Chapter 8 - Board Effectiveness Flashcards
What are the main topics covered by FRC Guidance on Board Effectiveness?
Follows the layout/setout of UKCGC
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk, internal control
- Remuneration
According to FRC Guidance on Board Effectiveness, what are the characteristics of an effective board?
- Provides direction for management;
- Demonstrates ethical leadership, displaying (and promoting throughout the company) behaviour that is consistent with the culture and values it has defined for the organisation;
- Creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction;
- Makes well-informed and high-quality decisions based on a clear line of sight into the business;
- Creates the right framework for helping directors meet their statutory duties under the CA2006, and other relevant statutory and regulatory regimes;
- Is accountable, particularly to the providers of the company’s capital (shareholders); and
- Thinks carefully about its governance arrangements and embraces evaluation of their effectiveness.
What does Pearse Trust identify as key qualities that make a successful chair?
- Ability to chair meetings
- Understanding the business
- Ability to influence others, without dominating
- Strong and resilient personality
- Good comms skills and able to comm overall strategy to external stakeholders.
Provide actions that the Chair can undertake to improve boardroom dynamics
- Create a positive environment
- Facilitate decision-making
- Steer to consensus
- Stimulate debate- encourage all to contribute
- Promote airing/resolution of disagreements
- Set an example with respect to conflicts of interest
- Maintains control but does not dominate
- Encourage discussion and contribution
How can NEDs contribute to board effectiveness?
- Attend regularly, prepares to be an effective decision-maker
- Objective - open to other perspectives
- Does not dominate
- Recognises collective decisions
- Fosters constructive challenge
- Shares information
- Provides checks and balance
- Gives access to networks
What should all information be per Code/FRC Guidance?
Accurate, timeley, high quality
What is the CoSec’s role in the supply of information?
- Responsible, under direction of chair, for good information flows.
- Implement processes required to achieve the objective of accurate, timely and high quality information that flows all levels.
- CoSec is the facilitator, promoter and guardian of high standards.
What are the 4 main stages in the developing a board pack?
1) Identify information the board needs
2) Commission board papers
3) Writing board papers
4) Collate and distributing the board pack
What is the Company Secretary’s role regarding ‘board effectiveness’?
Facilitate discussion on future priorities, type and format of info required and coordinating planning
Responsible, under direction of chair, for good information flows - implement processes required to achieve flow of high quality, accurate and timley information at all levels..
Plan schedule - maintain provisional agenda
Coordinate prep of board pack (commission papers, ensure authors/sponsors ok regarding requirements on them, timetable and tracking)
Support those writing/presenting papers - ex. check understandable to a non-specialist
Act as guardian of house-style/format for papers
Ensure submitted on time
Coordinate collation, storage and distribution of board pack
With Chair/other board members - review whether the board papers meet their needs
What are the typica beneficial features of bespoke software packages (electronic board portals)?
- Secure tools to facilitate distribution and use of electronic agenda papers and board packs
- Archive facilities enabling directors to refer back to papers/minutes for previous meetings (especially beneficial for NEDs)
- Secure tools enabling directors to annotate & make notes on the agenda papers
- Tools to enable secure access to additional papers of interest to board members;
- Voting tools;
- Tools to facilitate the circulation and approval of minutes
- Quicker to draft, collate and distribute board packs
- Easier access/portability of documents
- Easier navigation of papers during meetings
- Secure messaging facilities
What is corporate culture?
A company’s behaviours and the ways in which it conducts its business and espouses its values.
Why is it important to set a company’s corporate culture?
A healthy corporate culture is a valuable asset which can be a source of competitive advantage and vital to the creation and protection of long-term value
What are some ways in which a company can monitor culture?
- Site visits by NEDs
- Hosting town-halls - open meetings
- Becoming a customer/mystery shopper
- Talking to external stakeholders
- Meetings with jr managers without bosses
- Review/follow up customer complaints
- Review/follow up on reports/breaches from whistleblowing-process
- Others as listed in FRC G.B.E para 23
What Watest Principle is applicable, and what does it recommend, re corporate culture?
PRINCIPLE 1
Company’s purpose and values should inform expected behaviours/practices throughout organisation
- Values should be explained/integrated into the diff functions and operations of the business
- Board, SHs & mgmt must make & maintain committment to embedding the desired culture throughout organisation
- Boards should consider how culture can be monitored effectively.
