Competency Levels Foundation Business Law and Professional Ethics : - - PDF document

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CPA Ireland Skillnet CPA Ireland Skillnet, is a training network that is funded by Skillnets, a state funded, enterprise led support body dedicated to the promotion and facilitation

• f training and up-skilling as key elements in sustaining Ireland’s national

competitiveness. The CPA Ireland Skillnet provides excellent value CPE (continual Professional Education) in accountancy, law, tax and strategic personal development to accountants working both in practice and in industry. However our attendees are not limited to the accountancy field as we welcome all interested parties to

• ur events.

The CPA Ireland Skillnet is funded by member companies and the Training Networks Programme, an initiative of Skillnets

• Ltd. funded from the Department of Education and Skills.

www.skillnets.ie

Trainee Accountant Workshop Series

19th December 2016

P1 – Corporate Law and Governance

Presented By: Mary Kelly

Competency Levels

Foundation Business Law and Professional Ethics : knowledge and understanding : identify and discuss

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Competency Levels

Professional level 1 Corporate Law and Governance : understand the theory: rationale : application: motivation and objectives : advise: consider the impact : Governance requirements of the business

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Approach to Governance question

• Section B
• Complete one question from two
• Read the two questions carefully
• What is the question asking you to do?

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Outcomes

• Analysis
• Critical discuss
• Evaluate
• Interpret, discuss and apply aspects
• Advise on and lead best practice in

governance Not list nor bullet points

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Approach to answer

• Full sentences: not lists or bullet points
• Structure

‐ Introduction and main content ‐ Conclusion

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Past Question

April 2016 “Executive compensation has become a major issue in corporate governance. The explosive increase in executive compensation, especially with respect to share‐based compensation, has attracted considerable public scrutiny”

Kumar, A., Zattoni, A. (2016) “Executive Compensation, Board Functioning and Corporate Governance”, Corporate Governance: An International review, vol. 24, no. 1, pp2‐4

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Past Question April 2016

REQUIREMENT: (a) Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance. (14 marks) (b) Critically assess the role of non‐executive directors on the remuneration committee and evaluate their contribution as key members of that committee. (14 marks) Format & Presentation (2 marks) [Total: 30 marks]

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Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance

Since the 1990s there has been an explosive increase of executive compensation in the US which has spread globally over the last 25 years. This increase has led to more public and governmental scrutiny and consideration

• f the elements to the executives’ salaries.

The role of boards in the executive compensation process has garnished more attention with increasing amounts of executive pay. The Cadbury report devoted attention to executive remuneration but it was the Greenbury report and the code of practice which focus specifically on issues relating to directors pay. An important aim is to create remuneration committees that will determine pay packages needed to attract, retain and motivate directors of the quality required but should avoid paying more than is necessary for this purpose.

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The remuneration committee should determine an appropriate balance between fixed and performance‐related, immediate and deferred remuneration. Performance conditions, including non‐ financial metrics where appropriate, should be relevant, stretching and designed to promote the long‐term success of the company. Remuneration incentives should be compatible with risk policies and systems and upper limits should be set and disclosed. Remuneration committees were established to determine the company's policy on executive remuneration including pension rights and any associated payments. The objective is to prevent executive directors determining and designing their own remuneration packages.

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Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance

This is supported by the academic literature which identifies remuneration committees as an essential requirement in preventing executives writing and signing their own paycheques. 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. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual

• performance. The committee should also recommend and monitor

the level and structure of remuneration for senior management

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Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance

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To enhance accountability the members of the remuneration committee should be listed each year in the report to shareholders and, for enhanced transparency, the company should make a report each year to the shareholders on behalf of the board. This report should include full details of all elements of the remuneration package for each individual director by name detailing basic salary, benefits in kind, annual bonuses, long‐term incentive schemes including share options as well as pension entitlements. requirements were developed further in later editions of the Combined Code. The range of incentives must focus, not purely on the immediate term but on a 3 to 5 year scale. This longer term focus is expected to generate any increase in shareholder value with enhanced corporate financial performance.

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Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance

Performance‐related elements should be transparent, stretching and rigorously applied. Shareholders should be able to see the remuneration that incentivises executive to maximise shareholder

• value. This should go in some way to reducing the agency cost for

these organisations. focus on external forces such as social conformity and social prestige in the determination of executive compensation is an element which is becoming more common of late, but with little real impact. The role of the shareholder in vetoing or confirming the remuneration package has been enhanced over the last 10 years. however, the actual power gained by such a change is a lot less than anticipated as the vote is only advisory. (14 marks)

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Analyse the role and responsibilities of the remuneration committee in enhancing corporate governance and securing improved long‐term performance

(b) The agency theory perspective of the presence of independent non‐executive directors on the company board should help to reduce the conflict‐of‐interest between shareholders and the company

• management. The increased monitoring conducted by an independent

voice in the boardroom should lead to enhanced accountability. The board should establish a remuneration committee of at least three, or in the case of smaller companies two, independent non‐ executive directors, non‐executive directors can provide advice and direction, monitor the company’s management decisions and the legal and ethical performance, monitor the adequacy of the controls in place and review the appointment, evaluation and remuneration of directors.

