KK is a large listed company. When a non-executive directorship of KK Limited became available, John Soria was nominated to fi ll the vacancy. John is the brother-in-law of KK’s chief executive Ken Kava. John is also the CEO of Soria Supplies Ltd, KK’s largest single supplier and is, therefore, very familiar with KK and its industry. He has sold goods to KK for over 20 years and is on friendly terms with all of the senior offi cers in the company. In fact last year, Soria Supplies appointed KK’s fi nance director, Susan Schwab, to a non-executive directorship on its board. The executive directors of KK all know and like John and so plan to ask the nominations committee to appoint him before the next AGM. KK has recently undergone a period of rapid growth and has recently entered several new overseas markets, some of which, according to the fi nance director, are riskier than the domestic market. Ken Kava, being the dominant person on the KK board, has increased the risk exposure of the company according to some investors. They say that because most of the executive directors are less experienced, they rarely question his overseas expansion strategy. This expansion has also created a growth in employee numbers and an increase in the number of executive directors, mainly to manage the increasingly complex operations of the company. It was thought by some that the company lacked experience and knowledge of international markets as it expanded and that this increased the risk of the strategy’s failure. Some shareholders believed that the aggressive strategy, led by Ken Kava, has been careless as it has exposed KK Limited to some losses on overseas direct investments made before all necessary information on the investment was obtained. As a large listed company, the governance of KK is important to its shareholders. Fin Brun is one of KK’s largest shareholders and holds a large portfolio of shares including 8% of the shares in KK. At the last AGM he complained to KK’s chief executive, Ken Kava, that he needed more information on directors’ performance. Fin said that he didn’t know how to vote on board reappointments because he had no information on how they had performed in their jobs. Mr Kava said that the board intended to include a corporate governance section in future annual reports to address this and to provide other information that shareholders had asked for. He added, however, that he would not be able to publish information on the performance of individual executive directors as this was too complicated and actually not the concern of shareholders. It was, he said, the performance of the board as a whole that was important and he (Mr Kava) would manage the performance targets of individual directors. Required:
(c) Explain the typical contents of a ‘best practice’ corporate governance report within an annual report and how its contents could help meet the information needs of Fin Brun. (10 marks)
参考答案：
Corporate governance report Best practice CG report Several corporate governance codes of practice prescribe the content for a report as part of an annual report. Although these vary slightly, the following are prominent in all cases. Information on the board and its functioning. Usually seen as the most important corporate governance disclosure, this concerns the details of all directors including brief biographies and the career information that makes them suitable for their appointment. Information on how the board operates, such as frequency of meetings and how performance evaluation is undertaken is also included in this section. This section is particularly important whenever unexpected or unanticipated changes have taken place on the board. Investors, valuing transparency in reporting, would always expect a clear explanation of any sudden departures of senior management or any signifi cant changes in personnel at the top of the company. Providing investor confi dence in the board is always important and this extends to a high level of disclosure in board roles and changes in those roles. The committee reports provide the important non-executive input into the report. Specifi cally, a ‘best practice’ disclosure includes reports from the non-executive-led remuneration, audit, risk and nominations committees. In normal circumstances, greatest interest is shown in the remuneration committee report because this gives the rewards awarded to each director including pension and bonuses. The report on the effectiveness of internal controls is provided based in part on evidence from the audit committee and provides important information for investors. There is a section on accounting and audit issues with specifi c content on who is responsible for the accounts and any issues that arose in their preparation. Again, usually a matter of routine reporting, this section can be of interest if there have been issues of accounting or auditor failure in the recent past. It is often necessary to signal changes in accounting standards that may cause changes in reporting, or other changes such as a change in a year-end date or the cause of a restatement of the previous accounts. These are all necessary to provide maximum transparency for the users of the accounts. Finally there is usually a section containing other papers and related matters which, whilst appearing to be trivial, can be a vital part of the accountability of directors to the shareholders. This section typically contains committee terms of reference, AGM matters, NED contract issues, etc. Fin Brun’s information needs Fin Brun is voicing a reasonable and realistic concern to Mr Kava because it is usually diffi cult to determine the contributions of individual directors (unless there has been some other publicity, positive or negative, throughout the year). The bonuses awarded to each director are, however, disclosed in the report of the remuneration committee and this gives an indication of the committee’s view on each director’s performance. The biographies of all directors, including NEDs, is included in a best practice disclosure and that can also provide information on the type of person the director is and an indication of his or her fi tness for the job. [Tutorial note. The study texts approach this content in slightly different ways (different headings). Allow for variations in expression of ideas].