How is corporate culture related to a company’s strategy, values and purpose?
FRC G.B.E : ‘An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.
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A company’s values and behaviours (its culture) should therefore be aligned with its purpose.
Why, in particular, might pay and performance structures lead to a bad corporate culture?
Pay incentives may reward employees for behaviour that is not in the best interests of the company’s clients and customers leading to a breakdown of trust, e.g. the payment protection insurance mis-selling scandal in the UK (ex. PPI)
What is business ethics?
‘… application of ethical values to business behaviour’
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Business ethics is relevant both to the conduct of individuals and conduct of the org as a whole. It applies to any aspect of business conduct…beyond the legal requirements…therefore, about discretionary decisions and behaviour guided by values’
What are the stages for developing a Code of Ethics?
1) CoSec asked to develop
2) When drafted, consults with employees and share feedback with the board
3) Board approve
4) Pilot for around 6 months (CoSec with HR and IT)
5) CoSec and HR collect input and feedback during pilot and feed back to board - with suggested amendments to ensure employee buy-in
6) CoSec/HR to roll out the code- posters, workshops and information on company intranet
7) Once operational - CoSec and IA monitor compliance (breaches raised under whistleblowing procedure - via Audit Committee)
8) CoSec recommend any ammendments based on result of stage.7 and due to changes in societal norms
9) When revised code approved - HR/CoSec to communicate to employees
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Changes should only be made where absolutely necessary - too many/too frequent may confuse employees
How can a company go about setting its ethical values/corporate culture?
- Agree and develop ethical values - consider how purpose and strategy aligned
- Develop/adopt a company Code of Conduct/Ethics - setting out values and behavioural expectations
- Ensure values and a code are communicated to the board, management and employees and taken into account when developing operational policies and procedures - ensure message is clear to senior management
- Publicise / implement training to ensure values & code embedded within org values & behaviours
- Ensure values integrated into all functions/operations of the company
- Ensure organisation performance management/rewards incentivise behaviour in line with the values and the code
- Ensure culture of openness and accountability (open environment) where employees feel they can raise unethical practices
- Ensure code of ethics reviewed from time to time taking into account changes in societal norms.
-Set tone from the top - transparency and integrity of the board and senior management
What does a standard / general Code of Ethics typically contain?
- Company values
- Company ethical principles
- Company ethical values (stakeholder groups)
- Implementation (statement of responsibility re compliance, means to obtain advice and any applicable training required/available)
What can the company do to measure that its Code of Ethics is effective?
- Staff surveys
- Report of customer complaints
- Reports/feedback re whistle-blowing procedure/pollicy and how effectively issues addressed via whilstleblowing helpine.
- Have this as a topic when engaging other stakeholders such as customers
- Having the Code of Ethics as a standing item for Board meetings
Provide ways in which the company secretary can assist the board in maintaining an ethical culture
BOARD
- Suggesting that discussions about corporate culture are (standing items) on the board’s agenda
- 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
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STAKEHOLDERS
- Suggesting culture indicators selected based on the expectations of the org’s stakeholders;
- Assisting in developing the reporting to stakeholders on the organisation’s culture
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INDICATORS & INFORMATION
- Developing a dashboard for the culture indicators that should be reviewed from time to time by the board
- Ensure information drawn from wide range of sources (to support/monitor perception of performance for selected indicators)
Assist establishing an ethics management management programme aligning with organisation’s mission, vision and values.
What is the difference between ethical principles & ethical values?
- Ethical principles – guidance and direction for behaviour, relate to issues such as fairness, equality and justice etc, are universal and set boundaries to be respected
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- Ethical values – shape context in which ethical principles are implemented, guide the board and management’s choices, frame the organisation’s behaviour norms and incorporate into the organisational culture.
How might the company secretary be involved in the procedures to enable the directors to obtain independent professional advice?
- CoSec should propose board adopts a procedure
- This could be done by way of a board resolution or as part of a board procedures manual.
- If procedure sets certain conditions or imposes any financial limits, some sort of pre-approval mechanism will be required.
- The secretary could be the person whose approval is required.
- However, this could compromise the secretary’s impartiality, particularly if the conditions require difficult judgement calls to be made.
- In these circumstances, it makes more sense for the chair or the senior independent director to be the person who makes the decision.
- Even if the secretary is not personally involved in the approval process, it may be sensible for the initial application by a director to be made through the secretary, who then forwards it on to the appropriate person for approval.
