MKT APP 4 MKT APP 4 CORPORATE GOVERNANCE BEST PRACTICE STANDARDS
General1. This Appendix sets out, by way of Guidance, best practice standards relevant to each of the Corporate Governance Principles (the "Principles") set out in Rule 9.2. While the Principles have the status of Rules that apply to a Reporting Entity, the standards in this document are best practice standards that may be adopted by a Reporting Entity to achieve compliance with the Principles.2. A Reporting Entity to which the Principles apply is required under Rule 9.2.10 to state in its annual report whether the best practice standards have been adopted. In circumstances where a Reporting Entity has not fully adopted or only partially adopted the best practice standards, it needs to explain in its annual report why the standards were not fully adopted or adopted only partially and what actions, if any, it has taken to achieve compliance with the Principles.3. Section 73(2) of the FSMR provides that the Regulator is entitled to enact rules requiring a Reporting Entity to have a Corporate Governance framework which is adequate to promote prudent and sound management of the Reporting Entity in the long-term interest of the Reporting Entity and its Shareholders. Accordingly, in providing its explanation in the annual report as noted in 2, a Reporting Entity should aim to illustrate how its actual practices achieve compliance with the outcomes intended by section 73 of the FSMR and the Principles, and thereby contribute to prudent and sound management of the Reporting Entity.4. The annual report required under Rule 9.2.10 must include a statement by the Board of Directors (the "Board"), stating whether or not, in its opinion, the Corporate Governance framework of the Reporting Entity is effective in achieving the outcome required by section 73 of the FSMR and promoting compliance with the Principles, with supporting information and assumptions, and qualifications if necessary. As the Principles are the core of the Corporate Governance framework, the way in which they are applied should be the central question for the Board as it determines how the Reporting Entity conducts its affairs under its directorship in accordance with the letter and spirit of the applicable requirements including the Principles and the standards.5. The "comply or explain" approach reflected in the standards recognises that there is more than one way to comply with the Principles to achieve sound and prudent governance of the Reporting Entity. It also gives the Reporting Entity the flexibility to tailor its governance practices to achieve effective outcomes taking into account the nature, size and complexity of its business. For example, a Reporting Entity may have a small Board to reflect the small and less complex nature of its business, as opposed to a larger and more complex business which requires a larger Board. It may not be possible to have a large number of committees of the small Board to undertake the functions of committees discussed in this Appendix. In such cases, the Board as a whole may undertake all these functions, or alternatively, combine the roles of committees as appropriate.6. Where the standards set out in this Appendix are not adopted due to particular circumstances of the Reporting Entity, the reasons for deviating from the standards should be explained clearly and carefully in the Reporting Entity's annual report, thereby providing Shareholders with the opportunity to make well informed decisions with regard to their voting and the exercise of their rights.7. The standards in this Appendix are not exhaustive and hence a Reporting Entity may implement any additional measures as required in order for it to comply with the Principles and contribute to sound and prudent governance of the entity.8. For the purposes of this Appendix "Senior Management" includes any individual who either alone or jointly has ultimate responsibility for the day- to-day management, supervision and control of one or more (or all) parts of a Reporting Entity's business. Consistently with this, the Board should adopt a definition of "Senior Management" that includes the first layer of management below the Board.
Principle 1 — Board of Directors
"Every Reporting Entity must have an effective Board of Directors ("the Board") which is collectively accountable for ensuring that the Reporting Entity's business is managed prudently and soundly."9. The role of the Board is to provide leadership of the Reporting Entity within a framework of prudent and effective controls which enable risks to which the Reporting Entity is exposed to be identified, assessed and effectively managed.10. The Board should set the Reporting Entity's business and strategic objectives and risk parameters, ensure that the necessary financial and human resources are in place for the Reporting Entity to meet those objectives, and review management performance in achieving those objectives and outcomes. For this purpose, the Board should:a. determine the nature and extent of the significant risks it is willing to take in achieving the relevant strategic objectives; andb. set the Reporting Entity's values and standards and ensure that its obligations to its stakeholders are clearly understood and met.11. The Board should meet sufficiently regularly to discharge its duties effectively. There should be a formal schedule of matters specifically reserved for its decision.12. The mandate, composition and working procedures of the Board should be well defined.13. The annual report of the Reporting Entity should include a statement of how the Board operates and it should also set out the number of meetings of the Board.
Principle 2 — Division of responsibilities
"The Board must ensure that there is a clear division between the Board's responsibility for setting the strategic aims and overseeing the Reporting Entity and the Senior Management's responsibility for managing the Reporting Entity's business in accordance with the strategic aims and risk parameters set by the Board."
