6. Role and Membership of the Board of Directors

Question 1

What is the composition of a typical listed company?

Answer 1

• Chair – leads the board and ensures that it functions effectively
• CEO – responsible for executive management of the company’s operations
• Executive directors (such as a finance director)
• NEDs – bring outside experience and expertise
• SID – channel for shareholders and mediator in some circumstances

Question 2

Principle A states that a company is led by an effective and entrepreneurial board. What are the three things outlined as the role in this Principle?

Answer 2

• promote long-term sustainable success
• generate value for s/h
• contribute to society

Question 3

What does Principle B state a board should do?

Answer 3

Establish company’s purpose, values and strategy – in line with culture (refer to FRC Guidance on Board Effectiveness)

Directors to act with integrity, lead by example and promote desired culture

Purpose statement - encapsulate this as far as the outside world is concerned

All of these things are expanded on in the FRC Guidance

Question 4

Principle C says that the board must ensure and establish what?

Answer 4

Ensure necessary resources in place for company to meet objectives and measure performance

Establish framework of prudent and effective controls to assess and manage risk – e.g. approve delegated levels of authority, establish board committees and approve their ToR, adopting a schedule of matters reserved for the board, IC and RM procedures and setting the risk appetite

Question 5

Principle D is about engagement but what does it specifically say?

Answer 5

Ensure effective engagement with and encourage participation from shareholders
and stakeholders to meet responsibilities to these parties

Question 6

Principle E speaks about workforce but what specifically?

Answer 6

Ensure workforce policies and practices are consistent with values and support long-term sustainable success - FRC Guidance on Board Effectiveness – paragraph 47 and 48

Workforce should be able to raise any matters of concern

Question 7

What is the role of committees?

Answer 7

Usually make recommendations to the board on matters within their remit rather than make the final decision themselves (except for RemCo in relation to executive remuneration). Accordingly, the board still retains ultimate control over various matters i.e. matters reserved for the board

Question 8

Give examples of things which are matters reserved for the board

Answer 8

• New appointments to the board
• Setting the directors’ rem policy
• Approving accounts and other financial statements
• Establishing a framework of prudent and effective controls
• Proposing the appointment of auditors
• Setting the company strategy and objectives

Question 9

Principle F says the Chair should lead the board and is responsible for its overall effectiveness. What should the Chair demonstrate?

Answer 9

They should demonstrate objective judgement and promote a culture of openness and debate. They must facilitate constructive board relations and contribution of all directors.

Question 10

What is the link between Principle G and Provision 11?

Answer 10

Principle G
Should include an appropriate combination of executive and NEDs (in particular, independent NEDS), so that no one individual or group of individuals dominates

Provision 11 - At least half the board, excluding the chair, should be an independent NED

Question 11

Principle G also says that there should be a clear division of responsibilities between who?

Answer 11

There should be a clear division of responsibilities between the board and management

Question 12

What does Principle H say about NEDs?

Answer 12

NEDs should have sufficient time to meet their board responsibilities. They should provide challenge, strategic guidance, offer specialist advice and hold management to account.

Question 13

Principle I speaks about the co-sec - expand?

Answer 13

The board, supported by the co-sec, should ensure that it has the policies, processes, information, time and resources it needs to function effectively and efficiently.

Question 14

Talk about the role of the chair

Answer 14

• Principle F - Chair leads the board and is responsible for its overall effectiveness. They should demonstrate objective judgement and promote a culture of openness and debate. They must facilitate constructive board relations and contribution of all directors.
• Provision 9 – Chair should be independent on appointment against provision 10 – Chair and CEO should not be the same individual
• FRC guidance – role of chair, in particular, is demanding and time-consuming; multiple roles are therefore not advisable i.e. overboarding

Question 15

Talk about the role of the CEO

Answer 15

FRC Guidance – CEO has primary responsibility for setting an example to the company’s workforce, board aware of senior management views, etc

Question 16

Talk about the role of other executive directors

Answer 16

• Full time employees with same duties as other directors
• Many companies have deliberately reduced the number of ED to reduce the number of NEDs
• Often want to present a united front to the rest of the board – unlikely to provide any effective challenge
• See FRC Guidance

Question 17

Specifically highlight the role of NEDs from what is written in the Code

Answer 17

• Principle H – provide challenge, strategic guidance, offer specialist advice and hold management to account
• Provision 13 – prime role in appointing and removing executive directors
• Provision 12 – meet at least annually without chair present to appraise the chair’s performance
• Provision 10 - Circumstances which are likely to impair a NEDs independence include:
o Employee within last 5 years
o material business relationship with company within last three years
o additional remuneration from company, close family ties, cross-directorships with other directors
o significant shareholder
o has served for > 9 years on board

Question 18

How can we maximise the effectiveness of NEDs? TITIS

Answer 18

TITIS – time, induction, training, information, skills/SID (see also Figure 3 on FRC Guidance)

Question 19

Speaking about time commitments of NEDs, what should we be weary about?

Answer 19

• H – NEDs should have sufficient time to meet their board responsibilities.
• Provision 14 - individual attendance in AR – onus on individual
• Provision 15 - When making new appointments, board should take into account other demands on directors’ time. Additional external appointments should not be undertaken without prior approval of the board, with reasons for permittance explained in the AR (preventative measures)
• FRC’s Guidance on Board Effectiveness 2018 – letters of appointment should set out the expected time commitment. Nom Comms are encouraged to consider whether to set limits in relation to shareholder concerns about ‘overboarding’.

Question 20

What is the role of a SID?

Answer 20

• Provision 12 – one independent NED should be SID to provide a sounding board for the chair and serve as an intermediary for other directors and shareholders
• FRC Guidance – take responsibility for chair’s successor within NomCo, resolve issues when there is a period of stress i.e. dispute between chair and chief executive or shareholders or NEDs have expressed concerns not being addressed by chair or CEO, decisions are being made without the approval of the full board, etc

Question 21

What does the Code and FRC Guidance say about the co-sec?

Answer 21

• Provision 16 – all directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters
• Principle I – the board, supported by the co-sec, should ensure that it has the policies, processes, information, time and resources to function effectively
• FRC Guidance – co-sec responsibilities include good information flows, facilitating induction, arranging board training, access to independent professional advice
• Provision 16 – appointment and removal should be a matter for the board as a whole

Question 22

The code recommends that listed companies establish which three committees comprising wholly of independent NEDs?

Answer 22

1. Audit committee (mandatory as per DTRs)
2. Nomination committee
3. Remuneration committee