Board of Directors (BoD)

Question 0

Balanced Board

Answer 0

Size - Varied views vs coherence or decision making
NED and ED mix
Diversity - Gender, Ethnicity, Backgrounds, Experience

Question 1

Role of Board

Answer 1

• Promote success of company by directing and supervising its affairs
• Provide entrepreneurial leadership within framework of prudent and effective controls that enables risk to be assessed and managed
• Set companies strategic aims, ensure necessary financial and human resource in place, and review management performance
• Maximise shareholders wealth (revenue and capital)
• Ensure proper Financial Reporting
• Maintain ethics and reputation of business
• Engage shareholders semi regularly
• Appoint to board and senior staff
• Compliance with laws and regulation ICS and RM

Achieved through monthly board meetings

Question 2

Appraisal of Board

Answer 2

• Performance against objectives
• Independent and innovative thinking
• Continuous professional development
  And adequacy of decision making
• Familiarity with business and industry information
• Active participation in all business
• Positive and enthusiastic committee work
• Contribution towards business development
• Communications and quality of feedback
• Response to problems

Appraisals are an important control over it

Question 3

Roles of NED’s

Answer 3

• No executive (managerial) responsibilities, role is to safeguard interests of shareholders
• Reduce conflicts of interests by providing balance via their independent viewpoint
• Solution to agency risk/conflicts of interest (reduce agency gap + risk)

ROLE
STRATEGY - Challenge direction and offer advice on strategy

SCRUTINISE performance of management, and monitoring of performance

RISK MANAGEMENT - Ensure adequate and robust system of ICS, RM and financial controls, and accurate financial information.

PEOPLE - appointments and remunerations of directors and senior managers. Contract and disciplinary issues. Succession planning.

Practise

• One with Financial background
• Sit on committees (Audit, Nomination, Remuneration)

Question 4

For and Against NED’s

Answer 4

FOR

• Provide expertise and experience (relevant)
• Wider perspective
• Independent and Objective view
• Monitoring role esp. remunerations
• Improve perception of company (assurance)
• Compliance with CG

AGAINST/Problems

• Lack of effectiveness
• Lack of trust on behalf of exec
• May waste board time
• Lack of quality NED’s
• Too much liability for insufficient reward
• Lack of true independence

Question 5

Threats to Independence of NED’s

Answer 5

UK Code points

• Material business relationship in last 3yrs
• Employee in last 5yrs
• Cross directorship in other companies
• Served on board for over 9yrs
• Significant shareholder
• Close family ties with director
• Receive remunerations besides directors fee

Question 6

Remunerations Committee

Answer 6

• All NEDs
• According to UK code
• Significant proportion of reward being related to measurable business performance or enhanced shareholder value (determine the targets)
• Full transparency in accounts
• Relative to other similar companies

• Duties

• Expenses policy of Chair and CEO
• Total individual remuneration packages
• Contactual terms and terminations
• Determine targets of performance related pay

Issues

• risk of upward ratchet without corresponding improvement in performance
• Need to be sensitive of pay conditions within company
• Need to Attract, Retain and Motivate to pursue long term interests of shareholders

Components include
Basic Salary
Performance Related Pay
Benefits (in kind)
Pensions
Shares
Share Options

Question 7

Unitary VS Multi-Tier

Answer 7

Unitary - single board of Executive Directors and NED. When shareholders are main stakeholders

ADV

• Equal responsibility for management and strategic performance
• Easier cooperation and coordination
• Presence of NEDs = better decisions
• Less likely excluded from decision making and information

DisADV

• Onerous time requirements from NED
• Emphasises divide between shareholders and directors

Two-tier - two boards:
Management (Operating) Board (Lower)
Responsible for running business. Members appointment by supervisory.
Supervisory (Corporate) Board (Upper). When workers or banks have more involvement in running. Common in Not for profits.
Review company direction and strategy. Safeguard stakeholder interest

ADV

• Clear SEPARATION of management and control
• WIDER and IMPLICIT stakeholder involvement
• Board room FOCUS
• Direct POWER over management
• Less opportunity for FAMILIARITY and INTIMIDATION

DisADV
- Dilution of power from stakeholder involvement
- Isolation of supervisory from management
- Reliance on CEO and chairman relationship
- Agency problem between boards
More bureaucracy - slow decision making. More meetings

Question 8

Nominations Committee

Answer 8

UK code requires ‘formal, rigorous and transparent procedure for the appointment of new directors to board’

Majority NED

Duties

• Evaluate current balance of skill
• Review time required from NED and if enough time given from individuals
• Consider succession planning
• Prepare statement in AR detailing process of appointments