Board and Senior Management14. The division of responsibilities between the Board and the Senior Management of the Reporting Entity should be clearly established, set out in writing, and agreed to by the Board. In assigning duties, the Board should ensure that no one individual has unfettered powers in making decisions. It should also ensure that there is a clear segregation of the functions of:a. the oversight of the management by the Board; andb. the management of the Reporting Entity's business by the Senior Management in accordance with the strategic aims and risk parameters set by the Board.15. Board members may include individuals undertaking Senior Management functions. For example, the Chief Executive of a Reporting Entity may also be a Board member. Where this is the case, the Board should ensure that when assessing the performance of the Senior Management, the independence and objectivity of that process is achieved through appropriate mechanisms, such as the assignment of such a task to a non-executive Director of the Board or a committee comprising a majority of non-executive Directors.
Chairman and Chief Executive16. In order to ensure that the Board's function of providing effective oversight of the management of the Reporting Entity is not compromised, it is important that the role of the chairman of the Board and the role of the Chief Executive of the Reporting Entity should not be held by the same individual.17. However, if the Board decides that the Chief Executive should also hold the position of the chairman of the Board, there should be effective measures to ensure that the Board is able to properly discharge its function of providing effective oversight of the management of the business of the Reporting Entity by its Senior Management. For example, the performance assessment of the Chief Executive and other members of the Senior Management should be undertaken by a non-executive Director of the Board or a committee comprising a majority of non-executive Directors who report to the Board directly on their assessment, and also, prior approval by Shareholders of the appointment of the Chief Executive as chairman of the Board.18. Except where the positions of the chairman of the board and the Chief Executive are held by the same person, the division of responsibilities between the chairman and Chief Executive should be clearly established, set out in writing and agreed to by the Board.19. The chairman should be responsible for providing leadership of the Board, ensuring its effectiveness in all aspects of the Board's role and setting its agenda.20. Except where the positions of the chairman of the Board and the Chief Executive are held by the same individual, the chairman of the Board should meet the independence criteria set out in paragraph 31.21. The annual report of the Reporting Entity should:a. identify the chairman, the deputy chairman (where there is one), the Directors and the Chief Executive; andb. include a high level statement of which types of decisions are to be taken by the Board and which are to be delegated to the Senior Management.
Principle 3 — Board composition and resources
"The Board and its committees must have an appropriate balance of skills, experience, independence and knowledge of the Reporting Entity's business, and adequate resources, including access to expertise as required and timely and comprehensive information relating to the affairs of the Reporting Entity."
Balance of skills and independence22. A major consideration that underpins the effectiveness of the Board is the availability at the Board level of the relevant skills, expertise and resources as are necessary to discharge the Board functions, taking due account of the nature, scale, diversity and complexity of the business of the Reporting Entity.23. It may well be that no single Director has all the knowledge, skills and expertise needed by a Board to discharge its functions. The Board should have an appropriate number and mix of individuals to ensure that there is an overall adequate level of knowledge, skills and expertise commensurate with the nature, scale and complexity of the business of the Reporting Entity.24. In order to ensure that the Board is equipped with the necessary skills, expertise and resources appropriate to the business of the Reporting Entity, there should be a formal, rigorous and transparent procedure for the appointment of Directors to the Board. Appointments to the Board should be made on merit and against objective criteria, with due regard to the benefits of diversity on the Board. 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.25. All Directors should be submitted for re-appointment at regular intervals, subject to continued satisfactory performance. The Board should ensure planned and progressive refreshing of the Board to ensure the on-going effectiveness of the Board, particularly the objectivity of the decision making by the Board and maintaining the skills and expertise as relevant to the Reporting Entity's business.26. All Directors should be subject to election by Shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. The Board should satisfy itself that there is adequate succession planning in respect of Board membership and the Senior Management, so as to ensure an orderly and smooth change-over of positions whilst maintaining an appropriate balance of skills and experience within the Reporting Entity and on the Board.
Chairman27. For the appointment of a chairman, there should be a job specification, and an objective assessment against the relevant criteria including an assessment of the time commitment expected, recognising the need for availability in the event of crises. Generally, the nomination committee should undertake this function. A chairman's other significant commitments should be disclosed to the Board before appointment and included in the annual report. Changes to such commitments should be reported to the Board as they arise, and their impact explained in the next annual report.28. The chairman should ensure that new Directors receive an appropriate induction on joining the Board. The chairman should ensure that the Directors continually update their skills and their knowledge and familiarity with the Reporting Entity required in fulfilling their role both on the Board and its committees. All Directors should have appropriate knowledge of the Reporting Entity and should be provided with adequate access to its operations and staff to carry out their respective responsibilities.29. The Reporting Entity should provide the necessary resources for developing and updating its Directors' knowledge and capabilities. The chairman should regularly review and agree with each Director their training and development needs.
