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Corporate Governance > Chapter 4: The Board Of Directors > Flashcards

Chapter 4: The Board Of Directors Flashcards

1
Q

According to the Code, what are the governance responsibilities of the board of directors?

A
  • 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.
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2
Q

What additional governance responsibilities of the board are noted in King IV?

A
  • ethical conduct and sustainability of the business
  • compliance with laws, regulations and codes
  • governing the relationship between the company and its stakeholders
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3
Q

What factors does the FRC Guidance on Board Effectiveness state are required for good decision making?

A
  • high quality documentation
  • obtaining views of experts
  • allowing time for debate
  • resolving issues in a timely fashion
  • being clear on what actions are required
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4
Q

Which matters should be reserved to the board?

A
  • 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.
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5
Q

What would be the disadvantages of a large listed company restricting the total size of its board to 6 members?

A

There may be an insufficient range of skills and experience for the board to function effectively.

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6
Q

What are the provisions of the UK Code for the size and composition of the board of directors in a FTSE350?

A

At least half (excluding the chairman) must be independent NEDs

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7
Q

Why are NEDs appointed to boards?

A
  • act as a counter balance to executive directors, who may otherwise prioritise their own interests
  • bring alternative skills and experience
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8
Q

How many directors of a smaller company should be NEDs?

A

2

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9
Q

What is a fiduciary duty of a director?

A

A duty of trust

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10
Q

To whom do directors owe their duties?

A

To the company (not the shareholders).

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11
Q

What are the 7 statutory duties of directors?

A

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

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12
Q

In what circumstances is it acceptable for a director to have an interest in a third party transaction with the company?

A

So long as the director declares his interest in the transaction to the rest of the board and has it approved.

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13
Q

What is a derivative action for breach of a statutory duty by a director?

A

An action brought against a director by a member on behalf of the company.

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14
Q

What are the provisions of the UK DTR for listed companies with regard to related party transactions?

A

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
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15
Q

Is a company liable for any contractual obligation, if a director has acted outside his powers?

A

Yes, so long as the third party has acted in good faith.

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16
Q

When may a derivative action be made?

A

When there has been an “actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director.”

17
Q

What is the role of the chairman?

A
  • set an appropriate agenda for board meetings
  • ensure that relevant information is provided to directors
  • encourage open discussion
  • encourage all directors to contribute.
18
Q

Why should the CEO/Chairman not be combined?

A

Too much power leads to board dominance.

Also because A.2.1 UKCGC

19
Q

What are the requirements of the Code with regard to the company’s chairman?

A
  • 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
20
Q

In what circumstances is it acceptable for an individual to be the chairman of more than one FTSE 100?

A

Only if they can demonstrate that they have sufficient time to devote to the role, and disclose any other commitments.

21
Q

What is the role of the CEO?

A
  • leads the executive team
  • proposes strategy to the board
  • implements strategy as decided by the board.
22
Q

What are the intended functions of independent NEDs?

A
  • support the EDs in their management of the business

- monitor ED conduct within an atmosphere of “mutual respect”.

23
Q

What does the FRC Guidance on Board Effectiveness, state about the NED?

A
  • 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
24
Q

According to the UKCGC, what are the roles of NEDs?

A
  • 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.
25
Q

List 6 circumstances in which an NED would not normally be considered independent.

A

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
26
Q

To comply with the UKCGC, what measures should be taken if a company appoints an NED who is not considered independent?

A
  • 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
27
Q

What did the PwC report on NEDs 2010 state about the workload of NEDs?

A

Workload is increasing due to:

  • increased regulatory burden
  • economic downturn
  • more demanding committee work
  • more time committed to board meetings
28
Q

What are the respective roles of a management board and a supervisory board in a two-tier board structure in Germany?

A

The management board manages the company (led by the CEO).

The supervisory board oversees the company and the management board.

29
Q

What are the criticisms of a two-tier board structure?

A
  • 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
30
Q

What criticism has been stated on the role of the SID?

A

An effective chairman should be able to resolve shareholder issues, and SID should therefore be superfluous.

31
Q

What criticism has been stated on the role of the SID?

A

An effective chairman should be able to resolve shareholder issues, and SID should therefore be superfluous.

32
Q

What are the three recommended committees in the UKCGC?

A

Nomination
Audit
Remuneration

33
Q

Which board committee is mandatory for quoted companies?

A

Audit (EU Statutory Audit Directive 2008)

34
Q

What does the UKCGC recommend on the composition of the nomination committee?

A

Majority independent NEDs

35
Q

What does the UKCGC recommend on the composition of the auditr committee?

A

All independent NEDs

36
Q

What does the UKCGC recommend on the composition of the remuneration committee?

A

All independent NEDs.

Corporate Governance (24 decks)

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