Chapter 7 - Board composition and succession planning

Question 1

If a board is comprised of a chair, three executive directors, one of whom is the CEO, and a non-executive director representing the major shareholder, how many independent directors will be required to comply with the UK Corporate Governance Code?

Answer 1

Under the Code, at least half the board (excluding the chair) must be independent NEDs. Accordingly, the minimum number of independent NEDs required must balance out the three executive directors and the NED who is not independent. This means that there must be at least four independent NEDs.

Question 2

List the factors that will typically influence the size of the board.

Answer 2

The main factors that will typically influence the size of the board are:

• the requirements for a balanced board;
• the requirements of the UK Code on the composition of the board;
• the need to service board committees; and
• the ability of the board to hold productive, constructive discussions and make prompt rational decisions.

Question 3

What is a skills matrix?

Answer 3

A skills matrix is a table that displays people’s proficiency in specified skills, knowledge, competencies and aptitudes.

Question 4

What purpose would such a matrix serve in the process of appointing a new director?

Answer 4

A skills matrix can be used:

• to assess whether there are any areas in which the skills and aptitudes of the board as a whole may be lacking, or
  may become lacking as a result of the departure of one or more directors;
• to assess whether the board is over-reliant on the skills or aptitudes of certain individuals in any particular area;
• to map the existing skillset against that required to execute strategy and meet future challenges; and
• to draw up a profile of the ideal candidate for any board vacancies

Question 5

How does the 2018 UK Corporate Governance Code seek to promote diversity?

Answer 5

Code Principle J provides that both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. In addition, Code Principle L states that the annual board evaluation should consider diversity.

However, the main tool used to promote diversity is to require disclosure in the report of the nomination committee on diversity issues.

These disclosure requirements effectively mean that the board must adopt a diversity and inclusion policy for board and senior executive appointments, which could include diversity targets, and succession policies that promote diversity.

These policies could be part of an overall diversity and inclusion policy that covers the workforce as a whole or in addition to it

Question 6

List the types of disclosures listed companies are required to make on diversity.

Answer 6

Listed companies are required under the Code to make the following disclosures in the report of the nomination
committee:

• the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
• how the board evaluation has or will influence board composition;
• the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives (this requirement is also mirrored by DTR 7.2.8A); and
• the gender balance of those in the senior management and their direct reports

CA2006, s. 414C also requires quoted companies to include in their strategic report a breakdown showing at the end of the financial year the number of persons of each sex who were:

• directors;
• senior managers; and
• employees of the company

Question 7

What are the three main roles of the nomination committee?

Answer 7

The three main roles of the nomination committee
are to:

• lead the process for appointments;
• ensure plans are in place for orderly succession to both the board and senior management positions; and
• oversee the development of a diverse pipeline for succession.

Question 8

What are the membership requirements for the committee?

Answer 8

The Code provides that a majority of members of the nomination committee should be independent non-executive
directors. This provision is effectively designed to enable the company chair to serve on the committee, even if not
considered independent.

Question 9

Outline the process for appointing a new NED.

Answer 9

The nomination committee should evaluate the skills, experience and knowledge on the board, the future challenges affecting the business, and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.

It should then agree the process to be undertaken to identify, sift and interview suitable candidates, ensuring that a proper assessment of values and expected behaviours is built into the recruitment process. This will typically involve engaging recruitment consultants.

The nomination committee will interview a selection of candidates put forward by the recruitment consultants and use these interviews to narrow down the list of candidates or ask for further candidates to be proposed.

In the final stages of the process, the nomination committee may invite the final candidate(s) to meet other members of the board.

After taking soundings from other board members, the committee will make its final recommendation to the board, which will then make the final decision.

As the Code requires all directors to be re-elected annually, the shareholders will have the opportunity to confirm or reject
the appointment at the next AGM.

Question 10

How might that process differ when seeking to appoint a new chair or chief executive?

Answer 10

The appointment of a new chair or CEO may involve the consideration of internal candidates.

An existing independent NED could be elected as the chair and an existing senior executive could be promoted to become CEO. In contrast, the appointment of a NED will always involve recruiting external candidates if they are to be considered independent.

Question 11

Briefly outline the three time horizons that a succession plan should cover.

