Board effectiveness Flashcards
Cite five factors that can limit effective decision making (excluding
those relating to the supply of information).
Any five from:
A dominant personality or group of directors on the board, inhibiting contribution from others.
Insufficient diversity of perspective on the board, which can contribute to ‘group think’.
Excessive focus on risk mitigation or insufficient attention to risk.
A compliance mindset and failure to treat risk as part of the decision making process.
Insufficient knowledge and ability to test underlying assumptions.
Failure to listen to and act upon concerns that are raised.
Failure to recognise the consequences of running the business on the basis of self-interest and other poor ethical standards.
A lack of openness by management, a reluctance to involve non-executive directors, or a tendency to bring matters to the board for sign-off rather than debate.
Complacent or intransigent attitudes.
Inability to challenge effectively.
Lack of time for debate and truncated debate.
Undue focus on short-term time horizons.
What sort of significant decisions might the Guidance on Board
Effectiveness have in mind when it suggests that boards may wish to consider extra steps?
Extra steps might be considered appropriate where the board is setting the company’s strategy, purpose, culture and objectives and in situations where there appear to be strongly divergent views.
What are the four main stages in the development of a board pack?
The four main stages in the development of a board pack are:
identifying the information the board needs;
commissioning board papers;
writing board papers; and
collating and distributing the board pack.
What are the typical features of board portal software?
typical features of board portal software are:
secure tools to facilitate the distribution and use of electronic agenda papers and board packs;
archiving facilities that enable directors to refer back to the papers and minutes prepared for previous meetings;
secure tools which enable directors to annotate and make notes on the agenda papers;
voting tools;
tools to facilitate the circulation and approval of minutes, and
secure messaging features.
What are the advantages of board portal software over traditional
hard copy agenda papers?
The advantages of board portal software over traditional hard copy agenda papers are:
reduced time spent producing, collating and circulating board papers;
secure storage of those documents;
easier access to and portability of those documents;
easier navigation of papers during meetings;
quicker distribution;
ability to centrally store annotations and notes made by participants;
ability to refer back to papers and minutes for previous meetings;
secure messaging facilities.
How is corporate culture related to a company’s strategy, values and purpose?
According to the Guidance on Board Effectiveness: ‘An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.’
A company’s values and behaviours (its culture) should therefore be aligned with its purpose.
Why, in particular, might pay and performance structures lead to a bad corporate culture?
Pay incentives may reward employees for behaviour that is not in the best interests of the company’s clients and customers leading to a breakdown of trust, e.g. the payment protection insurance mis-selling scandal in the UK.
How might the company secretary be involved in the procedures to enable the directors to obtain independent professional advice?
The secretary should propose that the board adopts a procedure to be followed by directors seeking to take independent professional advice. This could be done by way of a board resolution or as part of a board procedures manual. If that procedure sets certain conditions or imposes any financial limits, some sort of pre-approval mechanism will be required. The secretary could be the person whose approval is required.
However, this could compromise the secretary’s
impartiality, particularly if the conditions require difficult judgement calls to be made. In these circumstances, it makes more sense for the chair or the senior independent director to be the person who makes the decision. Even if the secretary is not personally involved in the approval process, it may be sensible
for the initial application by a director to be made through the secretary, who then forwards it on to the appropriate person for approval. Someone will need to record the fact that an application has been made and whether the necessary approval has been given (or refused). This information will also need
to be reported to the board, particularly where approval has been given and advice has been obtained. Somebody also needs to authorise the payment of any invoices to the independent advisers. These task will typically fall to the secretary.
Under the Code what should the annual performance evaluation
cover?
According to Principle L of the UK Code, the annual performance evaluation should cover:
board evaluation: the composition of the board, its diversity and how effectively members work together to achieve objectives; and
individual evaluation: should demonstrate whether each individual director continues to contribute effectively.
Code Provision 21 clarifies that the annual evaluation should extend not only to the performance of the board and individual directors, but also to board committees and the chair.
What information should be disclosed in the annual report and
accounts on the annual performance evaluation?
Code Provision 23 requires the nomination committee report to state:
how the board evaluation has been conducted;
the nature and extent of an external evaluator’s contact with the board and individual directors;
the outcomes and actions taken; and
how the evaluation has or will influence board composition.
A company that does not comply with Code Provision 21 on annual performance evaluation will also need to include an explanation in its corporate governance report.
Under the Code, how often should a company have an externally
facilitated evaluation?
Code Provision 21 requires FTSE 350 companies to have an externally-facilitated board evaluation at least every three years. It requires chairs of other companies to consider having a regular externally facilitated board evaluation.
What should the aims of an induction process be?
What should the aims of an induction process be?
Induction programmes should ultimately seek to enhance the effectiveness of new directors. According to the ICSA Guidance on Induction of Directors, they should aim to:
build an understanding of the nature of the company, its business and the markets in which it operates;
build a link with the company’s people;
build an understanding of the company’s main relationships; and
ensure an understanding of the role of a director and the framework within which the board operates.
How might a company benefit from having its executive directors
serve as NEDs on other boards?
Executive directors serving as NEDs on other company boards will:
gain experience of how other boards operate;
be able to compare different practices and recommend the adoption of those that appear to be better; and
experience first-hand what it is like to be a NED and what NEDs expect and require in order to perform effectively.
Chapter summary
Chapter summary
Boards must meet regularly in order to discharge their duties effectively and allow adequate time for consideration of all the issues falling within their remit. In practice, FTSE 100 company boards meet on average about eight or nine times a year.
Well-informed and high-quality decision making is critical for board effectiveness.
Boards should consider adopting a more formal decision-making process for certain significant decisions.
The chair’s role in ensuring the effectiveness of the board is critical.
However, all directors (and the secretary) should consider the contribution they make to the dynamics of the board.
Effective board decision making is not simply a matter of getting the right people around the table. They need to address the right issues and ask the right questions and to do these things they need the right information. Companies are increasingly using board portal software to facilitate access to board packs and other information by directors. Such software enables companies to dispense with hard copy agenda papers and provide
additional security features.
Boards of directors may need to adopt policies on the use of social media applications for communications purposes.
The 2018 Code introduced a renewed focus on corporate culture. A healthy corporate culture should be viewed as a valuable asset, a source of competitive advantage and vital to the creation and protection of long term value.
The Code recommends that the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. It also requires all directors to act with integrity, lead by example and promote the desired culture, and requires the board to assess and monitor culture.
Boards should adopt a procedures which enables directors to take independent professional advice at the company’s expense on matters which concern them in the performance of their duties as directors.
The Code expects boards to undertake a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors.
In the case of FTSE 350 companies, the evaluation should be externally facilitated at least once every three years.
The chair is expected to ensure that all directors receive a full, formal and tailored induction on joining the board that all directors continually update their skills, knowledge and familiarity with the company. The company secretary will assist the chair in arranging such programmes.
