1. This Appendix sets out, by way of Guidance, best practice standards relevant to each of the Corporate Governance Principles (the "Principles") set out in Rule 9.2. While the Principles have the status of Rules that apply to a Reporting Entity, the standards in this document are best practice standards that may be adopted by a Reporting Entity to achieve compliance with the Principles.
2. A Reporting Entity to which the Principles apply is required under Rule 9.2.10 to state in its annual report whether the best practice standards have been adopted. In circumstances where a Reporting Entity has not fully adopted or only partially adopted the best practice standards, it needs to explain in its annual report why the standards were not fully adopted or adopted only partially and what actions, if any, it has taken to achieve compliance with the Principles.
3. Section 73(2) of the FSMR provides that the Regulator is entitled to enact rules requiring a Reporting Entity to have a Corporate Governance framework which is adequate to promote prudent and sound management of the Reporting Entity in the long-term interest of the Reporting Entity and its Shareholders. Accordingly, in providing its explanation in the annual report as noted in 2, a Reporting Entity should aim to illustrate how its actual practices achieve compliance with the outcomes intended by section 73 of the FSMR and the Principles, and thereby contribute to prudent and sound management of the Reporting Entity.
4. The annual report required under Rule 9.2.10 must include a statement by the Board of Directors (the "Board"), stating whether or not, in its opinion, the Corporate Governance framework of the Reporting Entity is effective in achieving the outcome required by section 73 of the FSMR and promoting compliance with the Principles, with supporting information and assumptions, and qualifications if necessary. As the Principles are the core of the Corporate Governance framework, the way in which they are applied should be the central question for the Board as it determines how the Reporting Entity conducts its affairs under its directorship in accordance with the letter and spirit of the applicable requirements including the Principles and the standards.
5. The "comply or explain" approach reflected in the standards recognises that there is more than one way to comply with the Principles to achieve sound and prudent governance of the Reporting Entity. It also gives the Reporting Entity the flexibility to tailor its governance practices to achieve effective outcomes taking into account the nature, size and complexity of its business. For example, a Reporting Entity may have a small Board to reflect the small and less complex nature of its business, as opposed to a larger and more complex business which requires a larger Board. It may not be possible to have a large number of committees of the small Board to undertake the functions of committees discussed in this Appendix. In such cases, the Board as a whole may undertake all these functions, or alternatively, combine the roles of committees as appropriate.
6. Where the standards set out in this Appendix are not adopted due to particular circumstances of the Reporting Entity, the reasons for deviating from the standards should be explained clearly and carefully in the Reporting Entity's annual report, thereby providing Shareholders with the opportunity to make well informed decisions with regard to their voting and the exercise of their rights.
7. The standards in this Appendix are not exhaustive and hence a Reporting Entity may implement any additional measures as required in order for it to comply with the Principles and contribute to sound and prudent governance of the entity.
8. For the purposes of this Appendix "Senior Management" includes any individual who either alone or jointly has ultimate responsibility for the day- to-day management, supervision and control of one or more (or all) parts of a Reporting Entity's business. Consistently with this, the Board should adopt a definition of "Senior Management" that includes the first layer of management below the Board.