6 - Role and membership of the board of directors Flashcards
Board ensuring the necessary resources are in place for the company to meet its objectives and measuring performance against them (first half of Principle C) will involve:
- Approving annual operating and cap expenditure budgets
- Ensuring necessary financing is in place
- Appointing the right people in senior management positions
- Setting targets for reviewing management/operational performance
Board’s establishment of a framework of prudent and effective controls (second half of Principle C) will involve: (5)
- Approving delegated level’s of authority
- Establishing board committees and approving terms of reference
- Adopting a schedule of matters reserved for board
- Establishing internal control and risk management procedures
- Setting the company’s risk appetite
Which directors duty does Principle D (ensuring effective engagement with, and encouraging participation from, shareholders and other stakeholders) relate to?
S.172 duty - promoting the success of the company taking into account the interests of other stakeholders
What will be involved in Principle E (ensuring that workforce policies are consistent with the company’s values and support its long-term sustainable success)?
Reviewing policies and practices - including remuneration policies, rewards and incentives - that have an impact on the experience of the workforce and drive behaviours
The Code states that the only area which a committee will make the final decision on is:
Executive remuneration
How does the Board ensure that they get the final say on critical management decisions such as major capital investments or material contracts?
By including these things (with thresholds to define ‘major’) in a schedule of matters reserved for the board
Schedule of matters reserved for the board should include those matters which the board wishes to have the final say on, and:
Those matters which law requires they have the final say on (such as approval of accounts)
4 benefits of adopting schedule of matters
- Clarify for exec team which decisions need board approval
- Internal safety net to ensure decisions are referred to the board
- Simplifies process of delegation
- Company-wide changes can be made through alteration of single document
12 elements included in ISCA’s draft schedule of matters
- Strategy and management
- Structure and capital
- Fin. reporting and controls
- Internal controls
- Contracts
- Communication
- Board membership and other appointments
- Remuneration
- Delegation of authority
- CG matters
- Policies
- Other matters
2 key aspects of ‘strategy and management’ as a matter reserved for the board
- Approval of overall strategy and strategic objectives
- Approval of annual operating capital and capital expenditure budgets
1 key aspect of ‘structure and capital’ as matter reserved for the board
Changes in corporate or capital structure
3 key aspects of ‘financial reporting and controls’ as matter reserved for the board
- Approving the annual report and accounts
- Declaring interim dividend and recommending a final dividend
- Approval of any significant changes in accounting policies or practices
1 key aspect of ‘contracts’ as matter reserved for the board
Approval of major contracts and investments
1 key aspect of ‘internal controls’ as matter reserved for the board
Approving the risk appetite of the company
2 key aspects of ‘delegation of authority’ as matter reserved for the board
- Approval of delegated levels of authority
- Establishing board committees
3 key aspects of ‘communication’ as matter reserved for the board
- Approval of formal comms with shareholders
- Approval or resolutions and related documentation
- Approval of all circulars, prospectuses and listing particulars
2 key aspects of ‘corporate governance’ as matter reserved for the board
- Undertaking formal and rigorous annual review of own performance
- Review of group’s overall CG arrangements
3 key aspects of ‘board membership’ as matter reserved for the board
- Changes to the structure, size and composition
- Ensuring adequate succession planning for the board
- Appointment, reappointment or removal of external auditor
1 key aspect of ‘remuneration’ as matter reserved for the board
Determining remuneration policy for directors, CoSec, other senior execs
5 policies - matters reserved for the board
- Bribery prevention
- Whistleblowing
- Share dealing policy
- CSR policy
- Charitable donations policy
4 functions that the board performs through its board committees on which it still has its final say (and which committee is in charge of reco)
- New appointments to the board (nomination committee)
- Approving accounts and other financial statements (audit committee)
- Establishing a framework of prudent and effective controls, which enable risk to be assessed and managed (audit committee)
- Proposing appointment of auditors (audit committee)
Board of directors of listed co typically consists of:
- Chair (possibly deputy chair)
- CEO
- Other exec directors
- NEDs
- SID
Which board member also takes up the role of deputy chair?
SID
What does UKCG Code say on amount of execs and NEDs on boards?
Should be appropriate combination such that no individual or group dominates. At least half, excluding chair, should be independent non-execs
In practice, who often holds the balance of power on boards?
The independent NEDs
Provision 9 states that the chair should be independent - significance?
Chair is natural ally of independent NEDS, therefore giving the independent NEDs a majority
What information will be reported in annual report, re. directors?
- Who has served as director
- Which are independent NEDs
- Number of meetings and attendance
Where can FRC guidance on role of chair be found?
2018 FRC Guidance on Board Effectiveness
Under common law, chair of BM has a duty to ensure that: (4)
- Meeting is properly conducted
- All shades of opinion given fair hearing
- Sense of meeting properly ascertained and recorded
- Order is preserved
4 rights typically given to the chair through Articles
- Make rulings on whether a director is entitled to vote on any matter which comes before board
- Casting vote at meeting of directors
- First right to chair board meetings
- First right to chair meetings of the members/shareholders
Implications of wording of Provision 9 - chair should be independent on appointment
- Following appointment, chair need not be independent
- Natural ambivalence regarding status of chair as non-executive
What is said to hinder possibility that chair can remain independent?
Time commitments and fees paid to them
Roughly what percentage of FTSE chair appointments are external?
60%
If a chair is appointed externally, what must happen before they can become chair (per typical articles)?
