Board composition and succession planning Flashcards
If a board is comprised of a chair, three executive directors, one
of whom is the CEO, and a non-executive director representing the major shareholder, how many independent directors will be required to comply with the UK Corporate Governance Code?
Under the Code, at least half the board (excluding the chair) must be independent NEDs. Accordingly, the minimum number of independent NEDs required must balance out the three executive directors and the NED who is not independent. This means that there must be at least four independent NEDs.
List the factors that will typically influence the size of the board.
The main factors that will typically influence the size of the board are:
the requirements for a balanced board;
the requirements of the UK Code on the composition of the board;
the need to service board committees; and
the ability of the board to hold productive, constructive discussions and make prompt rational decisions.
What is a skills matrix?
A skills matrix is a table that displays people’s proficiency in specified skills, knowledge, competencies and aptitudes.
What purpose would such a matrix serve in the process of
appointing a new director?
A skills matrix can be used:
to assess whether there are any areas in which the skills and aptitudes of the board as a whole may be lacking, or may become lacking as a result of the departure of one or more directors;
to assess whether the board is over-reliant on the skills or aptitudes of certain individuals in any particular area;
to map the existing skillset against that required to execute strategy and meet future challenges; and
to draw up a profile of the ideal candidate for any board vacancies.
How does the 2018 UK Corporate Governance Code seek to promote diversity?
Code Principle J provides that 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.
In addition, Code Principle L states that the annual board evaluation should consider diversity.
However, the main tool used to promote diversity is to require disclosure in the report of the nomination committee on diversity issues. These disclosure requirements effectively mean that the board must adopt a diversity and inclusion policy for board and senior executive appointments, which could include diversity targets, and succession policies that promote diversity. These policies could be part of an overall diversity and inclusion policy
that covers the workforce as a whole or in addition to it.
List the types of disclosures listed companies are required to make on diversity
Listed companies are required under the Code to make the following disclosures in the report of the nomination committee:
the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
how the board evaluation has or will influence board composition;
the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives (this requirement is also mirrored by DTR 7.2.8A); and
the gender balance of those in the senior management and their direct reports.
CA2006, s. 414C also requires quoted companies to include in their strategic report a breakdown showing at the end of the financial year the number of persons of each sex who were:
directors;
senior managers; and
employees of the company.
What are the three main roles of the nomination committee?
The three main roles of the nomination committee are to:
lead the process for appointments;
ensure plans are in place for orderly succession to both the board and senior management positions; and
oversee the development of a diverse pipeline for succession.
What are the membership requirements for the committee?
The Code provides that a majority of members of the nomination committee should be independent non-executive directors. This provision is effectively designed to enable the company chair to serve on the committee, even if not considered independent.
Outline the process for appointing a new NED.
The nomination committee should evaluate the skills, experience and knowledge on the board, the future challenges affecting the business, and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.
It should then agree the process to be undertaken to identify, sift and interview suitable candidates, ensuring that a proper assessment of values and expected behaviours is built into the recruitment process. This will typically involve engaging recruitment consultants.
The nomination committee will interview a selection of candidates put forward by the recruitment consultants and use these interviews to narrow down the list of candidates or ask for further candidates to be proposed.
In the final stages of the process, the nomination committee may invite the final candidate(s) to meet other members of the board.
After taking soundings from other board members, the committee will make its final recommendation to the board, which will then make the final decision.
As the Code requires all directors to be re-elected annually, the shareholders will have the opportunity to confirm or reject the appointment at the next AGM.
How might that process differ when seeking to appoint a new chair or chief executive?
The appointment of a new chair or CEO may involve the consideration of internal candidates. An existing independent NED could be elected as the chair and an existing senior executive could be promoted to become CEO. In contrast,
the appointment of a NED will always involve recruiting external candidates if they are to be considered independent.
Briefly outline the three time horizons that a succession plan should
cover
Succession plans should consider the following different time horizons:
contingency planning – for sudden and unforeseen departures;
medium-term planning – the orderly replacement of current board members and senior executives (e.g. retirement); and
long-term planning – the relationship between the delivery of the company strategy
Why is it more difficult to prepare a succession plan for executive
directors?
There is no minimum term of office for executive directors. If the company is successful, the CEO may seek to avoid any discussion surrounding their eventual departure. If the company is not successful there may be sudden, forced departures. Senior executives may also be poached by other companies, leaving
a sudden vacancy.
Give three legitimate reasons why the nomination committee might propose a refreshment of the board.
Refreshment could be used:
to replace a non-executive who is not making an effective contribution;
to meet diversity targets; or
to bring in a new director who has certain critical skills.
Why does the Code require all directors to offer themselves for
re-election on an annual basis?
According to the FRC, the annual re-election requirement was introduced to give shareholders an annual opportunity to express their views on the performance of the directors and to give boards an incentive to listen and respond to their concerns. The FRC hoped that this would in turn lead to ongoing engagement. Legally, annual re-elections mean that shareholders
seeking the removal of a director do not need to propose their own resolution, which would involve giving special notice.
Chapter summary
Chapter summary
The size of boards varies depending on the size of the company, the complexity of the business and the industry or sector in which it operates.
The minimum threshold in terms of board size is determined by the fact the Code expects the roles of chair and CEO to be separated and at least half the board (excluding the chair) to comprise of independent NEDs.
In addition, listed companies need sufficient independent NEDs to service the various board committees required under the Code.
Boards need a combination of skills, experience, knowledge and personal attributes. They should be comprised of individuals who display a range of softer skills, such as courage, tact, openness or integrity.
The Code requires both appointments and succession plans to be based on merit and objective criteria and, within this context, to promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
Boards are expected to adopt a policy on diversity and inclusion and make disclosures on that policy as part of the report of the nomination committee, including a summary of that policy, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives.
As part of that policy boards are expected to adopt diversity targets for the board and senior management positions, particularly in relation to gender and race.
These targets will probably be influenced by the recommendations of the Hampton-Alexander Review on gender diversity and the Parker Review on ethnic diversity.
Quoted companies are required under the CA2006 to include in their strategic report a breakdown showing the number of persons of each sex who were directors, senior managers and employees of the company.
In addition, businesses with 250 or more employees must publish gender pay gap information on their own website and a government website.
The Code requires boards to establish a nomination committee comprising of a majority of independent NEDs to lead the process for board appointments and succession planning and oversee the development of a diverse pipeline.
Board appointments should be made on merit against objective criteria.
The nomination committee should evaluate the skills, experience and knowledge on the board, and the future challenges affecting the business,
and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.
It should then agree the process to be undertaken to identify, sift and interview suitable candidates. This will result in a recommendation to the board, which will ultimately make the final decision on any new appointment.
Before accepting an appointment prospective directors are expected to confirm that they are able to commit the necessary time. They are also expected to conduct their own due diligence on the company.
Under the 2018 Code, the nomination committee is expected to ensure that plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.
Succession plans should consider preparing for sudden and unforeseen departures, the orderly replacement of current board members and senior executives and the relationship between the delivery of the company strategy and objectives to the skills needed on the board now and in the future.
The Code recommends that consideration should be given to the length of service of the board as a whole and its membership regularly refreshed.
It requires all directors to be subject to annual re-election by shareholders at the AGM. This ensures that the shareholders have an annual opportunity to remove any director without having to propose such a resolution themselves and to register a protest vote against their re-election.
