Case Study 1

In early 2018, the remuneration committee of Boom Co (a listed company) met to determine the rewards for the executive directors. It was the practice of the committee to meet annually to decide on executive rewards for the forthcoming financial year. In line with best practice, the committee was made up entirely of non-executive directors. When the remuneration committee met, its chairperson, Sarah Umm, reminded those present that the committee should comply with the guidance of the relevant code of corporate governance. She read out the section that she believed was most relevant to their discussions. 'A significant proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance. The remuneration committee should judge where to position their company relative to other companies. However, they should use such comparisons with caution in view of the risk of an upward movement of remuneration levels with no corresponding improvement in performance. Remuneration for non-executive directors should not include share options or other performance-related elements.' She explained that the committee should balance several concerns when setting rewards: the link with performance, market rates and the company's overall strategy. The strategic priority in the next few years, she explained, was to incentivise medium to long-term growth whilst retaining the existing executive board in place as long as possible. At the end of the meeting, a new member of the committee, Sam South, asked whether there were any performance-related elements of non-executive directors' rewards. Sarah Umm explained that these were only available to executive members of the board in line with the terms of the corporate governance code.

Required:

(a) Explain what is meant by a 'code of corporate governance' and discuss the general purposes of such a code in listed companies such as Boom Co.

(b) Briefly explain the general roles of non-executive directors in a listed company such as Boom Co, and discuss why non-executive directors should not receive performance-related elements in their rewards as Sam South enquired.