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Critically assess the role of non‐executive directors on the remuneration committee and evaluate their contribution as key members of that committee.

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The non‐executive directors need to have the integrity, high ethical standards and the ability and willingness to challenge and probe directors decisions. The majority of non‐executive director should be independent of management and free from any relationship that could affect their independence other than their fees and shareholders. lo, K and Wu, s (2015) Private information in executive Compensation, Corporate Governance: An International review, vol. 24, no. 1, suggest that independent directors are better at monitoring the Company compared with less independent directors, however, their inability to have constant access to information, because of their external roll, can limit their knowledge base. The involvement of non‐executive director may inhibit the entrepreneurial approach of the business and therefore hinder the performance

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Critically assess the role of non‐executive directors on the remuneration committee and evaluate their contribution as key members of that committee.

Rationale for Corporate Governance

• Shareholder primacy
• Agency theory
• Assurance hypothesis
• Conflict of interest

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Objectives of Corporate Governance

It is based on the underlying principles of good governance: accountability, transparency, probity and focus on the sustainable success of an entity

• ver the longer term.

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11/01/2017 7 Purpose of Corporate Governance

• The purpose of corporate governance is to

facilitate effective, entrepreneurial and prudent management that can deliver the long‐term success of the company.

• The Code is a guide to a number of key

components of effective board practice.

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Accountability

• Annual report
• Shareholder meetings
• Non‐executive directors/ head non‐executive

directors

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Accountability

• Committee structure

– Remuneration committee – Audit committee – Appointment committee

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Accountability

• Companies Registration Office (CRO)
• Office of the Director of Corporate

Enforcement (ODCE)

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Transparency

• Details of appointments, remuneration structure

in Corporate Governance Report in the annual report

• Details of directors and directors voting
• Relations with external consultancies
• Conflicts of interest

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Probity

• Chairman
• Non‐executive directors
• Institutional Investors
• AGM

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11/01/2017 9 Focus on the sustainable success of an entity over the longer term

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Risk assessment

The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

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Risk assessment

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’s auditors.

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Risk assessment

Need to carry out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. The directors should describe those risks and explain how they are being managed or mitigated.

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Risk assessment

The directors should include in the annual report an explanation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company

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Risk assessment

Need to assess the prospects of the company, over what period they have done so and why they consider that period to be appropriate. The directors should state whether they have a reasonable expectation that the company will be able to continue in

• peration and meet its

liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary

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Risk assessment

Need to monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report. The monitoring and review should cover all material controls, including financial, operational and compliance controls.

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Risk assessment

The directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate.

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Kerry Group 2015

The Group has identified a number of risks which, if they arise, could potentially impact the achievement of its strategic objectives. The Board is responsible for determining the nature and extent of the risks it is willing to accept in achieving the strategic objectives.

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Kerry Group 2015

The Directors have assessed prospects of the Group over a period of 5 years to 31 December

• 2020. This period is considered appropriate as it

aligns with the Group five year rolling strategic planning process.

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Kerry Group 2015

This assessment considered the potential impact

• f the Group’s principal risks and uncertainties as

described in the annual report should one or more

• f these risks materialise. The Group’s strategic

plan was stress tested for a number of severe but plausible scenarios that could materially impact the Group’s business model, future performance, solvency or liquidity

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Kerry Group 2015

The potential impact of scenarios that could arise

• ut of one, or a combination, of the Group’s

principal risks being realised and which may negatively impact on profitability, growth forecasts or cashflows were considered.

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11/01/2017 13 Kerry Group 2015

Risk Oversight Committee The Risk Oversight Committee (ROC) is chaired by the Chief Financial Officer and comprises of senior business management. The ROC supports the Audit Committee in the risk management process through on‐going monitoring and evaluation of the risk environment and ensuring continuous improvement of the effectiveness of risk mitigation activities.

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• Portfolio Management

‐ range of factors including economic, demographic, technological, competitive and

• ngoing changes in

consumer preferences

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Kerry Group 2015 ‐ Strategic Risks

• Business Acquisition and Divestiture
• Developing Markets

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Kerry Group 2015 ‐ Strategic Risks

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• Quality and Food Safety

quality and safety of our products could expose the Group to product liability claims, product recalls, customer complaints, litigation or non‐compliance with food safety legislation.

• Raw Material and Input Cost Fluctuations
• Talent Management
• ICT Systems, Information Security and Cybercrime

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Kerry Group 2015 ‐ Operational Risks

• Taxation
• Treasury Risk

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Kerry Group 2015 Financial and Compliance Risks Approach

• Text books
• Lecture material
• Past exam paper questions and solutions
• CPA Articles

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