Board effectiveness

Question 1

What are the 8 main considerations for the board regarding board effectiveness?

Answer 1

1. Need for regular board meetings (Code Provision 14)
2. Effective decision-making process
3. Dynamics at board meetings
4. Supply of information (Principle F)
5. Corporate culture (Principle B and Provision 2)
6. Independent professional advice
7. Board evaluation (Principle L and Provision 21)
8. Induction and professional development

Question 2

What does paragraph 28 FRC Guidance on Board Effectiveness say regarding regular board meetings?

What does provision 14 UK CG Code say regarding disclosure of this?

What was the average number of meetings held by FTSE 150 companies in 2018?

Answer 2

• para 28 = ‘Meeting regularly is essential for the board to discharge its duties effectively

• Provision 14 = requires the annual report to set out the number of meetings of the board and its committees, and the individual attendance by directors

• According to the Stuart Spencer (2018) Board Index = FTSE 150 companies held an average of 7.3 meetings in 2018

Question 3

What are 5 factors that can limit effective decision-making according to paragraph 30 FRC Guidance on Board Effectiveness?

Answer 3

para 30 = factors that can limit effective decision making:
1. a dominant personality

2. insufficient diversity on the board
3. insufficient attention to risk;
4. poor quality papers
5. Inability to challenge effectively

Question 4

Name 3 things the chair does in the decision-making process at board meetings.
Name 3 things the ED/NEDs do.
Name 3 things the cosec does.

Answer 4

Chair:
1. Maintains control of proceedings, does not dominate
2. Stimulates debate, encourages all to contribute
3. Encourages constructive discussions

ED/NEDs:
1. Attends regularly, and prepares so as to be an effective decision-maker
2. Acts objectively, and is open to other perspectives
3. Fosters constructive challenge

Cosec:
1. Registers attendance
2. Advises on governance issues
3. Maintains a record of the proceedings to produce the minutes and an action log

Question 5

According to Bernic McCarthy: About Learning (1996), what means a meeting is successful? (5)

Answer 5

1. There is a flexible agenda
2. Honesty is encouraged
3. Information is based on facts
4. Pros and cons are weighed
5. Closure is achieved

Question 6

What does Principle F UK CG Code say the chair should do in relation to the supply of information?

What does paragraph 73 FRC Guidance on Board Effectiveness say the CEO should do in relation to the supply of information?

What does paragraph 77 FRC Guidance on Board Effectiveness say the NEDs should do in relation to the supply of information?

What does paragraph 81 FRC Guidance on Board Effectiveness say the cosec should do in relation to the supply of information?

Answer 6

• Principle F = the chair should ensure that directors receive accurate, timely, and clear information

• CEO = para 73 = responsible for ensuring management fulfils its obligation to provide the board with accurate, timely and clear information

• NEDs =para 77 = should insist on receiving high-quality information

• Cosec = para 81 = Under direction of chair, should ensure good information flows within the board and its committees and between senior management and NEDs

Question 7

What is a board pack?

What are the 4 main stages in developing a board pack according to ICSA Guidance: ‘Effective Board Reporting’?

What is the cosec’s role in this process? (4)

Answer 7

= board papers that are a source of information for a director prior to a board meeting

ICSA Guidance: ‘Effective Board Reporting’:
1. identifying the information the board needs;
2. commissioning board papers;
3. writing board papers; and
4. collating and distributing the board pack

• Cosec’s role:
1. co-ordinating the preparation of the board pack
2. supporting those writing and presenting board papers, e.g. checking that the papers are understandable to a non-specialist;
3. ensuring that papers are submitted on time;
4. reviewing with the chair and other board members whether the board papers met their needs

Question 8

Name 2 board portal software that facilitates the production, distribution, and storage of board papers.

What are 5 typical features / advantages of Board Portal Software?

Answer 8

Diligent Boards and BoardEffect

1. secure tools to facilitate the distribution and use of electronic agenda papers and board packs = reduced time producing, collating, and distributing
2. archiving facilities that enable directors to refer back to the previous papers and minutes
3. voting tools;
4. tools to facilitate the circulation and approval of minutes, and
5. secure messaging features.

