Composition of board
The current board ratio of executive to non-executive directors is 5:2. this means that the executive directors can dominate the board proceedings. Corporate governance codes suggest that there should be a balance of executive and non-executive directors so this cannot happen. A minimum of three non-executive directors are also normally recommended, although reports such as Cadbury note this may be difficult to achieve.
I recommend that the number of executive and non-executive directors is equal to help ensure no one group dominates the board. This will mean appointing more non-executive directors to SGCC.
Director appointment
At present, Mr Sheppard appoints directors to the board, giving him absolute authority over who is appointed. This makes the appointment procedure and qualities directors are being appointed against difficult to determine. Corporate governance suggests that appointment procedures should be transparent so that the suitability of directors for board positions can be clearly seen.
I recommend that an appointments committee is established comprising three noon-executive directors to ensure there is no bias in board appointments. Formal job descriptions should also be published making the appointment process more transparent.
Review of board performance
It is correct that the performance of senior managers is reviewed, but this principle should also be applied to the board. While Mr Sheppard may undertake some review, this is not transparent and it is not clear what targets the board either met or did not meet.
I recommend that performance targets are set for each director and actual performance assessed against these on a regular basis. Reasons for underperformance should also be ascertained and where appropriate, changes made to the composition of the board.
Board pay
At present, board members’ pay is set by Mr Sheppard. This process breaches principles of good govemance because the remuneration structure is not transparent and Mr Sheppard sets his own pay. Mr Sheppard could easily be setting remuneration levels based on his own judgements without any objective criteria.
I recommend that a remuneration committee is established comprising three non-executive directors. They will set remuneration levels for the board, taking into account current salary levels and the performance of board members, remuneration should also be linked to performance, to encourage a high standard of work.
Internal control
The system of intemal control in SGCC does not appear to be reviewed correctly. While extemal auditors will review the control system, this review is based on their audit requirement and cannot be relied on to test overall effectiveness of the system. The system may therefore sill contain weaknesses and errors.
I recommend that some more formal review of internal control is carried out, perhaps by establishing an internal audit department, as noted below. The relationship with the company’s auditors must also be reviewed so that the work of the board and the auditors regarding intemal control is understood by both parties.
Internal audit
SGCC does not have an liternal audit department. Given the lack of formal review of internal control in the company, this is surprising. Good corporate governance implies that the control system is monitored and that and internal audit department is established to carry out this task.
I recommend that an internal audit department is established, reporting initially to the audit committee who will monitor internal control and then summarise reports for the board.
Financial statements
There appears to acceptable disclosure in the financial statements regarding the past results of the company. However, the board should also provide an indication of how the company will perform in the future, by a forecast review of operations or similar statement. This is partly to enable investors to assess the value of their investment in the company.
I therefore recommend that the annual accounts off SGCC include some indication of the future operations of the company.
Audit committee
There is no mention in the report of an audit committee. Good corporate governance implies that there is some formal method of monitoring external auditors as well as checking that the reports from the extemal auditors are given appropriate attention in the company.
I recommend that an audit committee is established-made up from non-executive directors. The committee will receive reports from the external and internal auditors （as mentioned above） and ensure that the board takes appropriate action on these reports.
I hope this information is useful. Please contact me again if you require any further assistance.
Sincerely
Ann C.Outent
Note to candidates: An alternative and allowable answer format was to answer sections（a ）, （b）and （c） of the question separately. Taking this approach would also allow other valid points in part（b）such as inability to obtain a stock exchange listing.
The current board ratio of executive to non-executive directors is 5:2. this means that the executive directors can dominate the board proceedings. Corporate governance codes suggest that there should be a balance of executive and non-executive directors so this cannot happen. A minimum of three non-executive directors are also normally recommended, although reports such as Cadbury note this may be difficult to achieve.
I recommend that the number of executive and non-executive directors is equal to help ensure no one group dominates the board. This will mean appointing more non-executive directors to SGCC.
Director appointment
At present, Mr Sheppard appoints directors to the board, giving him absolute authority over who is appointed. This makes the appointment procedure and qualities directors are being appointed against difficult to determine. Corporate governance suggests that appointment procedures should be transparent so that the suitability of directors for board positions can be clearly seen.
I recommend that an appointments committee is established comprising three noon-executive directors to ensure there is no bias in board appointments. Formal job descriptions should also be published making the appointment process more transparent.
Review of board performance
It is correct that the performance of senior managers is reviewed, but this principle should also be applied to the board. While Mr Sheppard may undertake some review, this is not transparent and it is not clear what targets the board either met or did not meet.
I recommend that performance targets are set for each director and actual performance assessed against these on a regular basis. Reasons for underperformance should also be ascertained and where appropriate, changes made to the composition of the board.
Board pay
At present, board members’ pay is set by Mr Sheppard. This process breaches principles of good govemance because the remuneration structure is not transparent and Mr Sheppard sets his own pay. Mr Sheppard could easily be setting remuneration levels based on his own judgements without any objective criteria.
I recommend that a remuneration committee is established comprising three non-executive directors. They will set remuneration levels for the board, taking into account current salary levels and the performance of board members, remuneration should also be linked to performance, to encourage a high standard of work.
Internal control
The system of intemal control in SGCC does not appear to be reviewed correctly. While extemal auditors will review the control system, this review is based on their audit requirement and cannot be relied on to test overall effectiveness of the system. The system may therefore sill contain weaknesses and errors.
I recommend that some more formal review of internal control is carried out, perhaps by establishing an internal audit department, as noted below. The relationship with the company’s auditors must also be reviewed so that the work of the board and the auditors regarding intemal control is understood by both parties.
Internal audit
SGCC does not have an liternal audit department. Given the lack of formal review of internal control in the company, this is surprising. Good corporate governance implies that the control system is monitored and that and internal audit department is established to carry out this task.
I recommend that an internal audit department is established, reporting initially to the audit committee who will monitor internal control and then summarise reports for the board.
Financial statements
There appears to acceptable disclosure in the financial statements regarding the past results of the company. However, the board should also provide an indication of how the company will perform in the future, by a forecast review of operations or similar statement. This is partly to enable investors to assess the value of their investment in the company.
I therefore recommend that the annual accounts off SGCC include some indication of the future operations of the company.
Audit committee
There is no mention in the report of an audit committee. Good corporate governance implies that there is some formal method of monitoring external auditors as well as checking that the reports from the extemal auditors are given appropriate attention in the company.
I recommend that an audit committee is established-made up from non-executive directors. The committee will receive reports from the external and internal auditors （as mentioned above） and ensure that the board takes appropriate action on these reports.
I hope this information is useful. Please contact me again if you require any further assistance.
Sincerely
Ann C.Outent
Note to candidates: An alternative and allowable answer format was to answer sections（a ）, （b）and （c） of the question separately. Taking this approach would also allow other valid points in part（b）such as inability to obtain a stock exchange listing.
