Chapter 7 - Board Composition & Succession Planning

Question 1

What are six factors the board should take into consideration when determining its size?

Answer 1

• Need for a balanced board
• Any provisions/requirements/restrictions in Articles
• Ability to service board committees
• Size of the organisation an complexity of the business and industry in which it operates.
• Requirements of the Code (Principle K)
• Ability to hold productive, constructive discussions and make prompt rational decisions.

Question 2

What are the Code requirements regarding the composition of the board?

Answer 2

Not overly dictated except that:

• Per PROV 11 - at least half the Board, excluding the Chair, should be NEDs who the Board considers independent

Therefore each additional director or non-independent NED must be matched by at least one independent NED.

Question 3

What are the key factors in ensuring a ‘balanced board’?

Answer 3

• Diversity
• Separation of Chair and CEO roles
• Balance of executive, NED and independent directors
• Gender balance
• Appropriate mix of skills, knowledge and experience

Question 4

What are the code requirements for composition of the 3 main board committees?

Answer 4

Prov.24 - Audit Committee
- At least 3 independent NEDs (2 in smaller companies)
- Chair cannot be a member

Prov.14 - Nomination Committee
- Majority independent NEDs
- Chair allowed but cannot chair re matter of their successor

Prov.32 - Remuneration Commitee
- At least 3 independent NEDs (2 in smaller companies)
- Chair allowed (if independent on appointment) but cannot chair the committee itself

Question 5

Per research - what are the main issues with having too large of a board?

Answer 5

• UNWIELDUY - hard to manage.
• INEFFECTIVE DECISION MAKING - more viewpoints, may lead to too many comprimises
• LONGER MEETINGS- everyone needing their turn
• LACK OF CONTRIBUTION- may feel someone else will make the same contribution and so don’t themselves.

Question 6

What does the Wall Street Journal GMI Ratings suggest are the benefits of smaller boards?

Answer 6

• More oversight of management
• More likely to dismiss a poorly performing CEO
• More likely to be “decisive, cohesive and hands-on”

Question 7

What is a skills matrix?

Answer 7

Table that displays people’s proficiency in specified skills, knowledge, competencies and aptitudes.

Question 8

How can a skills matrix aid with the director appointment process?

Answer 8

A skills matrix can be used:

• assess whether if any areas skills / aptitudes of the board may be lacking, or may become lacking as a result of (a) director(s) departure
• to assess whether the board is over-reliant on the skills or aptitudes of certain individuals in any particular area
• to map existing skillset against that required to execute strategy and meet future challenges
• to draw up a profile of the ideal candidate for any board vacancies.

Question 9

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

Answer 9

PRINC. J
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.

<br></br> PRINC.L
Annual board evaluation should consider diversity.
<br></br>

Main tool 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. Can be part of oveall d&i policy for the workforce, or in addition to it.

Question 10

Provide 3 recommendations from the Women on Boards Review (2011)

Answer 10

• Companies should periodically advertise non-executive board positions to encourage greater diversity in applications.
• Executive search firms should draw up a voluntary code of conduct addressing gender diversity and best practice which covers the relevant search criteria.
• Recruitment of different populations of women (i) executives from the corporate world and (2) women outside the corporate sector.

Question 11

Provide 3 recommendations from Hampton-Alexander Review (2016)

Answer 11

• 33% target- FTSE100 - exec/direct reports combined by 2020
• 33% target - FTSE250 boards by end of 2020
• FTSE350s to increase women in the role of Chair, SID and as exec directors generally

Question 12

What are the key disclosure requirements regarding diversity?

Answer 12

CA2006
- s.414(c) - quoted companies should include breakdown in their strategic report, number of person of each sex who were directors, senior managers, employeees
- Business/charity/certain public body with over 250 employees- gender pay gap reporting (in line with EU regulations)
<br></br>

CODE (disclosures in NomCo report)
- Appointment process
- Approach to succession planning
- How both develop a diverse pipeline
- How board evaluation has/will influence composition
- Policy on D&I - how implementated and progress
<br></br>

DTR 7.8.2A
- Policy applied to re admin, management and supervisory bodies with regard to ‘age, gender or educational and professional backgrounds
- Objectives of the policy
- How policy has been implemented
- Results within the reporting period

Question 13

What are some recommendations of the Parker Review 2016?