Question 9

Why do boards use social media? (2)
Why should boards be careful with social media?
What did Elon Musk do in 2018?

Answer 9

1. INEDs may use a WhatsApp group for example to discuss matters not to be shared with other directors
2. Using Twitter and Facebook for corporate public relations purposes and customer engagement

Directors of listed companies need to be careful not to release inside or misleading information through social media.

Elon Musk announced on Twitter that he was taking his company private, which turned out to be false and resulted in him being fined by the US authorities for publishing misleading information

Question 10

What were 3 key findings in the 2016 FRC report ‘Corporate culture and the role of boards: Report of observations’?

Answer 10

1. A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value.
2. A culture of openness and accountability at every level is critical.
3. Boards should devote sufficient resource to evaluating culture and consider how they report on it.

Question 11

What does Principle B UK CG Code say regarding corporate culture?

Which paragraph of the FRC Guidance on Board Effectiveness support this?

What does paragraph 19 FRC Guidance on Board Effectiveness say regarding how directors can reinforce this?

Answer 11

• Principle B = The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture

• para 11

• para 19 = directors can reinforce values through their own behaviour and decisions = tone from the top

Question 12

What does Provision 2 UK CG Code say regarding monitoring corporate culture?

What is the first step as suggested by paragraph 21 FRC Guidance on Board Effectiveness?

Answer 12

• Provision 2 = The board should assess and monitor culture. Where it is not satisfied that policy, practices, or behaviour are aligned with the company’s purpose, values, and strategy, it should seek assurance that management has taken corrective action.

• para 21 = suggests first step in assessing and monitoring culture for alignment with purpose and values is to establish a benchmark against which future monitoring can take place

Question 13

What are 5 suggestions for monitoring corporate culture?
Describe the case of Boeing 2019.

Answer 13

1. hosting town halls
2. becoming a customer/mystery shopper;
3. talking to external stakeholders;
4. holding meetings with junior managers without their bosses; and
5. Site visits = for NEDs to experience the culture of a business.

Boeing’s global reputation suffered following 2 fatal plane crashes. Evidence has shown there was a culture of concealment at Boeing which had led to many of the early warnings that the technology was unreliable being ignored.

Question 14

What does Principle 1 The Wates Corporate Governance Principles for Large Private Companies say about corporate culture?

Answer 14

• Principle 1 = ‘An effective board develops and promotes the purpose of a company, and ensures that its values, strategy, and culture align with that purpose.’

Question 15

How does The Institute of Business Ethics (IBE) define ethics?
What does ethics go beyond?
What does the UK CG Code say in relation to ‘B’usiness ‘E’thics? (2)

Answer 15

= the application of ethical values to business behaviour

• Ethics goes beyond the legal requirements for a company = discretionary decisions and behaviour guided by values

• Principle B = The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture

• Principle E = The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern

Question 16

What does the guidance on Principle 1 of the Wates Corporate Governance Principles for Large Private Companies say about business ethics?
How does the board achieve this? (4)

Answer 16

• Principle 1 = company’s values should be explained and integrated into the business.

1. Develop ethical values.
2. Reflect the ethical value in a code of conduct/ethics.
3. Ensure the values and code are communicated to the board, management and employees.
4. Implement a training programme to ensure that the values and code are embedded within the organisation

Question 17

What is the role of the cosec in building an ethical culture? (8)

Answer 17

1. speaking out against bad governance and unethical behaviour (the conscience of the company)
2. ensuring that the board sets standards of ethical business (relevant to the company and developed from the bottom up)
3. developing a code of ethics (not copied = every co. has different ethical issues)
4. Communicating the expected standards of ethical behaviour (e.g. shareholder approach to CG = values put interests of shareholder 1st, stakeholder = employees may come 1st = different behaviors)
5. alerting the board and management to the professional ethical standards of advisers and others (e.g. not to conflict with ICAEW)
6. Ensure compliance with the value and code of ethics is monitored and breaches are reported to the board
7. Ensure ethical values and the code of ethics are reviewed from time to time
8. ensure board approves and monitors implementation of whistleblowing policies and procedures

Question 18

What does paragraph 83 FRC Guidance on Board Effectiveness say regarding independent professional advice for directors?