Executive and non-executive Directors30. The Board should include a balance of executive and non-executive Directors (including independent non-executive Directors). No individual or small group of individuals should be able to dominate the Board's decision making. At least one third of the Board should comprise non-executive Directors, of which at least two non-executive Directors should be independent.31. The Board should consider a non-executive Director to be "independent" if that Director meets, upon an assessment, objective criteria of independence set by the Board. Such independence criteria should encompass independence in character and judgement of the individual by having no commercial or other relationships or circumstances which are likely to affect or could appear to impair his judgement in a manner other than in the best interests of the Reporting Entity. In making the assessment of independence against such criteria, the Board should consider matters such as whether the person:a. has already served as a member of the Board for a significant period;b. has been an Employee of the Reporting Entity or a member of the Group within the last five years;c. has or has had, within the last three years, a material business relationship with the Reporting Entity, either directly or as a Partner, Shareholder, Director or senior Employee of another body that has such a relationship with the Reporting Entity;d. receives or has received, in the last three years, additional remuneration or payments from the Reporting Entity apart from a Director's fee, or participates in the Reporting Entity's Share option, or a performance-related pay scheme, or is a member of the Reporting Entity's pension scheme;e. is or has been a Director, Partner or Employee of a firm which is the Reporting Entity's external auditor;f. has close family ties with any of the Reporting Entity's advisers, Directors or senior Employees;g. holds cross Directorships or has significant links with other Directors through involvement in other Companies or bodies; orh. represents a significant Shareholder.32. The terms and conditions of appointment of non-executive Directors should be made available for inspection by any person at the Reporting Entity's registered office during normal business hours. The letter of appointment should set out the expected time commitment. Non-executive Directors should undertake that they will have sufficient time to meet what is expected of them. Their other significant commitments should be disclosed to the Board before appointment, with a broad indication of the time involved. The Board should be informed of subsequent changes.33. The annual report of the Reporting Entity should identify each non-executive Director it considers to be independent, and the chairman and members of each of the Board committees. It should also state the relevant skills and expertise which each Director brings to the Board and set out the number of meetings of each of the committees and individual attendance by Directors.34. As part of their role as members of the Board, non-executive Directors should constructively challenge and help develop proposals on business objectives and strategies for achieving those objectives. Non-executive Directors should scrutinise the performance of Senior Management against agreed goals and objectives and monitor the reporting of their performance.
Nomination committee35. The Board should establish and maintain a nomination committee to lead the process for appointments and make recommendations to the Board relating to the appointment of Board members and the Senior Management. A majority of members of the nomination committee should be independent non-executive Directors. The chairman of the nomination committee should be an independent non-executive Director.36. The mandate, composition and working procedures of the nomination committee should be well defined. The nomination committee should make available on the website of the Reporting Entity its written terms of reference explaining its role and the authority delegated to it by the Board.37. The nomination committee should evaluate the balance of skills, knowledge, independence and experience on the Board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.38. A separate section of the annual report of the Reporting Entity should describe the work of the nomination committee, including the process it has used in relation to Board appointments. An explanation should be given if neither an external consultancy nor an open advertising process has been used in the appointment of the chairman or a non-executive Director of the Board.
Secretary of the Reporting Entity39. The responsibilities of the Reporting Entity's secretary should clearly include, under the direction of the chairman, ensuring good information flows within the Board and its committees and between Senior Management and non-executive Directors, as well as facilitating induction and assisting with professional development of Board members as required. The secretary should also be responsible for ensuring that Board procedures are fully complied with, and advising the Board through the chairman on all governance matters.40. Both the appointment and removal of the secretary of the Reporting Entity should be a matter for the Board as a whole.
Information and support41. All Directors should have access to accurate, timely and clear information relating to the business and affairs of the Reporting Entity to enable them to discharge their duties, taking due account of the roles undertaken by such members. The chairman is responsible for ensuring that the Directors receive such information. Senior Management has an obligation to provide such information, but Directors should seek clarification or amplification where necessary. All Directors should also have access to the advice and services of the secretary of the Reporting Entity, as he is responsible to the Board for ensuring compliance with the Board procedures.42. The Board should ensure that Directors, especially non-executive Directors, have access to independent professional advice at the Reporting Entity's expense where necessary to enable them to discharge their respective roles and responsibilities. Committees of the Board should also be provided with sufficient resources including information to carry out their role and responsibilities effectively.
