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Corporate Governance Guidance Note

Corporate Governance Guidance Note

Evidencing high standards - auditor's review of Code provisions

UPDATE: June 2015

This guidance note has been approved by the AFM Board. It was prepared by the AFM Regulation and Governance Committee, to reinforce the importance of clearly evidencing the approach to corporate governance, as part of our sector's continued commitment to high standards of governance. In October 2013 we issued new guidance about the expanded Auditor's Report and the new strategic report. The new style of reporting highlights the need for firms to constantly improve the narrative with their owners, and to demonstrate how the business model secures good outcomes.

However, in many respects, these have always been integral to the AFM approach, and we are taking this opportunity to remind members of, and to strengthen the obligation for, the external auditor to review the company's statement with regard to nine specific Code provisions: C1.1, C.2.1, and C3.1 to C3.7 (see Annex). This guidance was first provided in 2008 (for eight provisions) by our predecessor trade associations, for life companies only, so we are taking the opportunity now to extend it to all AFM members.

UPDATE: following changes made to FRC requirements in January 2015, we are extending to ten the Code provisions that should be subject to auditor review: C1.1, C2.1, C2.3 and C3.1 to C3.8.

For future report and accounts, we would expect the auditor, having undertaken the review, to include a comment as part of their auditor's report. An example is provided below:

"In accordance with our instructions from the Society we review whether the Corporate Governance Statement reflects the Society's compliance with the TEN provisions of the Annotated UK Corporate Governance Code specified by the Association of Financial Mutuals. We have nothing to report in respect of this review."

The auditor would also be expected to report by exception if there is anything in the accounts that is inconsistent with knowledge gained during the audit. And the expanded auditor's report encourages the auditor to weigh up the governance statements on risk made by the directors and audit committee in the annual report. The requirement to make this statement is similar to those for companies, and so forms part of a typical audit today, and should not therefore incur additional cost. The auditor's statement does not constitute a full review of the Code compliance exercise, so it is important that alongside this, each AFM member considers for itself how its annual report and accounts provide a fair, balanced and understandable view of the organisation.

In respect of its compliance with the Annotated Corporate Governance Code, there is a clear onus on each AFM member to:

  • make sure that it applies the Code to a common standard, and that it is at the heart of its Board culture;
  • be transparent in the way it explains areas of non-compliance; and
  • obtain Board sign-off in respect of it corporate governance approach, and in particular of the appropriateness of explanations provided for any noncompliance with the Code.

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Corporate Governance Questionnaire Keyx

A

AFM PREDECESSOR

AFM Predecessors are Association of Mutual Insurers and Association of Friendly Societies

Annual election

Annual election of all board directors has become commonplace in PLCs, since it was incorporated into the Code in 2010. This was a reaction to governance failures and their contribution to the financial crisis. Annual elections give members an opportunity to react to the performance of the company and are also required for directors that have served for more than nine years.

B

BOARD

Board includes committee of management.

C

CODE

The UK Corporate Governance Code (previously called The Combined Code), subject to the annotations made by AFM in the Annotated Corporate Governance Code (current version dated 2012).

COMPANY

Company means a mutual insurer and includes a friendly society.

CP

Code Provision of the Code.

D

Diversity

Diversity includes but is not limited to gender. Directors may differ in many important characteristics, such as educational and functional background, industry experience, social connectedness, insider status, gender, and race. The Davies report in 2011 put forward a voluntary target for gender diversity for the boards of listed companies of 25% by 2015.

E

Entrepreneurial leadership

The organising of a group of people to achieve a common goal using proactive entrepreneurial behavior by optimising risk, innovating to take advantage of opportunities, taking personal responsibility and managing change within a dynamic environment for the benefit of the organisation

Externally facilitated performance evaluation

An external facilitator brings rigour and struture to the performance evaluation of a board, as well as an independent and impartial perspective. Evaluation of the board of larger companies should be externally facilitated at least every three years. The external facilitator should be identified in the annual report and a statement made as to whether they have any other connection with the company.

F

Fair, balanced and understandable

This broad definition of the basis on which the annual accounts was prepared is intended to address the concern that the narrative report should reflect the board's considered view of the information that members and other users of the annual report and accounts needed, rather than being viewed as promotional in nature, and to ensure that the narrative and financial sections of the report were consistent.

I

Independent non-executive director

Member of the Board of Directors of an entity who is an outsider, meaning he or she is not an employee of or otherwise closely connected with that entity. An example is a broker sitting on the Board of a client company. Such directors are important because they bring unbiased opinions regarding the company's decisions and diverse experience to the company's decision-making process. In order not to have a conflict of interest, independent directors should not participate on the boards of directly competing businesses. Directors are typically compensated based on a standard fee for each board meeting, or on an annualised basis.

L

LARGE COMPANY

A Large Company is any mutual that does not meet the definition of a small mutual i.e. because it has gross premium income on average over the preceding three years of £20 million per annum or more and/or it has assets on average at the end of the last three financial years of £100 million or more.

M

Major shareholders

Although mutual insurers do not have shareholders, the principles underpinning the provisions of the Code are relevant and should be considered in relation to appropriate methods for facilitating direct member dialogue and involvement that may be in place (such as member forums or panels and/or delegate systems) and/or any members with significant membership rights. Also referred to as principal shareholders and significant shareholders in the Code.

MP

Main Principle of the Code.

MR

A recommendation from: "The Myners review of the governance of life mutuals published in December 2004"

P

Performance evaluation

Performance evaluation is a key means by which boards can recognise and correct corporate governance problems and add real value to their organisations. Boards who commit to a regular evaluation process find benefits in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision making, improved communication and more efficient board operations.

S

Senior independent director

The role of the Senior Independent Director includes the following:

  • Providing support for the Chair in the delivery of his or her objectives;
  • Ensuring the views of the other Directors are conveyed to the Chair;
  • Attending sufficient meetings with a range of members, perhaps in company with the Chair, to develop a balanced understanding of their issues and concerns;
  • Ensuring that the Chair is passing on the views of the members and especially that any concerns are conveyed to all Directors;
  • Ensuring that appropriate succession planning procedures are in place in relation to Board succession;
  • Carrying out the annual evaluation of the Chair in conjunction with other Non-Executive Directors while also taking account of the views of the Executive Directors; and
  • Taking responsibility for an orderly succession process for the Chair.

SMALL COMPANY

Small Company means a mutual with gross premium income of under £20 million per annum on average over the preceding three financial years and assets of less than £100 million on average at the end of the last three financial years.

SP

Supporting Principle of the Code.

Statutory duties

The Companies Act 2006 codified certain common law and equitable duties of directors for the first time. The Act sets out seven general duties of directors which are:-

  • to act within powers in accordance with the company's constitution and to use those powers only for the purposes for which they were conferred
  • to promote the success of the company for the benefit of its members
  • to exercise independent judgement
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare any interest in a proposed transaction or arrangement.

The statutory duties do not apply to the directors of friendly societies, although they must comply with very similar duties under the common law.

U

Unfettered powers of decision

No one person should be able to make major decisions about the organisation on his or her own.

Unitary board

Unitary boards include both executive and non-executive directors and make decisions as a unified group. By comparison a two-tier board has a separate management and supervision board

Y

YEAR

"Year" means the financial year of the company in respect of which the questionnaire is being completed