Chapter 6 - The role and membership of the board of directors Flashcards
What is the overarching role of the board according to the UK Corporate Governance Code?
To promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society
Cite three examples of things that the Code expects boards to do in performing this role.
Any three from:
- Establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.
- Act with integrity, lead by example and promote the desired culture.
- Ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them.
4.Establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
- Ensure effective engagement with, and encourage participation from, shareholders and other stakeholders.
- Ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success.
List three functions that the board performs through its board committees on which it still has the final say.
Examples include:
- making new appointments to the board;
- approving the accounts and other financial statements;
- establishing a framework of prudent and effective controls, which enable risk to be assessed and managed; and
- proposing the appointment of auditors
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.
However, the board will still retain control over key management functions, such as setting the company’s culture, strategy, purpose and objectives and monitoring performance against those objectives. In addition, most boards will require certain critical management decisions to be referred to the board.
The thresholds for when board approval is necessary will be set out in a schedule of matters reserved to the board.
What is the role of the company chair?
The chair leads the board and is responsible for its overall effectiveness in directing the company.
The chair should demonstrate objective judgement, promote a culture of openness and debate, facilitate constructive board relations and the effective contribution of all non-executive directors, and ensure that directors receive accurate, timely and clear information.
What are the requirements of the UK Code of Corporate Governance with regards to the independence of the company chair?
The chair should be independent on appointment when assessed against the circumstances set out in Code provision 10 regarding the independence of non-executive directors.
In addition, a chief executive should not go on to be chair of the same company
Why should the role of chair and CEO be separate?
The chair leads the board of directors. The CEO is the leader of the management team.
The Code requires there to be a clear division of responsibilities between these two functions to prevent one person from having an overly dominant influence on decision-making in the company
How does the FRC Guidance on Board Effectiveness expect the CEO to contribute to board effectiveness?
The CEO is expected to contribute by:
- proposing strategy to the board, and for delivering the strategy as agreed;
- setting an example to the company’s employees, and communicating to them the expectations of the board in relation to the company’s culture, values and behaviours;
- supporting the chair to make certain that appropriate standards of governance and ensure they are filtered through all parts of the organisation;
- making certain that the board is made aware, when appropriate, of the views of employees on issues of relevance to the business; and
- ensuring the board knows the executive directors’ views on business issues in order to improve the standard of discussion in the boardroom and, prior to final decision on an issue, explain in a balanced way any divergence of view in the executive team.
How does the FRC Guidance on Board Effectiveness expect the executive directors to contribute to board effectiveness?
The Guidance suggests that executive directors should:
- not see themselves only as members of the chief executive’s team;
- broaden their understanding of their board responsibilities by taking up a non-executive director position on another board; and
- welcome constructive challenge from non-executive directors as an essential aspect of good governance, and
- encourage their non-executive colleagues to test proposals in the light of their wider experience outside the company
What is the function of an executive committee?
The role of the executive committee is usually to act as a sounding board for the CEO and as a forum to receive and
discuss operational updates and progress reports.
It is not usually a formal committee of the board, but usually one that
is established by the CEO to assist in the management of the business.
How are NEDs expected to contribute towards the deliberations of the board?
According to the UK Corporate Governance Code, NEDs are expected to:
- provide constructive challenge;
- provide strategic guidance;
- offer specialist advice; and
- hold management to account (2018 Code principle H).
What particular functions are independent NEDs expected to fulfil under the Code?
The UK Corporate Governance Code expects independent NEDs to:
- lead the process for board appointments, succession planning and ensuring the development of a diverse pipeline, through their participation in the nomination committee;
- satisfy themselves on the integrity of financial information and that financial controls and systems of risk
management are robust and defensible, through their participation in the audit committee; and - set the directors’ remuneration policy and determine appropriate levels of remuneration for the chair, executive directors and senior management, through their participation in the remuneration committee
List six circumstances in which a NED would not normally be considered independent.
Any six out of:
- is or has been an employee of the company or group within the last five years;
- has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
- has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;
- has close family ties with any of the company’s advisers, directors or senior employees;
- holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
- represents a significant shareholder; or
- has served on the board for more than nine years from the date of their first election
What should the board do if any of its NEDs do not meet these independence criteria?
The board should identify, in the annual report and accounts, the non-executive directors it considers to be independent for the purposes of the Code.
If a NED is not identified as being independent, the assumption must be that the board does not consider them to be independent. Boards can decide that a NED is independent even though that individual does not comply fully with the independence criteria.
However, where this is the case, they must provide a clear explanation in the report and accounts.
List the main criticisms regarding non-executive director effectiveness.
The main criticisms of NEDs include:
- a lack of knowledge about the company’s business;
- insufficient time spent with the company;
- defects in the decision-making process; and
- ineffective challenge
