7 - Board composition and succession planning Flashcards
What is the average number of directors on UK boards (and worldwide boards)
(roughly) 10
5 requirements for a balanced & well functioning board
- CEO/chair separation
- Appropriate balance of execs and independent NEDs
- Appropriate skills, experience, knowledge
- Gender balance
- Diversity
3 reasons why slightly smaller board (8-10) is preferable to larger board (12-14)
- More effective oversight of management
- More likely to dismiss CEO for poor performance
- More likely to be decisive, cohesive and hands-on
What is often used by boards to track skills and competencies of board members?
A skills matrix
Key benefit of skills matrix for nomination committee
Aids understanding of which skills proposed appointee should have as:
- Easily identify which skills nobody on board has
- If one board member is soon to step down, can identify which of their skills nobody else has
2 reco’s by reviews/reports on diversity
- Hampton-Alexander Review - 33% women on board & exec committees by 2020, increase in the number of women in 3 key roles
- Parker Review - At least one director of colour on FTSE 100 by 2021, FTSE 250 by 2024, HR should identify and present people of colour to be considered
2 key advantages to greater board diversity (other than in fairness by reflecting wider demographics)
- Wider range of perspectives and knowledge
- Positive and motivating signal to stakeholders
Re. diversity, what are listed co’s required to disclose in nom. committee report? (2)
- Policy on diversity and inclusion, implementation
- Gender balance of those in senior management
Quoted co’s must show in their strategic report, a breakdown of the number of persons of each sex who were:
- Directors
- Senior managers
- Employees
3 types of disclosures on diversity
- Listed co’s - nom. committee report
- Quoted co’s - strategic report
- CG statement disclosures under DTRs
How is ‘senior management’ defined in the Code?
The executive committee or the first layer of management below board level, including the CoSec
Why are board evaluations useful for successional planning? (2)
- Help identifying whether board appointments are needed if skills are lacking
- Help identify any improvements that can be made compared to previous nominations
3 time horizons to be covered by succession plans
- Contingency planning - sudden/unforeseen departures
- Medium-term planning - orderly replacements
- Long-term planning - relating to skills needed on board to deliver strategy and objectives
For which role is it most important to do contingency planning for the departure of?
CEO
What is often a consequence of sudden departure of NED?
Temporary non-compliance with Code
Which 2 documents are key as a starting point for medium-term planning?
- Directors’ succession timetable (retirement dates)
- Skills matrix
Why are directors subject to to annual re-election? (3)
- Provides shareholders opportunity to express views on performance
- Gives boards incentive to listen and respond to shareholders concerns
- To avoid need for shareholders to propose own resolution to remove them
How does a shareholder typically express disapproval of behaviour of specific director?
Vote against or withhold their vote on reappointment resolution
When are rebellions of reappointment resolutions (voting against or withholding) deemed to have been a success? Why?
20%
Requires company to respond to concerns
5 factors to consider when deciding on size of board - acronym
BUSAC
5 factors to consider when deciding on size of board - BUSAC
- Requirements for a BALANCED board
- Requirements of UK Code (principle K)
- Need to SERVICE committees
- Ability of board to hold productive, constructive discussions leading to prompt rational decisions
- Complexity and size of company
4 recommendations of Higgs report on diverse recruitment of NEDs
- Consider candidates from wide range of backgrounds
- Draw more actively from areas where women are better represented
- Consider recruiting from private co’s, charities and public sector
- Recruit talented individuals from diverse backgrounds to boards of subsidiaries to give them exposure on board as stepping-stone to listed parent
Due diligence which should be done by NED prior to accepting appointment (6)
- Garner broad understanding of company through annual report and website
- Review recent regulatory and media announcements
- Arranging to meet board (or at least key members)
- Arrange meetings with third parties if taking on role of chair (auditors, remuneration consultant, etc.)
- Talk with stakeholders where possible
- Check scheduled board dates to ensure availability
How much of board should be independent?
At least half, EXCLUDING chair
Which review increased the goal for women on boards to 40%
FTSE Women Leaders Review
Look at Wates - which principle is on board skills and diversity?
Principle 2
Look at Code - which principles & provisions are on board skills and diversity?
Principle J
Principle K
Principle L
Provision 17
Provision 23
2 considerations re. appointing internal candidate (NED) as Chair
Not normal for an internal candidate to be selected as the new Chair without an external search process being carried out.
Threats to independence should be considered (ie. how long has NED been NED)
Which 3 elements should be ‘mapped’ by a nomination committee’s succession plan (re. board membership)
Length of tenure
Skills (and skills gaps)
Diversity
What should nomination committee prepare/do in advance of any specific appointment to the board? (2)
Prepare description of the role and any capabilities required
Carry out due diligence in relation to preferred candidate (obtaining references, conducting media searches, etc.)
2 key considerations of nomination committee when appointing new chair
Independence
Time commitments
Who has overall say on nominations to board? How does it work?
Nomination committee makes recommendation to board, and board will need to approve by resolution
NED/Chair appointments letters
Relatively simple letter stating terms of appointment such as fees and time commitment to company
Look at Code - which provision relates to need for NED to have sufficient time to commit?
Provision 15
FRC Guidance on BE - 3 suggestions for improving diversity in appointment process
- Publicly advertising appointments
- Working with recruitment agents that have made a commitment to diversity
- Ensuring interview process does not disadvantage candidates with more diverse backgrounds
3 measures which can be implemented to create a more diverse internal pipeline for execs
- Ensuring that development of internal talent takes into account diversity objectives and support diverse pipeline
- Ensuring that data considered by Board on talent development and the internal pipeline includes relevant diversity data
- Incorporating diversity training into training about talent management
4 key factors to consider in creating a succession plan
- Refreshing board membership
- Board composition requirements
- Mixture of skills
- Sufficient board diversity
Look at Code - which provisions/principles relate to refreshing board membership?
Principle K
Provisions 10 and 19
Look at Code - which provision/principle relates to board composition requirements?
Provision 11
Look at Code - which provision/principle relates to need for a mixture of skills?
Principle K
Look at Code - which provision/principle relates to board diversity?
Principle J
Look at Code - nom committee provision
17
Look at Code - audit committee provision
24
Look at Code - rem committee provision
32
Reporting requirement for succession planning
Annual report - description of nom committee’s work which must, amongst other things, set out the committee’s approach to succession planning and how it supports diverse pipeline
Look at Code - reporting requirement for succession planning - which provision
Provision 23