How might the cosec be involved in the procedures to enable the directors to obtain independent professional advice? (5)

Answer 18

para. 83 = CS’s responsibility to ensure directors, especially NEDs, have access to independent professional advice at the company’s expense

1. Cosec proposes board should adopt a procedure for directors seeking independent advice to follow = board resolution or part of board process manual
2. If procedure sets certain conditions or imposes financial limits, pre-approval may be required from Chair or SID
3. Cosec will record that an application has been made and whether approval given
4. Cosec will report this to the board
5. Cosec will authorise payment of invoices to the independent advisors

Question 19

Which guidance note did the ICSA publish in relation to independent professional advice?
Give an example of a recommendation.

Answer 19

= ‘Model Board Resolution on Independent Professional Advice’ = suggests how the board can adopt policies and procedures in this area

E.g. Director must give prior notice to [chair, Cosec, or SID] of their intention to seek independent professional advice, provide name(s) of advisers, and a brief summary of the subject matter.

Question 20

What does Paragraph 83 FRC Guidance on Board Effectiveness say regarding independent professional advice for committees?
What should the Terms of reference state?

Answer 20

• para 83 = board committees should be provided with sufficient resources to undertake their duties
= which could include access to independent professional advice

• The terms of reference of each committee should include any delegated authority the committee needs for these purposes.
○ e.g., the NC will need to appoint recruitment consultants

Question 21

What does Provision 21 UK CG Code require boards to do regarding performance evaluations?

What does Provision 12 UK CG Code say about NEDs responsibilities?

What does Principle L UK CG Code say about the board’s and individuals’ evaluations? (2)

What does Provision 22 UK CG Code say the chair is required to do?

What does Provision 23 UK CG Code require the NC report to state that’s specific to board evaluations? (4)

Answer 21

• Provision 21 = requires boards to undertake a formal and rigorous annual evaluation of the performance of the board, its committees, the chair, and individual directors

• Provision 12 = provides that the NEDs, led by SID, should be responsible for performance evaluation of the chair and should meet without the chair present at least annually

• Principle L:
1. the annual evaluation of the board should consider its composition, diversity, and how effectively members work together to achieve objectives; and
2. each individual’s evaluation should demonstrate whether they continue to contribute effectively

• Provision 22 = the chair is expected to act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board

• Provision 23 = requires the nomination committee report to state:
1. how the board evaluation has been conducted;
2. the nature and extent of an external evaluator’s contact with the board and individual directors;
3. the outcomes and actions taken; and
4. how the evaluation has or will influence board composition

Question 22

What do paragraphs 106-110 FRC Guidance on Board Effectiveness say regarding performance evaluations?
Specifically:
What should they aim to be?

Who has overall responsibility?

Chair should consider what?

What should they inform and influence?

Answer 22

• para 106 - 110 = makes following suggestions:
1. Evaluation process should aim to be objective and rigorous.

2. Chair has overall responsibility for the process
3. Chair should consider ways to obtain feedback from the workforce and other stakeholders – e.g., the auditors – on the performance of the board and individual directors.
4. Board evaluations should inform and influence succession planning.

Question 23

What does Provision 21 UK CG Code say regarding externally facilitated board evaluations? (2)

Answer 23

• Provision 21 = the chair should consider having a regular externally facilitated board evaluation. In FTSE 350 companies this should happen at least every 3 years
• non-FTSE 350 companies = chair should consider annually whether the company should have one

Provision 21 = name of any external facilitator used should be identified in the annual report and a statement made as to whether they have any other connection with the company or individual directors

Question 24

What does paragraphs 114-116 FRC Guidance on Board Effectiveness suggest in relation to externally facilitated board evaluations?
Specifically:

What is an ineffective method?

Who should companies select?

What will make externally facilitated board evaluations more valuable?

Answer 24

(para 114 - 116) = recommendations on selecting an external board evaluator. Suggests:
• Questionnaire-based external evaluations are unlikely to be effective

• Companies should select an evaluator who is able to exercise independent judgment

• External evaluation is likely to be more valuable if there is a clear set of recommendations and actions

Question 25

How are internal evaluations usually performed?
Why?
Why are they critisied?

