Effective Corporate Governance for Long-Term Company Success

2. CorporateGovernance • Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in generalmeeting. • Para 2.5 of Cadbury Committee, 1992UK

3. Agenda • UK Corporate Governance Code,2014 in Corporate Governance and UK in • Developments Stewardship January2016 2015, Report by FRC of Public • EU Directions on Statutory Audits InterestEntities • Companies (Amendment) Bill2016 • Listing Obligations & Disclosure • 2015 issued bySEBI • Financial ReportingStandards Regulations

5. Comply orExplain • Code is not a set of rigidrules • It contains a Principles – Main andSupporting • Recognizes that alternatives to the principles are justified under circumstances • Explain the reasons to the shareholders, in case ofnon-compliance • Shareholders have right to challenge the explanations but should not evaluate in a mechanicmanner • Departures from the Code should not be automatically treated as breaches

6. The Main Principles of theCode • Section A:Leadership • Section B:Effectiveness • Section C:Accountability • Section D:Remuneration • Section E: Relations withshareholders

7. Section A:Leadership A.1: The Role of theBoard Main Principle: Every company should be headed by an effective board which is collectively responsible for the long-term success of thecompany.

8. A.2: Division ofResponsibilities Main Principle: There should clear division of be a at the responsibilities head of the company between the running executive responsibility company’sbusiness. of the board and the for the running of the No one individual should powers ofdecision. have unfettered

9. A.3: TheChairman Main Principle: The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of itsrole.

10. A.4: Non-ExecutiveDirectors Main Principle: As part of their role as members of a unitary board, non-executive directors should develop constructively challenge and help proposals onstrategy.

11. Section B:Effectiveness B.1: The Composition of theBoard Main Principle: The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilitieseffectively.

12. B.2:Appointmentsto theBoard Main Principle: There should be a formal, rigorous and transparent procedure for the appointmentof new directors to theboard.

13. B.3:Commitment Main Principle: their responsibilitieseffectively.

14. B.4:Development Main Principle: All directors should receive induction on joining the board and should regularly update and refresh their skills andknowledge.

15. B.5: Information andSupport Main Principle: The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

16. B.6:Evaluation MainPrinciple performance and that individualdirectors. of its committees and

17. B.7:Re-election Main Principle: All directors should be submitted for re-election at regular intervals, subject to continued satisfactoryperformance.

18. Section C:Accountability C.1: Financial and BusinessReporting Main Principle: The board should present a fair, balanced and understandable assessment of the company’s position andprospects.

19. C.2: Risk Management andInternal Control Main Principle: The board is responsible for determining the it is nature willing and extent to take of the principal risks in achieving its strategic objectives. The board should maintain sound risk management and internal controlsystems.

20. C.3: Audit Committee andAuditors Main Principle: The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’sauditors.

21. Section D:Remuneration D.1: The Level & Components ofRemuneration Main Principle: Executive designed directors’ to promote remuneration should be the long-term success of the company. Performance-related elements should be transparent, rigorouslyapplied. stretching and

22. D.2:Procedure Main Principle: There should procedure for remuneration be a formal and transparent on executive developing policy and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

23. Section E:Relationswith shareholders E.1: Dialogue withShareholders Main Principle: There should be a dialogue with shareholders based on the mutual The board ensuring understanding of has objectives. as a whole responsibility for that a satisfactory dialogue with shareholders takesplace.

24. E.2: Constructive Use ofGeneral Meetings Main Principle: The board should use general meetings to communicate with investors and to encourage theirparticipation.

26. Governance of ListedCompanies Overall compliancerates Compliance with Code provisions remains high, with 90 per cent of FTSE 350 companies reporting that they were either complying with all, or all but one or two, of its 54provisions.

27. Top 10 areas of Non-compliance with the Code, requiring explanation, as reported by FTSE 350 companies in their 2014/2015 annualreport

28. Compliance with Selected Provisions of theUK Corporate GovernanceCode

29. Explanations where less than half theboard, excluding the chairman, comprises independent Non-executive Directors(B.1.2) BoardComposition The Board currently comprises the Chairman, six non-executive directors and six executive directors; additionally, XX served as a non-executive director throughout the year to 30 September 2014. The Board, having given thorough consideration to the matter, considers the other five non-executive directors to be independent. XX joined the Board in 2004 and served on the Board until 30 September 2014. XX had served on the Board for more than nine years by the date of retirement … Taking into consideration XX’s independence of character and judgement, asset management knowledge and significant major plc board experience, the Board is of the opinion that XX remained an independent non-executive director until the date ofretirement. Contd.

30. Explanations where less than half theboard, excluding the chairman, comprises independent non-executive directors(B.1.2) Contd. BoardChanges We did not comply during the year, nor do we currently comply, with the Code requirements on the number of independent directors. The Board remains of the opinion that its size and composition should reflect the needs of the business and seeks to achieve this in compliance with theCode.

31. Explanations where companies havea combined Chairman and CEO(A.2.1) The Board notes the Code principle stating that there be a clear division of responsibilities at the head of the Company Chairman and and Chief provision that the roles of Executive not be exercised by the same individual. In order to successfully lead the Company through the period of flux as a result of its flotation to the London Stock Exchange and upgrade to a premium listing, the Board, following due consideration determined that it was, and remains to be, in the best interests of the Company and Group to retain XX as an ExecutiveChairman. Contd.

