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cracker jackers > 6 - Role and membership of the board of directors > Flashcards

6 - Role and membership of the board of directors Flashcards

1
Q

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:

A
  • 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
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2
Q

Board’s establishment of a framework of prudent and effective controls (second half of Principle C) will involve: (5)

A
  • 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
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3
Q

Which directors duty does Principle D (ensuring effective engagement with, and encouraging participation from, shareholders and other stakeholders) relate to?

A

S.172 duty - promoting the success of the company taking into account the interests of other stakeholders

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4
Q

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)?

A

Reviewing policies and practices - including remuneration policies, rewards and incentives - that have an impact on the experience of the workforce and drive behaviours

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5
Q

The Code states that the only area which a committee will make the final decision on is:

A

Executive remuneration

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6
Q

How does the Board ensure that they get the final say on critical management decisions such as major capital investments or material contracts?

A

By including these things (with thresholds to define ‘major’) in a schedule of matters reserved for the board

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7
Q

Schedule of matters reserved for the board should include those matters which the board wishes to have the final say on, and:

A

Those matters which law requires they have the final say on (such as approval of accounts)

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8
Q

4 benefits of adopting schedule of matters

A
  • 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
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9
Q

12 elements included in ISCA’s draft schedule of matters

A
  • 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
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10
Q

2 key aspects of ‘strategy and management’ as a matter reserved for the board

A
  • Approval of overall strategy and strategic objectives
  • Approval of annual operating capital and capital expenditure budgets
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11
Q

1 key aspect of ‘structure and capital’ as matter reserved for the board

A

Changes in corporate or capital structure

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12
Q

3 key aspects of ‘financial reporting and controls’ as matter reserved for the board

A
  • Approving the annual report and accounts
  • Declaring interim dividend and recommending a final dividend
  • Approval of any significant changes in accounting policies or practices
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13
Q

1 key aspect of ‘contracts’ as matter reserved for the board

A

Approval of major contracts and investments

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14
Q

1 key aspect of ‘internal controls’ as matter reserved for the board

A

Approving the risk appetite of the company

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15
Q

2 key aspects of ‘delegation of authority’ as matter reserved for the board

A
  • Approval of delegated levels of authority
  • Establishing board committees
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16
Q

3 key aspects of ‘communication’ as matter reserved for the board

A
  • Approval of formal comms with shareholders
  • Approval or resolutions and related documentation
  • Approval of all circulars, prospectuses and listing particulars
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17
Q

2 key aspects of ‘corporate governance’ as matter reserved for the board

A
  • Undertaking formal and rigorous annual review of own performance
  • Review of group’s overall CG arrangements
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18
Q

3 key aspects of ‘board membership’ as matter reserved for the board

A
  • Changes to the structure, size and composition
  • Ensuring adequate succession planning for the board
  • Appointment, reappointment or removal of external auditor
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19
Q

1 key aspect of ‘remuneration’ as matter reserved for the board

A

Determining remuneration policy for directors, CoSec, other senior execs

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20
Q

5 policies - matters reserved for the board

A
  • Bribery prevention
  • Whistleblowing
  • Share dealing policy
  • CSR policy
  • Charitable donations policy
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21
Q

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)

A
  • 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)
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22
Q

Board of directors of listed co typically consists of:

A
  • Chair (possibly deputy chair)
  • CEO
  • Other exec directors
  • NEDs
  • SID
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23
Q

Which board member also takes up the role of deputy chair?

A

SID

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24
Q

What does UKCG Code say on amount of execs and NEDs on boards?

A

Should be appropriate combination such that no individual or group dominates. At least half, excluding chair, should be independent non-execs

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25
Q

In practice, who often holds the balance of power on boards?

A

The independent NEDs

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26
Q

Provision 9 states that the chair should be independent - significance?

A

Chair is natural ally of independent NEDS, therefore giving the independent NEDs a majority

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27
Q

What information will be reported in annual report, re. directors?

A
  • Who has served as director
  • Which are independent NEDs
  • Number of meetings and attendance
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28
Q

Where can FRC guidance on role of chair be found?

A

2018 FRC Guidance on Board Effectiveness

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29
Q

Under common law, chair of BM has a duty to ensure that: (4)

A
  • Meeting is properly conducted
  • All shades of opinion given fair hearing
  • Sense of meeting properly ascertained and recorded
  • Order is preserved
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30
Q

4 rights typically given to the chair through Articles

A
  • 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
31
Q

Implications of wording of Provision 9 - chair should be independent on appointment

A
  • Following appointment, chair need not be independent
  • Natural ambivalence regarding status of chair as non-executive
32
Q

What is said to hinder possibility that chair can remain independent?

