Evaluation of Compliance with the Principles of the UK Corporate Governance Code 2018

AB21320 Assignment Case Study 2020/21

You have just taken over as Chief Executive Officer (CEO) of Mega Products PLC, a UK registered FTSE 250 company.  The public profile of the company is one of a successful property development firm.  In your first few days as CEO you start to find out about the company, its people and its governance arrangements.

In 2019, the company reported net profits of £15m on a turnover of £910m.  The previous few years had been profitable but margins have been erratic.  The company has a board of directors comprising the non-executive chairman, three indepenedent non-executives, the Finance Director and you as CEO.  There is a senior management team that reports to you as CEO and, in your absence, to the Finance Director if an issue arises that needs an immediate decision.

In the afternoon of your first day as CEO, you had a meeting with the Company Secretary.  His views were summarised in his closing comments to you.

“The priorities are the UK Corporate Governance Code compliance statement in the annual report, keeping the major shareholders happy and keeping any bad news out of the media.  I make sure that we can tick all the boxes on Code compliance, even if we do need to be slightly creative at times.    

The non-execs have backgrounds in finance, PR and HR.  The Chair is a retired Major General.  We have struggled with the issue of them having multiple FTSE 250 directorships and have settled on accepting our non-execs having up to three others as long as they are not with our competitors or strategic partners.  To maintain their independence, the non-execs and the Chair are not shareholders and have no business dealings with the company other than as directors.  There are no family or other relationship ties either.  The quorum for the Board is five.  Achieveing this can be a problem at times.

I agree the Board agenda a month in advance with the Chair and send out the meeting papers ten days before the meeting.  Most now ask for the papers to be sent electronically.  They seem to come to meetings well prepared: a little too well prepared at times!  We have Board meetings in the afternoons, starting at 2.00pm and finishing at 5.00pm.  The Board don’t like letting outsiders know our business, so I do the annual Board review.  I avoid finding fault, though I do make sure that I identify a few minor areas for improvement for appearances sake.”

He finished saying this with a mischieveous grin on his face.

The Finance Director has a half-yearly meeting with the major shareholders to update them on progress, to share half-yearly financial results with them and to keep in touch with their priorities.  These meetings usually take place in a private room in a two Michelin star restaurant.

Later on your first day as CEO, you also have a chat with the Finance Director.  You find her amiable and she appears to be very conscientious and competent.

“We were in good shape at the start of 2020.  I make sure that shareholders get dividends equivalent to about 6% of the market value of their shares.  With no bad news in the media, the markets tend to reward us with increases in share values that beat the FTSE 250 average.  Exchange rates are a problem though and BREXIT may stop us getting the workforce we need.  We have a couple of £10m projects that are marginal and which we may have to cut if we can’t recruit the builders and plumbers we need. 

What worries me?  I’m scared stiff about cyber risk and I would like the board to be keener to question things outside their professional areas.  The external auditors tell me that they have looked at our internal controls and that they are up to industry standards.  Covid-19 has hit us hard and our customers harder.  I think it will hit even harder over the next 12 – 18 months.  We could be doing more to contribute to wider society and I would like to start a programme of corporate giving but the major shareholders aren’t too keen on that.  Nor are the Board actually.  I think they follow that American, Milton Friedman.

We are a building firm and it is a dangerous industry: people get hurt and killed on construction sites.  I think that farming and mining have higher death rates but our numbers are still too high.  We have finally introduced a ‘Keeping Us Safe at Work’ whistle-blowing system for staff this year.”

On your second day, you visit two major development sites, meet the staff and have meetings with the project manager for each site.  You are not a construction specialist and quickly realise how little of what is going on you fully understand.  The project managers tell you that health and safety are taken very seriously and talk about record keeping and technical matters that you do not really understand, but it all sounds very impressive.  You see nothing that gives you cause for concern.  The idea of working on the roof of a five story building on a blustery winter’s day scares you a little.  Covid-19 has put all the current projects behind and taken them over cost.  Two major customers are close to liquidation and may not be able to complete on the current deals to lease completed properties.

The Board’s two committes, the Audit Committee and the Remuneration Committee, each meet quarterly.  The Audit Committee comprises the three non-executive directors and has regular private meetings with the internal and external auditors.  You have heard the meetings of both committees described as boring and those of the Audit Committee to be dominated by financial reporting issues.  The Chair of the Committee is a current partner in a Big 4 audit firm who likes to show his technical prowess and knowledge of current accounting issues. The Remuneration Committee comprises the full board and operates under terms of reference approved by the Board, as does the Audit Committee.  You have not yet been to a meeting of either committee but the minutes seem to indicate that their meetings are rather tedious and the discussion superficial.  Until 2018, there was also a Risk and Governance Committee but this was disbanded on 31st December 2018 due to poor attendance and its responsibilities are due to be shared out between the Audit Committee and the full Board.

Later in your first week, you have a brief talk with the Chair of the Audit Committee.  He has a mischievous sense of humour and says that as an audit partner of a Big 4 firm he likes “tweaking the tail” of the company’s external auditors by asking awkward questions at Audit Committee meetings. You find that you don’t like him but you develop a clear sense that he has an astute understanding of financial reporting and the contribution of the Audit Committee to it.  He is dismissive of internal auditing and has suggested that the small in-house team be closed down as, in his view, internal auditors serve no useful purpose.

Your contract as CEO provides for a bonus of up to 150% of your basic salary of £500,000 linked to the company’s share price.  The Finance Director has a similar bonus deal, albeit on a lower salary.  All senior staff have a pension provison that is generous by industry standards.

The previous CEO established a regular series of meetings with the CEOs of the company’s key strategic partners: two building materials suppiers; three plant and vehicle suppliers; a firm of architects; three large commercial landlords who purchase developed properties from Mega Products; and a PR firm.  The CEO’s personal assistant, now your personal assistant, shows you the schedule of these meetings for the next year and gives you the notes of the key issues that emerged from previous meetings, as dictated by your predessor to the PA shortly after the meetings.  There are some references to motivating decision-makers personally when contracts are being negotiated and of these costs being charged to a variety of miscellaneous budgets.  Overall, the notes indicate that the meetings are comprehensive and concentrate on future deals and problem-solving to maximise the mutal benefits of the strategic partnerships.

The five-year corporate startegy is set out in the Corporate Plan 2015 – 2019, which was approved by the Board in 2014.  The Corporate Strategy 2020 – 2024 is due to be debated by the Board and finalised soon.

REQUIRED

Answers must be based on the evidence in the case study and your interpretation of it.

Marking Criteria