Answer 25

• Usually performed using a self-assessment questionnaire

cheaper and easier to organise

Argued not as effective as an external evaluation as those involved may not be able or willing to identify problems

Question 26

What should be evaluated in the annual performance evaluations according to principle L UK CG Code? (2)

What should be evaluated in the annual performance evaluations according to paragraph 113 FRC Guidance on Board Effectiveness? (3)

Answer 26

• Principle L:
1. the annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives; and
2. each individual’s evaluation should demonstrate whether they continue to contribute effectively

• para 113 = areas which may be evaluated:
1. the mix of skills, experience and knowledge on the board
2. Shareholder and stakeholder engagement
3. processes for identifying and reviewing risks

Question 27

What is the cosec’s role in the performance evaluations? (4)

Answer 27

1. usually assist the chair in selecting an external facilitator
2. involved in designing and performing the internal evaluation
3. involved in the analysis of the evaluations and framing the recommendations
   4, produce a matrix of the recommendations and the actions taken on them so that this can be monitored

Question 28

What does paragraph 61 FRC Guidance on Board Effectiveness say about the chair’s role in relation to inductions?

Paragraph 81 = The cosec’s role in relation to this?

Paragraph 75 = The NEDs responsibility in relation to this?

Answer 28

• para 61 = the chair should ensure that all directors receive a full, formal, and tailored induction on joining the board

• para 81 = CS must facilitate and arrange induction and training under direction of the chair

• para 75 = NEDs should devote time to a comprehensive, formal, and tailored induction that should extend beyond the boardroom

Question 29

What does the ICSA Guidance Note: Induction of Directors suggest in relation to inductions? (2)

Answer 29

1. it is not possible to design a single programme to suit all circumstances = programme should be tailored to the needs of the specific individual; and
2. the time taken to complete an induction will depend on the organisation, its size and complexity, but may take 12 months in order to cover a full board cycle.

Question 30

According to the ICSA Guidance Note: Induction of Directors, what should the cosec do in relation to inductions? (3)

Answer 30

Cosec should:
1. consult the new director before devising the induction programme = to tailor the content and delivery of their induction programme
2. organise site visits and make use of meetings with executives, advisers and stakeholders
3. review the induction programme with the director mid-way through, and at the end of, the process

Question 31

What does paragraph 61 FRC Guidance on Board Effectiveness say on the chair’s role in relation to professional development?

What does paragraph 81 FRC Guidance on Board Effectiveness say on the cosec’s role in relation to professional development?

What does Provision 22 UK CG Code say the directors should do following the performance evaluation?

What does Paragraph 110 FRC Guidance on Board Effectiveness say should happen after the board evaluations?

What does paragraph 76 FRC Guidance on Board Effectiveness say the NEDs should do in relation to professional development?

Answer 31

• Para 61 = chair should ensure all directors continually update their skills, knowledge and familiarity with the company

• Para 81 = CS must arrange board training and assist with professional development under direction of chair

• Provision 22 = each director should engage with the evaluation process and take appropriate action when development needs have been identified

• para 110 = outcomes from board evaluation should be shared with and discussed by the board, and should be fed back into the design of induction and development programmes

• para 76 = NEDs should devote time to developing and refreshing their knowledge and skills

Question 32

What is seen as an essential part of professional development for EDs?

What does provision 15 UK CG Code say on this?

What is the advantage of EDs doing this?

What is a disadvantage?

Answer 32

• Taking up an outside position as NED

• Provision 15 = recommends that full-time EDs should not take on more than 1 NE directorship in a FTSE 100 company or other significant appointment

• Advantage = enables EDs to experience what being a NED is like = understand the concerns of NEDs on their own board better and therefore cater for them

• Disadvantage = danger the ED serving as a NED may moderate their behaviour to match would they expect from their own NEDs = not offer sufficiently robust challenge on the new board

Question 33

How might a company benefit from having its executive directors serve as NEDs on other boards? (3)

Answer 33

EDs serving as NEDs on other company boards will:
1. gain experience of how other boards operate;
2. be able to compare different practices and recommend the adoption of those that appear to be better; and
3. experience first-hand what it is like to be a NED and what NEDs expect and require in order to perform effectively