Answer 11

Succession plans should consider the following different time horizons:

• contingency planning – for sudden and unforeseen departures;
• medium-term planning – the orderly replacement of current board members and senior executives (e.g. retirement); and
• long-term planning – the relationship between the delivery of the company strategy and objectives to the skills
  needed on the board now and in the future.

Question 12

Why is it more difficult to prepare a succession plan for executive directors?

Answer 12

There is no minimum term of office for executive directors. If the company is successful, the CEO may seek to avoid any discussion surrounding their eventual departure. If the company is not successful there may be sudden, forced departures.

Senior executives may also be poached by other companies, leaving a sudden vacancy

Question 13

Give three legitimate reasons why the nomination committee might propose a refreshment of the board

Answer 13

Refreshment could be used:

• to replace a non-executive who is not making an effective contribution;
• to meet diversity targets; or
• to bring in a new director who has certain critical skills.

Question 14

Why does the Code 18 require all directors to offer themselves for re-election on an annual basis?

Answer 14

According to the FRC, the annual re-election requirement was introduced to give shareholders an annual opportunity to express their views on the performance of the directors and to give boards an incentive to listen and respond to their concerns.

The FRC hoped that this would in turn lead to ongoing engagement. Legally, annual re-elections mean that shareholders seeking the removal of a director do not need to propose their own resolution, which would involve giving special notice.

Question 15

What will a balanced board consist of

Answer 15

A balanced board will include:

1. Separate roles of chair and CEO - Provision 9
2. An appropriate balance of executive, non-executive and independent directors - Provision G and provision 11
3. Appropriate skills, experience and knowledge - Principle K
4. Gender balance - Principle J
5. Diversity - Principle J

Question 16

Recruiting NEDs from diverse backgrounds?

Answer 16

Recommended:

1. The nomination committee should be tasked with considering candidates from a wide range of backgrounds.
2. It should draw more actively from areas such as human resources, change management, customer care and the professions where women tend to be more strongly represented
3. It should also consider recruiting candidates from private companies, charities and public sector bodies
4. if operating in international markets, could benefit from having at least one international non-executive director with relevant skills and experience on their board; and
5. should consider bringing onto the boards of subsidiary companies talented individuals from wider and more diverse backgrounds to give them exposure to the operation of a board as a possible stepping-stone to the board of a listed company

Question 17

What should succession plans cover?

Answer 17

Succession plans should cover:

1. Contingency planning – for sudden and unforeseen departures
2. Medium-term planning – the orderly replacement of current board members and senior executives
3. Long-term planning – the relationship between the delivery of the company strategy and objectives to the skills needed on the board now and in the future.

Question 18

Q1. List four factors that a board may take into consideration when determining its size (4 marks)

Answer 18

1. The requirements for a balanced board
2. The requirements of the UK Code on
   the composition of the board (Principle K)
3. The need to service board committees
4. The ability of the board to hold productive, constructive discussions and make prompt rational decisions

Question 19

Q2. List four of the key elements of the ‘balanced board’ (4 marks)

Answer 19

1. Separate roles of chair and CEO
2. An appropriate balance of executive,
   non-executive and independent directors
3. Appropriate skills, experience and knowledge
4. Gender balance
5. Diversity

Question 20

Q3. Provide three recommendations from Higgs Report (2003) relating to recruiting NEDs from diverse backgrounds (3 marks)

Answer 20

1. The nomination committee should be tasked with considering candidates from a wide range of backgrounds.
2. It should draw more actively from areas such as human resources, change management, customer care and the professions where women tend to be more strongly represented
3. It should also consider recruiting candidates from private companies, charities and public sector bodies
4. if operating in international markets, could benefit from having at least one international non-executive director with relevant skills and experience on their board; and
5. should consider bringing onto the boards of subsidiary companies talented individuals from wider and more diverse backgrounds to give them exposure to the operation of a board as a possible stepping-stone to the board of a listed company

Question 21

Q4. List four tasks that a NED should undertake as due diligence before accepting a board position (4 marks)

Answer 21

1. Look at the company’s annual report and website to see how it articulates its business model, governance, the market environment and dynamics, recent operational performance, strategy, risks and uncertainties, sustainability and financial performance;
2. Review regulatory and media announcements issued since the last annual report was published
3. Arranging to meet the chair, CEO, CFO, company secretary and all members of the nomination committee, if not the entire board, before accepting an appointment;
4. If taking on the role of company chair or the chair of the audit or remuneration committees, arranging meetings with the auditors, the head of internal audit or the remuneration consultants as appropriate;
5. Talk with any other external advisers, senior management, employees, suppliers and customers; and
6. Check scheduled board dates for the year ahead at an early stage in the due diligence process to ensure free to attend.