Performance evaluation43. The Board should undertake a formal and rigorous evaluation of its own performance and that of its committees and individual Directors at least annually.44. The chairman of the Board should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the Board and making any changes to the composition of the Board as required.45. The Board should state in the annual report how performance evaluation of the Board, its committees and its individual Directors has been conducted.
Principle 4 — Risk management and internal control systems
"The Board must ensure that the Reporting Entity has an adequate, effective, well-defined and well-integrated risk management, internal control and compliance framework."46. The Board should, at least annually, conduct a review of the effectiveness of the Reporting Entity's risk management, internal control and compliance framework and should report to the Shareholders that it has done so. The review should cover all aspects of material controls, including management, financial, operational and compliance controls and risk management systems. The Board may satisfy this requirement by instructing an external auditor to undertake the review and report to it on its outcome. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and effective.47. The Board should establish formal and transparent arrangements for considering how it should apply the financial reporting and internal control systems, and for maintaining an appropriate relationship with its auditors.48. The Board should establish policies and procedures for the identification and oversight and management of material business risks and disclose a summary of those policies and procedures in its annual report. The Board should also ensure that Senior Management implements the requisite risk management and internal control systems to manage material risks.
Audit committee49. The Board should establish and maintain an audit committee to monitor and review the Reporting Entity's internal audit function and other internal controls. The main roles and responsibilities of the audit committee should be set out in written terms of reference, be available on the website of the Reporting Entity and include at least the following:a. monitoring the integrity of the financial statements of the Reporting Entity and any formal announcements relating to the Reporting Entity 's financial performance and reviewing significant financial reporting judgements contained in them;b. reviewing the Reporting Entity's internal financial controls and, unless expressly addressed by a separate risk committee of the Board or the Board itself, internal controls and risk management systems;c. monitoring and reviewing the effectiveness of the Reporting Entity's internal audit function;d. making recommendations to the Board in respect of the appointment, re-appointment, removal and terms of engagement, including remuneration, of the external auditor;e. reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of the audit process;f. developing and implementing policy on the engagement of the external auditor to supply non-audit services; andg. reviewing the adequacy of arrangements by which staff of the Reporting Entity may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.50. The Board should appoint at least two independent non-executive Directors to the audit committee. At least one of the independent non-executive Directors appointed to the audit committee should have recent and relevant financial expertise. The chair of the audit committee should be an independent non-executive Director.51. A separate section of the annual report should describe the work of the audit committee in discharging its responsibilities. The annual report should also explain to Shareholders how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded.
Principle 5 — Shareholder rights and effective dialogue
"The Board must ensure that the rights of Shareholders are properly safeguarded through appropriate measures that enable the Shareholders to exercise their rights effectively, promote effective dialogue with Shareholders and other key stakeholders as appropriate, and prevent any abuse or oppression of minority Shareholders."52. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with Shareholders takes place. Such dialogue should be based on the mutual understanding of objectives and provision of adequate information relating to the Reporting Entity including financial information, and how the business and affairs of the Reporting Entity are carried out.53. The Board should hold a general meeting of Shareholders at least annually.54. The Board should use the annual general meeting to communicate with Shareholders on important aspects of the Reporting Entity's business and affairs and encourage their participation. Shareholders should have the opportunity to ask questions of the Board, to place items on the agenda of general meetings and to propose resolutions.55. At any general meeting, the Reporting Entity should propose a separate resolution on each substantial separate issue, and should in particular propose a resolution at the annual general meeting relating to the report and accounts. For each resolution, proxy appointment forms should provide Shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote.56. The chairman should arrange for the chairs of the audit, remuneration, and nomination committees to be available to answer questions at the annual general meeting and for all Directors to attend either in person or by electronic means.57. Whilst recognising that most Shareholder contact is with the Chief Executive and finance Director, the chairman and other Directors, including non-executive 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 using means which are most practical and efficient taking into account the nature, scale and complexity of its operations and the nature of its Shareholder base. The Board should use its website as a forum for the posting of information such as new strategies and a calendar for important meetings and other events.58. The chairman should ensure that the views of Shareholders are communicated to the Board as a whole. In addition, the chairman should discuss the governance and strategy of the Reporting Entity, at least with its major Shareholders. Non-executive Directors should be offered the opportunity to attend meetings with major Shareholders and should expect to attend such meetings, especially if requested by major Shareholders.59. The Board should ensure that no steps are taken which may prevent Shareholders consulting with other Shareholders on issues concerning their basic Shareholder rights, subject to exceptions to prevent abuse. Similarly, the Board should also protect minority Shareholders from any oppressive or abusive action by controlling or major Shareholders.
