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.
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:
AFM Predecessors are Association of Mutual Insurers and Association of Friendly Societies
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.
Board includes committee of management.
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 means a mutual insurer and includes a friendly society.
Code Provision of the Code.
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.
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.
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.
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.
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.
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.
Main Principle of the Code.
A recommendation from: "The Myners review of the governance of life mutuals published in December 2004"
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.
Senior independent director
The role of the Senior Independent Director includes the following:
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.
Supporting Principle of the Code.
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:-
The statutory duties do not apply to the directors of friendly societies, although they must comply with very similar duties under the common law.
Unfettered powers of decision
No one person should be able to make major decisions about the organisation on his or her own.
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
"Year" means the financial year of the company in respect of which the questionnaire is being completed