Question 22

Q5. Provide five actions that the Chair can undertake to improve boardroom dynamics (5 marks)

Answer 22

1. Maintains control of proceedings (Does not dominate)
2. Facilitates decision-making
3. Stimulates debate, encourages all to contribute
4. Encourages constructive discussions
5. Promotes airing and resolution of disagreements
6. Steers towards consensus
7. Ensures that decisions are understood and recorded
8. Creates a positive environment
9. Sets an example with respect to conflicts of interest

Question 23

Q6. List 5 of the steps in setting a company’s culture (5 marks)

Answer 23

1. Agree what the company’s values are and considering how the company’s purpose and strategy are aligned with those values
2. Develop and adopt a company Code of Ethics which sets out the company’s values and expectations as to behaviours
3. Ensure that the values that have been agreed are taken into account when developing the company’s operational policies and procedures – the Board also needs to ensure that this message is clear to the company’s senior managers
4. Publicise the company’s values, or its Code of Ethics, for example in public and internal documents and by including them in employee induction and training
5. Integrate the values into all of the functions and operations of the company
6. Ensure that the company’s employee performance management and reward systems encourage behaviours that are consistent with the company’s culture and values
7. Ensure that there is a culture of openness and accountability, so that employees feel able to raise concerns about behaviour, including via an effective whistleblowing policy and procedures
8. Set the tone from the top – ensuring that the behaviours of the Board members individually, and the Board as a whole, are in line with the company’s values, for example by acting with integrity and transparency

Question 24

Q7. Provide four ways in which a company can measure that its Code of Ethics is effective (4 marks)

Answer 24

1. Using staff surveys to check employees’ views about the company’s Code of Ethics
2. Including the Code of Ethics as one of the matters discussed or surveyed as part of the company’s engagement with other stakeholders such as suppliers or customers
3. Having the Code of Ethics as standing items for the Board meetings
4. Receiving a report of customer complaints
5. Receiving reports and feedback about the company’s whistleblowing policies and procedures, how effective they are and issues raised via any whistleblowing helpline.
6. Ensuring that the Board are able to get first-hand experience or indications of the Code of Ethics within the company by being able to have direct interaction with employees and other stakeholders.

Question 25

Q8. List four ways in which the company secretary can assist the board in maintaining an ethical culture (4 marks)

Answer 25

1. Suggesting that discussions about corporate culture are on the board’s agenda
2. Suggesting that culture indicators are selected based on the expectations of the organisation’s key stakeholders
3. Developing a dashboard for the culture indicators that should be reviewed from time to time by the board
4. ensuring that information is drawn from a variety of sources to support and monitor perceptions of performance for the selected indicators;
5. organising site visits so that members of the board can get out and about and meet employees to assess for themselves the culture embedded within the organisation
6. assisting in developing the reporting to stakeholders on the organisation’s culture

Question 26

Q9. List three elements that should be included in a Board Evaluation (3 marks)

Answer 26

1. The mix of skills, experience and knowledge on the board, in the context of the challenges facing the company
2. Clarity of, and leadership given to, the purpose, direction and values of the company;
3. succession and development plans
4. How the board works together as a unit, and the tone set by the chair and the CEO;
5. key board relationships, particularly chair/CEO, chair/senior independent director, chair/company secretary and executive/non-executive directors
6. Effectiveness of individual directors

Question 27

Q10. List four elements that should be included in an induction programme for a director (4 marks)

Answer 27

1. Explanation of the role of a director and the legal framework
2. Key company documents
3. Board and senior management of the company
4. Board meetings and procedures
5. Company policies and procedures
6. Presentation from senior managers
7. Business information
8. Shareholders
9. Site visits