Other stakeholders60. While Shareholders of the Reporting Entity form the major stakeholder group of the Reporting Entity, the Board should also ensure that there are adequate channels of communication with its other key stakeholders as appropriate to the nature, scale and complexity of its business operations, and the environment in which it operates. Such stakeholders may include Employees, creditors and business Customers of the Reporting Entity. The Board should make an assessment of the level of information that should generally be made available to the public, or to any particular group of stakeholders, relating to the affairs of the Company, and how best to make use of its website or any other channels of communication as appropriate to disseminate relevant information.
Principle 6 — Position and prospects
"The Board must ensure that the Reporting Entity's financial and other reports present an accurate, balanced and understandable assessment of the Reporting Entity's financial position and prospects by ensuring that there are effective internal risk control and reporting requirements."61. The Board's responsibility to present a true, balanced and understandable assessment of its financial position and prospects should extend to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by law.62. The Directors should explain in the annual financial report their responsibility for preparing that report and accounts, and there should be a statement by the auditor about their reporting responsibilities.63. The Directors should include in the annual report an explanation of the basis on which the Reporting Entity generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the Reporting Entity.64. The Directors should report in annual and half yearly financial statements that the business is a going concern, with supporting assumptions or qualifications as necessary.
Principle 7 — Remuneration
"The Board must ensure that the Reporting Entity has remuneration structures and strategies that are well aligned with the long-term interests of the entity."
Directors' remuneration65. Levels of remuneration of Directors should be sufficient to attract and retain Directors of appropriate quality, taking into account the nature, scale and complexity of the business of the Reporting Entity, and to provide effective direction and leadership to the Reporting Entity in managing its business and affairs successfully. In doing so, the Reporting Entity should avoid paying more than is necessary for this purpose.66. The performance-related elements of remuneration should form an appropriate proportion of the total remuneration package of executive Directors and should be designed to promote the long term interests and viability of the Reporting Entity, to align their interests with those of Shareholders and other key stakeholders and to give these Directors appropriate incentives to perform at the highest levels.67. Levels of remuneration for non-executive Directors should reflect the time commitment and responsibilities of their respective roles and the objectivity of judgement in the decision making required by them. In considering whether to grant Share options to non-executive Directors, a Reporting Entity should consider whether the granting of the Share options will impair the objectivity or independence of the non-executive Directors' decision making.68. Generally, where non-executive Directors' remuneration includes Share options, rights resulting from the exercise of Share options should be subject to appropriate retention and vesting periods, generally until at least one year after the non-executive Director leaves the Board.69. There should be a formal and transparent procedure for developing policies on executive remuneration and for fixing remuneration packages of individual Directors. No Director should decide his own remuneration, and ideally, all Directors' remuneration should be subject to recommendations of any internal remuneration committee, and otherwise upon the advice of an external consultant.
Remuneration committee70. The Board should establish and maintain a remuneration committee to assess the remuneration of Directors (including the chairman). The remuneration committee should comprise at least three members, with a majority of those members being independent non-executive Directors. The chair of the committee should be an independent non-executive Director. In addition, the chairman of the Board may also be a member but not the chair of the committee.71. The remuneration committee should have delegated responsibility for setting remuneration for all executive Directors and the chairman. The committee should also recommend and monitor the level and structure of remuneration for the Senior Management and other key control functionaries such as the risk or compliance officers and auditors, to ensure that the independence and objectivity of the decision making by such control functionaries is not compromised or impaired by their remuneration structure. An important consideration that should be taken into account in setting remuneration of key control functionaries of the Reporting Entity is that their remuneration is not substantially linked to the profits generated by business or trading units whose activities are subject to monitoring and oversight by those functionaries.72. The mandate, composition and working procedures of the remuneration committee should be well defined. The remuneration committee should make available on the website of the Reporting Entity its written terms of reference explaining its role and the authority delegated to it by the Board.73. The remuneration committee should also be responsible for appointing any external consultants in respect of executive Directors' remuneration. Where external consultants are appointed, a statement should be made available of whether they have any other connection with the Reporting Entity.74. The Board itself, or where required by the articles of association or other constitutional documents, the Shareholders, should determine the remuneration of the non-executive Directors.75. The annual report of the Reporting Entity should contain sufficient information relating to the overall remuneration policy and strategy of the Reporting Entity to demonstrate that the remuneration, particularly of the executive Directors and Senior Management, properly links rewards to corporate and individual performance and outcomes, and to ensure that any performance-based remuneration granted is structured in such a way so as to not induce inappropriate risk taking by such individuals.