- Someone will need to record the fact that an application has been made and whether the necessary approval has been given (or refused).
- This information will also need to be reported to the board, particularly where approval has been given and advice has been obtained.
- Somebody also needs to authorise the payment of any invoices to the independent advisers. These task will typically fall to the CoSec.
What does ICSA’s Model Board resolution on independent professional advice set out?
- Directors given right to consult prof advisers of company and, if necessary, seek indepedent advice at company’s expense
- Only where furthering exercise of their duties as directors of the company
- Must give prior notice of intent to seek - who / brief summary of subject matter
- CoSec to provide written acknowledgement of receipt - whether fees payable by company or not
- Director must obtain prior approval - where fees expected to exceed stated amount
- Any advice obtained must be made available to the board if it so requests
Generally, under the Code - what should the annual performance evaluation cover?
Princ L:
* Board composition, diversity,how effectively members work together to achieve objectives
* Indiv: whether each individual director (still) contributes effectively.<br></br>
Prov.21
* Should extend not only to performance of boards and directors but also board committess and the chair.
What does the FRC Guidance on Board effectiveness suggest regarding the selection of an external evaluator?
- Different providers apply different methods - costs vary greatly depending on this
- Nature/extent of external evaluator’s contact usually be defining factors in quality
- ex. questionnaire-based evaluations unlikely to ‘reach dynamic’ of the boardroom)
- Should be mindful of existing commercial relationships/potential conflicts of interest - select one that can provide independent judgement
- Agree objectives/scope, expected quality, value/longevity of service & communicate to board
- Ensure full cooperation with evaluator - full access to papers/info- observation of meetings/meet with directors individually
- Ensure evaluation not approached as merely a compliance exercise
What are some further aspects that can be included in an evaluation as per FRC Guidance on Board Effectiveness?
- Mix of skills, experience and knowledge in context of company’s challenges
- Clarity of/leadership given to - purpose, direction and values of the company
- Succession and development plans
- How board works as unit - tone set by chair and CEO
- Key board relationships
- Effectiveness of individual directors
- Clarity of SID role
- Effectiveness of board committees & how they are connected with the main board
- Quality of information, papers and presentations, discussions around individual proposals
- Process chair uses to ensure sufficient debate re major/contentious issues
- Effectiveness of CoSec/secretariat
- Clarity of decision-making process
- Process(es) for identifying and reviewing risks
- How board communicates with / listens & responds to shareholders and other stakeholders
When are evaluations most valuable, as per FRC Guidance on Board Effectiveness?
- Recommendations are constructive, meaningful, forward-looking
- Clear set of recommendations and actions - time period for review of progress against agreed outcomes
- Includes views beyond boardroom
- Includes peer reviews of directors/chair and feedback on each director
- Good practice in other companies shared
- Interaction between directors and between CEO and chair observed by evaluation
- Robust analysis of information provided to board
- Feedback to each individual board member provided
- Board challenged on: composition, diversity, skills gaps, refreshment & succession
How can the Company Secretary (CoSec) assist in the annual evaluation process?
- Help chair select external facilitator
- Where internal - possibly will be involved in designing and performing the evaluation
- Either way, will usually involved in analysis of evaluation results and framing any recommendations presented
- Once any recommendations have been proposed to the board, Company Sec will produce a matrix of recommendations/actions taken to ensure monitoring is undertaken
What information should be disclosed in AR & accounts regarding the annual performance evaluation?
PROV.23 - Annual Report should describe the work of the nomination committee including:
- How board evaluation conducted
- Nature and extent of external facilitators’ contact with board/individual directors
- Outcomes/actions taken
- How evaluation has or will influence board composition <br></br>
A company that does not comply will need to include an explanation in CG report.
Under UKCGC - how often should a company have an externally facilitated board evaluation?
PROV.21
* Since 2021- FTSE 350 companies must have an externally-facilitated board evaluation at least every three years.
* Code requires that chairs of other companies to annually consider having a externally facilitated board evaluation now or at some point in the future.
As per FRC Guidance, what four characteristics should any board evaluation have (internal or external)?
- Objective and rigorous process
- Bespoke in formulation and delivery
- Chair has overall responsibility and should select appropriate approach, involving the SID if required
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NEDs, led by SID, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors. <br></br>
In certain circumstances the SID may lead the whole evaluation process, for example where the CEO is acting as the company Chair.
