. Its audit committee comprises two NEDs and the finance director. Excluding the chair, half of eight is four, so board independence meets the Code. The audit committee does not: the finance director is executive and not independent, and the committee needs three independent NEDs. The company should remove the finance director and appoint a third independent NED with financial experience. If it does not, it must explain the non-compliance in the annual report.
Traps that cost marks
The Code is not statute; breach is not automatically unlawful. 'Comply or explain' is not a tick-box and requires a reasoned explanation. NEDs have the same legal duties as executives. Independence is judged by character and judgement plus relationships, not job title. Section 172 does not create direct duties to employees or the environment.