Chapter 6 - Role of the Board & Membership of the Board of Directors Flashcards
What is the overarching role of the board according to the UK Corporate Governance Code?
Principle A
“to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”
What does the Code suggest boards do in order to fulfil their role as defined by Principle A of the UKCGC?
Principle A is similar to s.172 of CA 2006 - it is fleshed out by Princ. B - E, stating that directors should:
- Establish company purpose/values/strategy and satisfy itself that these are aligned with the culture (B)
- Act with integrity, lead by example, promote desired culture (B)
- Estabish framework of prudent and effective controls, which enables risk to be assessed and managed (C)
- Effective engagement with/encourage participation from shareholders and other stakeholders (D)
- Ensure workforce policies/practices consistent with company’s values and support its long-term sustainable success (E)
How does FRC’s Guidance on Board Effectiveness flesh out Principle E regarding workforce policies and practices?
- Boards should keep both under review to ensure they are consistent with company values and support its long-term success.
- Aspects such as remuneration policies, rewards and incentives can impact on the experience and drive behaviours
What is a purpose/values/strategy statement?
- Purpose Statement : encapsulates company’s purpose for the outside world. Can be hard to condense into 20 or so words, especially with groups with diverse business activities
- Values Statement - highlights main qualities company views as critical for achieving its purpose
- Strategy Statement - sets out what company aims to achieve supported by targets for measuring success
How can boards achieve the “necessary resources to meet objectives and measuring performance against them” per Princ. C?
- Budgets
- Any financing required = in place
- Appoint right people
- Set targets and review management and operational performance
How can boards ensure they ‘establish a framework of prude and effective controls’ per pt.2 of Princ. C?
- Approve delegation levels, including limits
- Establish committes which have clear ToR
- Adopt schedule of matters reserved for the board
- Establish IC/RM procedures
- Set risk appetite
What Principle of Wates applies to the role of the board and individual directors?
PRINCIPLE 3
* Board and individual directors to have clear understanding of their accountability & responsibilities
* Should be policies/procedures in place to support effective decision-making and independent challenge
Over which matters does the board retain ultimate control within the remit of its corporate governance committees
- Appointments ( NomCo make recommendations)
- Appointment of auditor (AudCo make recommendations)
- Directors’ remuneration policy (RemCo make recommendations)
- Ensuring a framework of prudent and effective controls are in place (AudCo review/make recommendations)
- Approve accounts/other financial statements (AudCo will review, prior to board approval)
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- Delegation to comittee allows indepedent non-execs to set agenda which reduces influence of Exec Directors
- Board having final say means it still has a key role to play
In practice, do boards delegate all management power?
No.
UKCGC expects that directors will retain control/decision-making of certain critical management decisions
Board may also insist on final say on certain important matters (ex. major capital investment project)
Thresholds for board approval can be set out in a formal ‘schedule of matters reserved for the board’
Which matters must the board legally retain control/decision-making over?
By law - the board must deal with certain other matters, this is also set out in schedule of matters reserved for the board
For example:<br></br>
* Approval of financial statements
* Adoption of anti-bribery and health and safety policies
Why is setting a formal schedule of matters reserved for the board beneficial?
- Clarity, especially for NEDs & new directors, what role of board is
- Clarity (for executive team) – which decisions need board approval
- Without one, matters may appear to fall within delegated authority of executive directors /board committee
- Acts as internal safety net to ensure matters referred to the board
-
Simplifies delegation
* Broad powers delegated easily if subject to restrictions which are set out in such a schedule
* Company wide changes are possible without having to alters terms of any delegations in place.
What matters should be reserved for the board?
PER ICSA Guidance on Matters Reserved for the Board (2013)
* Strategy and Management
* Structure and Capital
* Financial Reporting and controls
* Contracts
* Internal controls
* Communication
* Board Membership
* Corporate Governance
* Remuneration
* Delegation of Authority
* Policies
Other Misc. Matters per company (what constitutes ‘high level management decision’ is subjective to each individual company)
To what extent does the board manage the company’s business?
- The board can be said to have a supervisory role in the management of the company’s business.
- Responsibility for day-to-day management will be delegated to the executive team.
- Board board will retain control over key management functions, such as setting the company’s culture, strategy, purpose and objectives and monitoring performance against those objectives.
- Most boards will require certain critical management decisions to be referred to them.
- Thresholds for when board approval necessary to be set out in a schedule of matters reserved to the board.
What are the main reporting requirements in respect of directors/board commitees?
- CA2006 : names of all directors who have served in the financial year to be disclosed in the directors’ report
-
UKCGC
- Prov. 10 - number of NEDs board considers to be independent and any relevant explanations
- Prov.14 - Number of meetings and individual director attendance
- Prov.14 - Responsibilities of CEO/Chair/Board/Committees in writing and made public
- Prov.18 - Papers with resolution to elect/re-elect director, give specific reasons their contribution is/continues to be important to long-term sustainable success of the company
What is the role of the Chair in a listed company?
PRINCIPLE F
- Lead the board
- Overall effectiveness in directing company
- Demonstrate objective judgement
- Promote culture of openness and debate
- Facilitate constructive board
- Facilitates effective contribution of ALL NEDs
- Ensure directors receive accurate/timely/clear information
Examples of the chair’s role from FRC Guidance on Board Effectiveness (which expands on Principle F)
- Setting a board agenda (focus on strategy, performance, value creation, culture, stakeholders and accountability, ensures relevant issues are discussed by the board)
- Shaping boardroom culture
- Encouraging all board members to engage in board and committee meetings (by drawing on their skills, experience and knowledge)
- Guidance and mentoring to new directors as appropriate;
- Leading annual board evaluation (spport from SID as appropriate) and acting on the results.
- Considering the requirement for regular externally facilitated board evaluations
- Ensuring:
- time on agenda to discuss all items
- timely flow of accurate high-quality information
- all directors are aware of their duties/responsibilities
- that the board listens to **all views **(inc. shareholders, workforce & other stakeholders)
What duties does Chair have under common law?
Ensure
- the meeting is properly conducted;
- all shades of view are given a fair hearing;
- the meeting is properly ascertained and recorded; and
- order is preserved.
What powers are usually conferred on chair by AoA?
- Specific power to make rulings on whether a director is entitled to vote;
- Casting vote at meetings;
- First right to chair board meetings; and
- First right to chair meetings of the members/shareholders.
What are the requirements of the Code with regard to the role/independence of the the company chair?
- PRINCIPLE F - summarises the role of the Chair which is expanded in FRC Guidance on Board Effectiveness
- PRINCIPLE G - clear division of responsibilities between leadership of the board and executive leadership of the company’s business
- PROV.9 - the chair should be independent on appointment when assessed against the circumstances set out in Prov.10
- PROV.9 - chair and CEO roles should not be exercised by the same person
-
PROV.19 - chair should not remain in post beyond nine years from the date of their first appointment to the board.
This could be extended if it facilitiates effective succession planning / especially if was prev. NED before appointment - clear explanations to be provided
Why should the role of the chair and CEO be separate?
- PRINC.G - clear division of responsibilities between board leadership and exec leadership of the company’s business to prevent overly dominant influence on decision-making
- PROV.9 - Chair and CEO roles should not be exercised by the same person
- CEO leades management team / Chair leads the board
- FRC GUIDANCE ON BOARD EFFECTIVENESS - when deciding the differing responsibilities of the chair and the chief executive, particular attention should be paid to areas of potential overlap.’