What might the induction of a new director consist of?
FRC G.B.E
* Chair should ensure all new directors recieve a full, formal and tailored induction on joining the board.
* CoSec under direction of chair should facilitate induction, arrange training and assist with professional development as required.<br></br>
para 107 - induction should be bespoke in its formluation and delivery
para. 110 - information gained from board evaluation can be fed back into induction (and other processes)
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May include:
- Site visits
- Product presentations
- Meetings with senior management and staff
- Meetings withe external advisers
- Meetings with major shareholders, if they , UKCGC states as part of the induction process, directors should be offered the opportunity to meet with the company’s major shareholders.
What should the aims of an induction process be?
Induction programmes should ultimately seek to enhance the effectiveness of new directors.
According to the ICSA Guidance on Induction of Directors, they should aim to:
- Build an understanding of the nature of the company, its business and the markets in which it operates
- Build a link with the company’s people
- Build an understanding of the company’s main relationships
- Ensure an understanding of the role of a director and the framework within which the board operates.
How might a company benefit from having its executive directors serve as NEDs on other boards?
Some see serving as an NED as an essential part of executive director professional development<br></br>
- By becoming NED at a non-competitor - 1st hand experience of the exec/non-exec divide
- Should aid understanding of NED concerns/make executive directors more likely to cater for NEDs
- Gain experience of how other boards operate
- Be able to compare different practices and recommend the adoption of those that appear to be better
- Experience first-hand what it is like to be a NED and what NEDs expect and require in order to perform effectively.
- Danger that executives will simply moderate their behaviour to what they expect of an NED - thus will not offer suitably robust challenge
Name some factors that can limit effective decision-making?
- Poor quality papers
- Dominant personality(ies) - ineffective challenge
- Lack of time for debate
- Undue focus on short-time horizons
- Lack of openness by management, including reluctance to involve NEDs (board ‘rubber stamps’ rather than discuss)
- Insufficient diversity- GROUPTHINK
- Conflicts of interest
- Emotional attachments
- Compliance mindset: failure to treat risk as part of the decision-making process
- Failure to listen to/act on concerns raise (anywhere)
- Inappropriate reliance on previous experience & decisions (insufficient knowledge/unable to test underlying assumptions)
Give 5 characteristics of ‘‘painful meetings’’ and 5 characteristics of ‘‘successful meetings”
PAINFUL
- Chair is insensitive
- No agenda
- Lack of focus, forays into side issues
- Rigid adherance to agenda and/or timetable
- Long monologues
SUCCESSFUL
- Connections are made
- Issues and tasks are clearly defined
- Productive problem-solving climate
- Flexible agenda
- Energy is generated
CoSec role in board meeting
- attendance
- quorum
- record
- advise on governance matters (all)
- advise on procedural matters (chair)
What does the Code/FRC Guidance state regarding director professional development ?
- Frequent update of skills etc
- CoSec to facilitate/organise under direction of the Chair
- Training needs are likely to show/good to look at when analysing results of the board evaluation process<br></br>
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Prov.22 - chair should act on results of evaluation/directors should engage with the process and take appropriate action to any ideas highlighted for development
FRC G.B.E - NEDs should devote time …continue to make positive contribution and generate respect of the other directors - NEDs need to understand main area’s of the company’s business as well as its organisational culture
What common actions will the company secretary take regarding induction, training and professional development?
- Organise adhoc sessions - where important issues for update/training prior to board meetings
- Use of away-days - adhoc and opportunity for shorter training sessions
- Make presentations / invite external advisers/experts to deliver sessions
- More intense in-house/external courses where required
- Consider online/webinars/podcasts as potential training opportunities
What should the company secretary do during the induction of a new appointee?
- Consult with them prior to beginning the induction programme
- Prioritise/schedule matters over reasonable period so as not to overwhelm the new director
- Vary delivery
- Organising site visits/meetings
- Plan induction with reference to training/development programme - one should transition smoothly into the other
- Review with the director mid-way and at end of the process
What are the differences between business ethics, corporate reponsibility and sustainability?
- Business ethics - integrating company’s ethical values into business behaviours and functions. Essentially, the organisation doing ‘the right thing’.
- CR = doing good deeds, having a positive effect on communities and environment and lessening negative impacts
- Sustainability = the long term.
