Chapter 4: The Board Of Directors Flashcards
According to the Code, what are the governance responsibilities of the board of directors?
- provide leadership
- set strategic aims
- ensure appropriate resources are in place to meet objectives.
- review management performance
- set the company’s values and standards
- make sure shareholder obligations are met.
What additional governance responsibilities of the board are noted in King IV?
- ethical conduct and sustainability of the business
- compliance with laws, regulations and codes
- governing the relationship between the company and its stakeholders
What factors does the FRC Guidance on Board Effectiveness state are required for good decision making?
- high quality documentation
- obtaining views of experts
- allowing time for debate
- resolving issues in a timely fashion
- being clear on what actions are required
Which matters should be reserved to the board?
- approval of strategy
- approval of budgets
- oversight of operations
- compliance with legal and regulatory requirements
- management review
- approving risk appetite
- approving reports and accounts
- declaring dividends
- approval of shareholder communications
- approval of major contracts
- approvals of policies on CSR, H&S etc.
What would be the disadvantages of a large listed company restricting the total size of its board to 6 members?
There may be an insufficient range of skills and experience for the board to function effectively.
What are the provisions of the UK Code for the size and composition of the board of directors in a FTSE350?
At least half (excluding the chairman) must be independent NEDs
Why are NEDs appointed to boards?
- act as a counter balance to executive directors, who may otherwise prioritise their own interests
- bring alternative skills and experience
How many directors of a smaller company should be NEDs?
2
What is a fiduciary duty of a director?
A duty of trust
To whom do directors owe their duties?
To the company (not the shareholders).
What are the 7 statutory duties of directors?
171 - act within powers
172 - promote success of the company
173 - exercise independent judgement
174 - exercise reasonable skill care and dilligence
175 - avoid conflicts of interest
176 - not accept benefits from third parties
177 - declare any interest in a proposed transaction
In what circumstances is it acceptable for a director to have an interest in a third party transaction with the company?
So long as the director declares his interest in the transaction to the rest of the board and has it approved.
What is a derivative action for breach of a statutory duty by a director?
An action brought against a director by a member on behalf of the company.
What are the provisions of the UK DTR for listed companies with regard to related party transactions?
UK Disclosure And Transparency Rules state that during a related party transaction, the company must:
- make an announcement to the stock market, giving details of the transaction.
- send a circular to shareholders giving more detail.
- obtain prior approval of shareholders
- ensure that the related party does not vote
Is a company liable for any contractual obligation, if a director has acted outside his powers?
Yes, so long as the third party has acted in good faith.
When may a derivative action be made?
When there has been an “actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director.”
What is the role of the chairman?
- set an appropriate agenda for board meetings
- ensure that relevant information is provided to directors
- encourage open discussion
- encourage all directors to contribute.
Why should the CEO/Chairman not be combined?
Too much power leads to board dominance.
Also because A.2.1 UKCGC
What are the requirements of the Code with regard to the company’s chairman?
- responsible for board leadership
- responsible for setting board agenda
- promote a culture of openness and debate
- ensuring directors receive information
- ensure that shareholder communications are effective
In what circumstances is it acceptable for an individual to be the chairman of more than one FTSE 100?
Only if they can demonstrate that they have sufficient time to devote to the role, and disclose any other commitments.
What is the role of the CEO?
- leads the executive team
- proposes strategy to the board
- implements strategy as decided by the board.
What are the intended functions of independent NEDs?
- support the EDs in their management of the business
- monitor ED conduct within an atmosphere of “mutual respect”.
What does the FRC Guidance on Board Effectiveness, state about the NED?
- devote time to formal induction, and to refreshing of skills
- make sufficient time available to carry out their responsibilities
- should receive a letter of appointment specifying the amount of time to be spent on company business
- should insist on receiving timely and accurate information
According to the UKCGC, what are the roles of NEDs?
- constructively challenge and help develop proposals on strategy
- scrutinise the performance of management in meeting agreed goals
- satisfy themselves to the integrity of financial reporting
- decide the remuneration of EDs
- have a prime role in the appointment of executive directors.
List 6 circumstances in which an NED would not normally be considered independent.
UK Code:
- employee in the last 5 years
- has a material business relationship with the company in the last 3 years
- receives additional remuneration from the company
- has close family ties with the company in some way
- represents a significant shareholder
- has served on the board for more than nine years
To comply with the UKCGC, what measures should be taken if a company appoints an NED who is not considered independent?
- when considering membership of committees, ensure that undue reliance is not placed on particular individuals
- only individuals able to attend committee meetings are the members of those committees, unless by invitation
What did the PwC report on NEDs 2010 state about the workload of NEDs?
Workload is increasing due to:
- increased regulatory burden
- economic downturn
- more demanding committee work
- more time committed to board meetings
What are the respective roles of a management board and a supervisory board in a two-tier board structure in Germany?
The management board manages the company (led by the CEO).
The supervisory board oversees the company and the management board.
What are the criticisms of a two-tier board structure?
- supervisory boards are too big
- supervisory board members are often ex-executives who could find it hard to be independent.
- “employee representatives” on supervisory boards can lack competence
What criticism has been stated on the role of the SID?
An effective chairman should be able to resolve shareholder issues, and SID should therefore be superfluous.
What criticism has been stated on the role of the SID?
An effective chairman should be able to resolve shareholder issues, and SID should therefore be superfluous.
What are the three recommended committees in the UKCGC?
Nomination
Audit
Remuneration
Which board committee is mandatory for quoted companies?
Audit (EU Statutory Audit Directive 2008)
What does the UKCGC recommend on the composition of the nomination committee?
Majority independent NEDs
What does the UKCGC recommend on the composition of the auditr committee?
All independent NEDs
What does the UKCGC recommend on the composition of the remuneration committee?
All independent NEDs.
