Board composition and succession planning Flashcards
How big should the board of directors be?
What factors influence this? (3)
What 4 things should boards consider when deciding the size of the board?
What is the average size?
No recommendation in Code = unless articles specify a min or max, up to the board to decide
Size varies depending on size of company, complexity of business and the industry/sector in which it operates in
• Board should consider:
1. The requirements of a balanced board
2. The requirements of the UK CG Code on composition of the board
3. The need to service board committees
4. The ability of the board to hold proactive, constructive discussions and make prompt rational decisions
Spencer Stuart 2018 Board Index = average Board of a top FTSE 150 company has 10.1 directors
What are the 5 requirements for a balanced board?
- Separation of the roles of CEO and chair
- An appropriate balance of executive, non-executive and independent directors
- Appropriate skills, experience, and knowledge
- Gender balance
- Diversity
What are the requirements of the UK CG Code on board composition? (3)
- A separate board chair (who must be independent on appointment)
- A separate CEO
- A number of INEDs = Provision 11 = at least 1/2 board, excluding the chair, should be NEDs whom the board considers to be independent
= Each additional director or non-independent NED must be matched by at least one independent NED
Example = If company has 5 EDs and 2 NEDs who are not independent = total 7 non-independent directors = need at least 7 independent NEDs to balance them out. Add in the chair = company must have a total of 15 directors
What are the requirements of the UK CG Code for each committee composition? (3)
If each INED was only allowed to serve on 1 committee, how many INEDs would need in a large company?
What about a small company?
Can INEDs sit on more than 1 committee? What is the relevant guidance?
Provision 17 = NC = majority of members should be INEDs
Provision 24 = AC = at least 3 INEDs for large companies and 2 INEDs for small
Provision 32 = RC at least 3 INEDs for large companies and 2 INEDs for small
• If each INED was only allowed to serve on 1 committee, you would need:
• A minimum of 8 INEDs in a large company
• A minimum of 5 INEDs in a small company
• Code doesn’t say that INEDs can only serve on 1 committee
FRC Guidance on Board Effectiveness (para 63) = the chair should ensure that INEDs are not over-burdened when deciding the chairs and membership if committees
What are the 3 advantages of small boards as found in the Wall Street Journal study?
What are 2 other disadvantages of large boards?
• 2014 Wall Street Journal study = companies with fewer board members reap considerably greater rewards for their investors because:
1. There is more effective oversight of management by smaller boards
2. Smaller boards are more likely to dismiss their CEOs for poor performance
3. Smaller boards are more likely to be decisive, cohesive, and hands-on
Disadvantaged of large boards:
1. Allowing everyone to have their turn and contribute = longer meetings
2. More viewpoints have to be dealt with = lead to ineffective decision-making as too many compromises are made
What is the requirement of the UK CG Code on the board and its committees’ balance of skills, knowledge, and experience?
What does FRC Guidance on Board Effectiveness say is one of the key elements of board effectiveness?
What does FRC Guidance on Board Effectiveness say can reduce group think?
What does FRC Guidance on Board Effectiveness say about personal attributes and recommend the NC do?
• Principle K = the board and its committees should have a combination of skills, experience, and knowledge
- p.87 = Appointing directors who are able to make a positive contribution is one of the key elements of board effectiveness
- p.88 = Diversity in the boardroom can have a positive effect on the quality of decision-making by reducing the risk of group think.
- p.91 = Diversity of personal attributes is equally important = suggests NC should seek to ensure that the board is comprised of individuals who display a range of softer skills like:
○ courage;
○ openness;
○ honesty;
○ ability to listen;
What is a skills matrix?
Who should prepare?
What is the evaluation process?
Who is responsible for keeping it up to date?
What 2 features could improve its usefulness?
What is a skills gap analysis?
A skills matrix = table that displays people’s proficiency in specified skills, knowledge, competencies, and attributes to help identify skill or knowledge gaps on the board
• Nomination committee should prepare
• Evaluation process = an anonymous survey in which the directors are asked to evaluate both themselves and their peers, with the results being weighted in favour of the latter
• Cosec / governance professional is responsible for keeping the skills matrix up to date
- Showing years left to serve highlights which skills may need to be replaced sooner rather than later
- Uppercase ‘X’ shows critical skills held by only one person
• A skills gap analysis will compare what skills and aptitudes the board now has against what it needs either now or in the future e.g. if want to expand overseas may need to appoint a director with previous international business experience
What purpose would a skills matrix serve in the process of appointing a new director? (4)
A skills matrix can be used:
1. to assess whether there are any skills and aptitudes of the board that may be lacking / become lacking if someone leaves
2. to assess whether the board is over-reliant on the skills or aptitudes of certain individuals;
3. to map the existing skillset against that required to execute strategy and meet future challenges; and
4. to draw up a profile of the ideal candidate for any board vacancies.
How does the UK CG Code seek to promote diversity? (3)
• Principle J = Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths
• Principle L = Annual evaluation of the board should consider its composition, diversity, and how effectively members work together to achieve objectives
• Provision 23 = requires the annual report to describe the work of the nomination committee, including:
1. process for appointments, approach to succession planning, and developing a diverse pipeline;
2. policy on diversity and inclusion
3. the gender balance of those in the senior management and their direct reports
What does FRC Guidance on Board Effectiveness say the NC should do to promote diversity? (2)
- para 90 = NC with HR will need to take an active role in setting and meeting diversity objectives and strategies for the company as a whole e.g. mentoring and sponsorship schemes
- para 94 = recommends NC work with recruitment consultants who have made a commitment to promote diversity to access a more diverse pool of candidates
What did Lord Davies ‘Women on Boards’ Report recommend?
Recruitment of different populations of women (i) executives from the corporate world and (2) women outside the corporate sector.
What was the Hampton-Alexander Review tasked with in 2016?
What did the Review recommend? (3)
What did Cranfield University publish in 2020 and what did it show? (2)
• Tasked with increasing the representation of women on FTSE boards and in senior executive positions.
• Recommended:
1. a 33% target for women on FTSE 100 executive committees and direct reports to executive committee on a combined basis by 2020
2. a 33% target for women on FTSE 350 boards by the end of 2020;
3. FTSE 350 companies increase the number of women in the roles of chair, SID and ED positions on their boards
• 2020 Cranfield University published the annual Female FTSE Board Report which shows:
1. 34.5% of FTSE 100 boards consist of women
2. FTSE 350 boards should hit the Hampton-Alexander target of 33% by end of 2020 (which they did)
What were the Parker Review Committee’s recommendations to increase the ethnic diversity of UK boards? (2)
- Each FTSE 100 board should have at least 1 BAME director by 2021
- NC of all FTSE 100 and FTSE 250 companies should require HR teams to identify and present qualified people of colour to be considered for board appointment when vacancies occur
What was the Higgs Report recommendation on recruiting NEDs from diverse backgrounds (women specific)?
Do most companies have a policy on board diversity?
Boards should draw more actively from the professions where women tend to be more strongly represented
• University of Exeter Business School’s report commissioned by the FRC (2018) = reported 88% of FTSE 250 companies have a policy on board diversity
What types of disclosures are listed companies required to make on diversity under UK CG Code, CA2006, and DTR? (3)
- Provision 23 = listed companies must disclose in the NC’s report:
a. their policy on diversity and inclusion and
b. the gender balance of those in the senior management
2.s.414 CA2006 = quoted companies must include in their strategic report a breakdown showing gender balance for:
• directors;
• senior managers; and
• employees of the company
- DTR 7.2.8 = Listed companies must disclosure in their CG statement their diversity policy or explain why they don’t have one