Be appointed a director
Appointment process for chair is usually led by:
Nomination committee (incumbent chair and any candidates should not be involved)
FRC guidance suggests the CEO should be responsible for: (5) re. board (not generally)
- Proposing and delivering strategy
- Setting example to employees and communicating board’s expectations
- Supporting chair in ensuring standards of governance permeate through org
- Ensuring board is aware of views of employees
- Ensuring board is aware of views of execs on business issues in the boardroom
In practice, majority of CEOs time will be dedicated to what?
Delivering the company’s strategy through delegated powers, working with other execs and senior management
Briefly explain executive committee
Committee of exec docs and high-level managers.
Typically, no authority to take decisions.
Used by CEO to take soundings and receive updates and progress reports
Who will employees look to as their leader?
CEO
Who will Board members look to as their leader?
Chair
Why should CEO and Chair not be the same person? (2)
- To prevent one individual having an overly dominant influence on decision making
- To ensure that work of CEO gets checked, and targets are set
Look at Code - which provision for separation of roles of Chair and CEO
Provision 9
5 reasons why CEO should not become chair when no longer CEO
- Outgoing CEO will not be independent on appointment as chair
- Outgoing CEO will often retain some executive responsibilities
- Division of responsibilities become blurred
- Incoming CEO’s freedom may be restrained as outgoing CEO keeping tabs
- Outgoing CEO may view any changes by incoming CEO as implied criticism
What is the tension faced by executive directors on the board?
Between
- Role as members of the board, ‘one step down from shareholders’
and
- Role as senior operational directors, ‘one step up from management’
Why do exec directors on board rarely challenge CEO?
Exec directors like to present united front to rest of the board at BMs, even if they disagree (likely that they will have argues against proposals in prior discussions)
2 contributors to ‘us and them’ board mentality
- Execs support views of CEO on all matters
- Execs mistrust views of NEDs as ‘outsiders’ lacking company knowledge
Which review/report is re. NEDs?
Higgs review on effectiveness of NEDs
Where can a lot of guidance on role of NEDs be found?
UKCG Code 2018
5 key roles of NEDs
- Provide challenge, guidance and advice
- Scrutinise performs ff execs against objectives
- Lead process for board appointments (nom committee)
- Lead role in audit committee
- Determine remuneration for chair and execs (rem commiittee)
7 criteria which can hinder NED’s independence
- Employee within 5 years
- Business relationship within 3 years
- Additional remuneration (or share/pension compensation) other than director’s fee
- Close family ties
- Significant links with other directors through other orgs
- Represents significant shareholder
- NED for more than 9 years
If the board are to consider NED independent in spite of code criteria, what must they do?
Provide a clear explanation as to why
4 potential hindrances to effectiveness of NEDs
- Lack of knowledge about business
- Insufficient time with the company
- Defects in decision-making process
- Ineffective challenge
What is generally considered to hinder on a NEDs ability to devote sufficient time to the business?
Having more than one NED appointment
Why would it not be surprising of challenge of NEDs is not effective?
They probably only spend 20% of time with the company, so can never be expected to know the company as will as the execs, and they often have to secede in disputes due to this
When might the SID intervene? (6)
- Dispute between chair and CEO
- Shareholder/non-exec concerns are not being addresses
- Strategy not supported by entire board
- Chair and CEO too close
- Decisions are made without approval of full board
- Succession planning is being ignored
Can the board chair sit on the nom committee?
Yes, but should not chair the committee when it is dealing with the appointment of their successor
Composition requirement - nom committee
Majority of members should be independent NEDs
Function of nomination committee
leading the process for board appointments, ensuring plans are in place for orderly succession to both the board and senior management positions, and overseeing the development of a diverse pipeline.
Can the board chair sit on the audit committee?
No
Required experience for audit committee (2)
At least one member should have ‘recent and relevant financial experience’.
Committee should have ‘competence relevant to the sector in which the company operates’
Function of audit committee (3)
Monitoring the integrity of financial statements
Reviewing internal controls and risk management
Ensuring the independence and effectiveness of internal and external audit functions
Composition requirement - audit committee
All independent NEDs
3 in larger companies, 2 in smaller companies
Composition requirement - rem committee
All independent NEDs
3 in larger companies, 2 in smaller companies
Can the board chair sit on the rem committee?
Only if independent on appointment - cannot chair committee
Requirement for chair of rem committee
Before appointment as chair, appointee should have served on a rem com for at least 12 months
Function of rem committee
Determining the policy for executive director remuneration and setting remuneration for the chair, executive directors and senior management
What may prevent a director from taking up an additional NED role at another company?
Provisions in their appointment letter giving the board the ability to refuse allowing the director to take on additional appointments
Look at Code - which provision relates to approvals required for directors to take additional external appointments
Provision 15
Look at Code - which principle/provisions relate to responsibilities of Chair and CEO and separation of roles
Principle G
Provision 14
2 primary examples of what the Chair should lead rather than the CEO?
- Engagement with shareholders
- Leading the board
Look at Code - Chair should lead shareholder engagement which provision?
Provision 3
What is meant by ‘leading the board’ as chair’s responsibility?
Chair should lead the board by
- setting agenda
- focussing on Board culture
- Making sure everyone is contributing effectively
- Running effective board meetings
-Ensuring views of shareholders are taken into account
2 benefits of having a schedule of matters reserved for the board
- Helps clarify for board members what the role of the board is
- Helps clarify to execs which decisions need board approval