Answer 13

• FTSE100: at least 1 by 2020 / FTSE250: at least 1 by 2024
• NomCo of all FTSE100/250 require HR/search firms to identify/present qualified candidates when vacancies
• Standard voluntary code of conduct expanded to ethnic minorities
• Greater transparency and disclosure - describe policy in AR / explain non-compliance
• FTSE250 companies to have mechanisms to identify/develop and promote - ensure pipeline of board capable candidates
• Mentor/Sponsor - readiness for internal snr management role or external role (ex. NED position)
• Encourage/support - internal board roles (e.g. subsidiaries) or BoD/Trustee roles within external organisations

Question 14

Give some examples of recommendations (throughout the years) to encourage recruitment of NEDs from under-represented backgrounds.

Answer 14

HIGGS
- NomCo tasked to consider candidates from wide range of backgrounds
- Draw from areas women more represented (ex. HR, customer care)
- Consider recruiting from the private company, charity and public sectors
- Consider bring on talented individuals from wider/diverse backgrounds to subsidiary boards (gain experience/stepping stone)
- If in international markets - consider having 1 international NED with relevant skills and experience
<br></br>

TYSON
- NomComs should look at the marzipan layer of management in PLCs for future NEDs
- Advice now to identify and recruit broad range of NEDs
- Range of backgrounds and experience can improve board effectiveness
- NED’s of UK companies tend to be domestic citizens despite globalisation of business - may be mismatch between international issues and the knowledge domestic members bring
- Optimising board membership is vital for performance/competitiveness and restoring shareholder/public trust in UK boardrooms

DYNAMIC BOARDS
- Indentify gaps
- Proportionate advert
- Advertise openly

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Question 15

What are the three main roles of the nomination committee?

Answer 15

PROV.17<br></br>
- Lead in appointment process

• Ensure plans in place for orderly succession (board and senior management positions)
• Oversee the development of a diverse pipeline for succession

Question 16

What are the membership requirements for the nomination committee?

Answer 16

• Majority independent NED
• Company chair can join but should not chair on deciding their succcesor
• Common that the company chair will be a member
• Rare anyone other than company chair / independent NEDs will serve on it
• Where company chair a member- take care for requirement to be majority independent

Question 17

What work of the NC should be described in AR?

Answer 17

• Process for appointment, succession planning and supporting a diverse pipeline
• Conduct of board evaluation (nature and extent of external evaluator’s contact with board and individual directors / outcomes of actions taken / how it has or will influence board composition)
• D&I policy - objectives and linkeage to strategy (how implemented/progress on achieving objectives)
• Gender balance of those in senior management and their direct reports

Question 18

What do the Code and FRC G.B.E say about time committments?

Answer 18

PROV. 15 (avoidance of “over-boarding”)

• Take time commitments into account when making appointments (demands on their time)
• Prior to appointment - any signif commits should be disclosed w/indication of time involved
• Additional appointments should be approved by board
• Reasons for permitting significant other appointments should be disclosed in the AR
• Full time exec directors should not take on more than 1 NED role in FTSE100/other significant appointment

FRC G.B.E -

• Directors expected to undertake will have sufficient time to meet what expected effectively
• Chair role, in particular, is demanding - multiple appointments are not advisable
• Board may considering if setting appointment limits

Question 19

What are the inspection rights in realtion to director service contracts/letters of appointment?

Answer 19

s.228 CA 2006 –

• Directors’ service contracts to be available for inspection by members at the company’s RO or SAIL.

FRC G.B.E (authority derived from CA2006)

• All terms of appointment available to inspect by ANY person at RO (normal business hours) & at AGM

Question 20

List tasks (as recommended by ICSA) that NEDs should undertake as due diligence prior to accepting an appointment to the board?

Answer 20

• Review company’s annual report/website and how it articulates governance, operational performance, strategy, risks etc.;
• Review regulatory and media announcements since last annual report;
• Meet Chair, CEO, CFO and CS and all members of the Nomination Committee;
• Talk with external advisers, stakeholders both internal and external.
• If joining to chair/chair AC or RC - meet with auditors/head of internal audit/rem consults
• Check scheduled board date - ensure they can attend- part of early due diligence

Question 21

Outline the process for appointing an NED.

Answer 21

• NC evaluate current 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.
• NC then agree process to be undertaken to identify, sift and interview suitable candidates, ensuring that a proper assessment of values and expected behaviors is built into the recruitment process. This will typically involve engaging recruitment consultants.
• NC 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, NC may invite the final candidate(s) to meet other members of the board.
• After taking soundings from other board members, 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.