32. Explanations where companies havea combined Chairman and CEO(A.2.1) Contd. The Board, with assistance from the Nomination Committee, will keep this arrangement under review. It is envisaged that XX will become Non-Executive Chairman once the complete business transformation is vacancy for, and creating a thereby separation of, the role of Chief Executive Officer. As a result, the Chairman established, Board. division of responsibilities between the Executive will be clearly out in writing and agreed by the Contd. and Chief set .

33. Explanations where companies havea combined Chairman and CEO(A.2.1) Contd. The Directors consider Board and the integrity that the structure of the of the individual Directors ensures that no single individual or group dominates the decision making process. There is a common purpose of promoting the overall success of XX with a unified vision of the definitions of success, the core strategic principles, and the understanding, alignment and mitigation ofrisks.

34. AuditTendering should put their external audit contract out to tender at least every tenyears. 46 FTSE 350 companies put their external audit engagement out to tender in the period to 31 October 2015 (up from 27 previously), with 36 of those companies changing auditors as a result.

35. Audit CommitteeReporting Audit committees to provide more detail on the work they do:- descriptions of the significant issues considered by the audit committee in relation to the financial statements and how they wereaddressed; howtheauditcommittee external audit process;and assessed the effectiveness ofthe approachtoappointingtheauditorandsafeguardingobjectivity and independence relative to the use of non-audit services. Overalldisclosuresinthisareahaveimprovedwith companies in the FTSE 350 not giving an explanation. onlyfew

36. BoardroomDiversity • Code expects Board to set out policy on BoardroomDiversity. • This has led to an improvement in thequality • of reporting on genderdiversity. • Wider characteristics such as race, experience and approacharegaining greaterattention.

37. Fair, Balanced andUnderstandable Code asked boards to confirm that the company’s annual report and accounts balanced taken and as a whole are fair, (FBU), a primary outcome of understandable which is for the narrative sections of the annual report to reflect more accurately the company’s position, performance andprospects. FTSE 350 annual reports found that all companies bar two (2014: 25) now include such astatement

38. 2014 CodeChanges Risk Management and InternalControl • The 2014 Code changes require companiesto: • state whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so; • robustly assess their principal risks and explain how they are being managed ormitigated; • state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider itappropriate. • Contd.

39. 2014 CodeChanges Risk Management and InternalControl Contd. It is expected that the period assessed willbe significantly longer than 12 months;and monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annualreport. Risk appetite, quantification of risk and assessing the effect of internal controls are three significant challenges

40. Remuneration • Code requires Remuneration Policies to emphasis on long term success and mechanism to recover or withhold variablepay. • Encouraging compliancereported.

41. ShareholderEngagement • Code required the companies to disclose:- • How they engage with theshareholders • How they assess theirconcerns • How they respond to theconcerns • Increase in Minority Shareholders Voting in General Meetings

42. Significant Minority Voting at FTSE 350AGMs

43. Stewardship andEngagement • UK Stewardship Code 2010 has aimed to increase the profile of discussion on the Stewardship in the InvestmentChain. • Quality of reporting to improve to give aclear • picture on the Stewardshipissues

44. EU Directives on StatutoryAudits

45. Regulation (EU) 537/2014 dt. 16thApril • 2014 • AuditFees • Non-AuditFees • TransparencyReport • JointAudits

46. Article 4 AuditFees • Fees for provisions of Audit Fees shall not be contingentfees. • Permissible Non-audit fees to be limited to no more than 70% of average fees paid in last 3 consecutive years for statutoryaudits. • Where fees from P/E exceeds 15% of total fees to disclose to Audit Committee and discuss threats toindependence.

47. Article 5 Prohibition of the provisionsof non-auditservices a) Tax servicesrelatingto: preparation of tax forms; payrolltax; customsduties; iv. identification of public subsidies and tax incentives unless i. ii. iii. support from the statutory auditor or the audit firm in respect of such services is required bylaw; support regarding tax inspections by tax authorities unless support from the statutory auditor or the audit firm in respect of such inspections is required bylaw; calculation of direct and indirect tax and deferredtax; provision of taxadvice Contd. v.

48. Article 5 Prohibition of the provisionsof non-auditservices Contd. Services that involve playing any part in the management or decision-making of the audited entity; Bookkeeping and preparing accounting recordsand financialstatements; Payrollservices; Designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information or designing and implementing financial information technology systems; Contd.

49. Article 5 Prohibition of the provisionsof non-auditservices • Contd. • Valuation services, including valuations performed in connection with actuarial services or litigation supportservices; • Legal services, with respectto: • the provision of generalcounsel; • negotiating on behalf of the audited entity;and • acting in an advocacy role in the resolutionof litigation; • Services related to the audited entity's internal audit function; • Contd.

50. Article 5 Prohibition of the provisionsof non-auditservices Contd. (i) Services linked to the financing,capitalstructure and allocation, and investment strategy of the audited entity, except providing assurance services in relation to the financial statements, such as the issuing of comfort letters in connection with prospectuses issued by the auditedentity; (j) Promoting, dealing in, or underwriting sharesinthe auditedentity; Contd.