A

Time commitments and fees paid to them

33
Q

Roughly what percentage of FTSE chair appointments are external?

A

60%

34
Q

If a chair is appointed externally, what must happen before they can become chair (per typical articles)?

A

Be appointed a director

35
Q

Appointment process for chair is usually led by:

A

Nomination committee (incumbent chair and any candidates should not be involved)

36
Q

FRC guidance suggests the CEO should be responsible for: (5) re. board (not generally)

A
  • 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
37
Q

In practice, majority of CEOs time will be dedicated to what?

A

Delivering the company’s strategy through delegated powers, working with other execs and senior management

38
Q

Briefly explain executive committee

A

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

39
Q

Who will employees look to as their leader?

A

CEO

40
Q

Who will Board members look to as their leader?

A

Chair

41
Q

Why should CEO and Chair not be the same person? (2)

A
  • To prevent one individual having an overly dominant influence on decision making
  • To ensure that work of CEO gets checked, and targets are set
42
Q

Look at Code - which provision for separation of roles of Chair and CEO

A

Provision 9

43
Q

5 reasons why CEO should not become chair when no longer CEO

A
  • 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
44
Q

What is the tension faced by executive directors on the board?

A

Between
- Role as members of the board, ‘one step down from shareholders’
and
- Role as senior operational directors, ‘one step up from management’

45
Q

Why do exec directors on board rarely challenge CEO?

A

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)

46
Q

2 contributors to ‘us and them’ board mentality

A
  • Execs support views of CEO on all matters
  • Execs mistrust views of NEDs as ‘outsiders’ lacking company knowledge
47
Q

Which review/report is re. NEDs?

A

Higgs review on effectiveness of NEDs

48
Q

Where can a lot of guidance on role of NEDs be found?

A

UKCG Code 2018

49
Q

5 key roles of NEDs

A
  • 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)
50
Q

7 criteria which can hinder NED’s independence

A
  • 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
51
Q

If the board are to consider NED independent in spite of code criteria, what must they do?

A

Provide a clear explanation as to why

52
Q

4 potential hindrances to effectiveness of NEDs

A
  • Lack of knowledge about business
  • Insufficient time with the company
  • Defects in decision-making process
  • Ineffective challenge
53
Q

What is generally considered to hinder on a NEDs ability to devote sufficient time to the business?

A

Having more than one NED appointment

54
Q

Why would it not be surprising of challenge of NEDs is not effective?

A

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

55
Q

When might the SID intervene? (6)

A
  • 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
56
Q

Can the board chair sit on the nom committee?

A

Yes, but should not chair the committee when it is dealing with the appointment of their successor

57
Q

Composition requirement - nom committee

A

Majority of members should be independent NEDs

58
Q

Function of nomination committee

A

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.

59
Q

Can the board chair sit on the audit committee?

A

No

60
Q

Required experience for audit committee (2)

A

At least one member should have ‘recent and relevant financial experience’.
Committee should have ‘competence relevant to the sector in which the company operates’

61
Q

Function of audit committee (3)

A

Monitoring the integrity of financial statements

Reviewing internal controls and risk management

Ensuring the independence and effectiveness of internal and external audit functions

62
Q

Composition requirement - audit committee

A

All independent NEDs

3 in larger companies, 2 in smaller companies

63
Q

Composition requirement - rem committee

A

All independent NEDs

3 in larger companies, 2 in smaller companies

64
Q

Can the board chair sit on the rem committee?

A

Only if independent on appointment - cannot chair committee

65
Q

Requirement for chair of rem committee

A

Before appointment as chair, appointee should have served on a rem com for at least 12 months

66
Q

Function of rem committee

A

Determining the policy for executive director remuneration and setting remuneration for the chair, executive directors and senior management

67
Q

What may prevent a director from taking up an additional NED role at another company?

A

Provisions in their appointment letter giving the board the ability to refuse allowing the director to take on additional appointments

68
Q

Look at Code - which provision relates to approvals required for directors to take additional external appointments

A

Provision 15

69
Q

Look at Code - which principle/provisions relate to responsibilities of Chair and CEO and separation of roles

A

Principle G
Provision 14

70
Q

2 primary examples of what the Chair should lead rather than the CEO?

A
  • Engagement with shareholders
  • Leading the board
71
Q

Look at Code - Chair should lead shareholder engagement which provision?

A

Provision 3

72
Q

What is meant by ‘leading the board’ as chair’s responsibility?

A

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

73
Q

2 benefits of having a schedule of matters reserved for the board

A
  • Helps clarify for board members what the role of the board is
  • Helps clarify to execs which decisions need board approval

cracker jackers (17 decks)

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