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Question 22

How might the process for appointment differ when seeking to appoint a new chair or chief executive (rather than an NED)?

Answer 22

• 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 23

Why is it desireable for the board to plan for succession?

Answer 23

• PRINCIPLE J - Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management.
• “both..based on merit and objective criteria and, within this context, should promote diversity of gender, social and
• PROVISION 17 - NomCo to lead the process for appointments, ensure plans are in place for orderly succession to
• PROVISION 23 - AR should describe the work of the NC, including the process used in relation to appointments, its approach to succession planning and how both support a diverse pipeline.
• Avoids disruptions to the company’s decision-making processes or changes in policy or direction.
• Newly appointed individuals have** opportunity to learn** about their role prior to the actual succession date.
• Positions such as CEO, Chairman, CFO are all important positions and it is therefore undesirable to have these vacant for more than a short time.

Question 24

What are the three time horizons a succession plan should cover?

Answer 24

• Contingency planning (sudden/unseen departures)
• Medium-term (orderly replacement current members/snr execs, ex. retirement.)
• Long-term (rship between delivery of co strategy and objectives to skills req on board now/future)

Question 25

What is the main (only?) reporting requirement regarding succession planning?

Answer 25

PROV. 23 - AR should contain description of the work of NC, including its approach to appointments and succession planning and how these support the development of a diverse pipeline.

Question 26

What does the code / FRC Guidance say regarding tenure of the company Chair?

Answer 26

• Prov 10: independence comprimised after 9 years. Only appoints to the Chair’s appointment so tenure here does not stricly apply to the Chair
• Prov.19 : chair max 9 years - unless extension aids succession planning and diversity, especially where they were independent on appointment. Where serves longer than 9 years, explanation must be provided.
• FRC G.B.E: valid reasons chair can serve over 9 years. In particular where they have served on the board for a significant period of time or them carrying on in the role supports succession planning/diversity policy.

Question 27

How does the annual board evaluation process aid the board (NomCo) with succession planning?

-

Answer 27

• Process itself helps inform/influence succession planning
• Reviews skills/knowledge/experience and identifies gaps
• Assesses composition
• Agrees plan to fill skills gaps and improve diversity
• Looks at skills required to maximise board effectiveness
• NomCo should periodically review outcomes and propose any changes to the process as necessary
• Should share/discuss outcomes with the board and discuss with/board discuss
• Outcomes should be fed-back into board’s work on composition

Question 28

What are some methods FRC Guidance suggests for developing a diverse pipeline?

Answer 28

Overall the guidance recognises executive directors can be recruited internally but companies should also develop internal talent and capability. Some ways in which the guidance suggests a company could achieve this are:
- Initiatives to encourage development of middle management
- Facilitate engagement between NEDs and middle management
- Talent management in org can be strong motivation for some - this can provide NomCo with strong internal candidates : the NomCo may benefit to take active intests in org-wide talent management
- Succession planning should help increase diversity both in the boardroom and in the executive pipeline

Question 29

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

Answer 29

• No min/max term unless stated in AoA or their individual service contract
• Where company successful - CEO may avoid discussion of their eventual departure
• Where company not successful - may be sudden/forced departures
• Senior executives may cause a sudden vacancy, for example due to:
  - Poached by another company
  - Move on to ‘bigger and better’ things
  - Leave for personal/family reasons

Question 30

What are reasons the nomination committee might propose a refreshment of the board?

Answer 30

• Replace an NED who is not contributing effectively
• Meet diversity targets
• Bring in a director who has certain critical skills

Question 31

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

Answer 31

• PROV.18 - All direcors should be subject to annual re-election, it should be set out in the papers accompanying the resolution why their contribution is and continues to be, important to the company’s long term success.
• Per FRC- annual re-election requirement 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.
• Legally, annual re-elections mean that shareholders seeking removal of a director do not need to propose their own resolution, which would involve giving special notice.

Question 32

Which Wates Principle deals with board composition?

Answer 32

Principle 2
* Board requires an EFFECTIVE CHAIR and balance of skills/background/experience and knowledge
* Individual directors should have sufficient capacity to make a valuable contribution.
* Companies should consider having a D&I policy (based on targets set by government, industry initiatves and expert views)