Chapter 7 - Test yourself Q&A's - Board Composition and Succession Planning

Question 1

If a board is comprised of a chair, 3 executive directors, one of whom is the CEO, and a non-executive 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 of the board (excluding the chair) must ne independent NED’s. 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 4 independent NED’s.

Question 2

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

Answer 2

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

1. The requirement for a balanced board
2. The requirements of the UK Code on the composition of the boatd
3. The need to service board committees
4. 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:

1. 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.
2. To assess whether the board is over-reliant on the skills or aptitudes of certain individuals in any particular area.
3. To map existing skillset against that required to execute strategy and meet future challenges.
4. 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 exe. 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:

1. A process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline.
2. How the board evaluation has or will infleunce board composition.
3. 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
4. The gender balance of those in the senior management and their direct reports.

CA2006, s414C also requires quoted companies to include in their strategic report a breakdown showing at the end of the financial year, the number of each persons who were Directors, Senior Managers and Employees of the company.

Question 7

What are the 3 main roles of the nomination commitee?

Answer 7

The 3 main roles of the nomination committee are:

1. Lead the process for appointments.
2. Ensure plans are in place for orderly succession to both the board and senior management positions.
3. Oversee the development of a diverse pipeline for succession.

Question 8

What are the membership requirements for the commitee?

Answer 8

The code provides that a majority of the members if 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 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 involves 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 the appointment process differ when seeking to appoint a new chair or CEO?

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 could cover?

Answer 11

Succession plans should consider the following different time horizons:

1. Contingency planning - for sudden and unforeseen departures.
2. Medium term planning - the orderly replacement of current board members and senior executives (e.g. retirement)
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 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 discussions surrounding 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:

1. To replace a non-executive who is not making an effective contribution
2. To meet diversity needs
3. To bring in a new director who has certain critical skills