Corporate Governance - Board Composition and Effectiveness

Question 1

What are the key Considerations relevant in determining the optimal Board Size?

Answer 1

1. No specific limits concerning board size, unless specified in articles of association or shareholders’ agreement.
2. The board should, however, be balanced.
3. The Principle K, Code requirements as to composition should be observed.
4. Capacity to service board committees will also be relevant.
5. Board must be able to convene productive, constructive discussions and achieve prompt and rational decisions - cannot be too unwieldy.

Question 2

What is meant by a balanced Board?

Answer 2

1. Board and committees should have a combination of skills, knowledge and experience (Principle K, Code).
2. FRC Guidance on Board Effectiveness indicates:
   - Capacity to make positive contributions is key to board effectiveness.
   - Diversity can positively effect decision-making quality by reducing ‘group think’.
   - Nominations Committee should be alive to ensuring the board retains a diversity of softer skills (e.g. openness, tact, character strength).
3. A balanced board will have:
   - Separation of Chair and CEO roles.
   - Gender balance.
   - Diversity balance.
   - Appropriate skills and experience.
   - Balance of EDs, NEDs and independent directors.
4. A skills matrix may help map board skills and skill gaps, and support succession planning.

Question 3

What are the threshold Board Diversity requirements?

Answer 3

1. Ethnic and gender diversity been two principal focus areas (e.g. Harper-Alexander Review; Parker Review).
2. Appointments and succession plans should be based upon merit and objective criteria, promoting gender, social, ethnic and cognitive diversity (Principle J, Code).
3. Annual board evaluations should address composition, diversity and how well board members function together (Principle L, Code).
4. Quoted companies must include a gender breakdown of directors, senior managers and employees within their strategic reports (s.414C, CA ‘06).
5. The AR&A should additional outine the Nominations Committee’s work, including as to (i) appointments process, (ii) diversity within succession planning, (iii) conduct of the board evaluation, (iv) diversity and inclusion policy objectives and linkage to strategy, and (v) gender balance amongst senior management and their direct reports (Provision 23, Code).
6. Listed companies must also disclose (i) the diversity policy applied to their administrative, supervisory and management bodies, (ii) their diversity policy objectives, (iii) how the diversity policy has been implemented and (iv) results during the reporting period (FCA DTR 7.2.8A(1).

Question 4

What is required by way of a Nominations Committee?

Answer 4

1. A Nominations Committee should be establish to lead appointments processes, ensuring orderly succession planning and oversee a diverse pipeline for succession (Provision 17, Code).
2. The Committee should comprise a majority of independent NEDs; the board Chair may not chair the Committee when considering the appointment of their successor (Provision 17, Code).
3. The AR&A should comment on the Committee’s work, including its approach to appointments, succession planning and diversity pipeline, the D&I policy and linkage to strategy, gender balance of the senior management/direct reports, and how the board evaluation was conduct (Provision 23, Code).

Question 5

What are three key procedural Considerations relevant to Board Appointments?

Answer 5

1. Open advertisements and external search consultancies should generally be used for Chair and NED appointments; external consultancies should be identified in the AR&A together with any connections to the company or its directors (Provision 20, Code).
2. Board appointments should be merit-based, applying objective criteria. The Nominations Committee should evaluate board skills, experience and knowledge, future business challenges and hence prepare a statement of responsibilities and capabilities required for a particular appointment, building a proper assessment of values and expected behaviours into the recruitment process (FRC Guidance on Board Effectiveness).
3. Prior to accepting an appointment as a NED, the prospective role-holder should consider:
   - The company’s AR&A/website, considering business model, markets, governance, performance and dynamics.
   - Review regulatory and media announcements.
   - Meeting at least the Chair, CEO, CFO and CoSec, as well as the Nominations Committee, before accepting the appointment.
   - Liaise with the external advisers, senior management, employees, customers and suppliers, if possible.
   - Observe scheduled board meetings.

Question 6

What are the key Succession Planning Considerations?

Answer 6

1. Plans should be implemented for orderly succession to both board and senior management positions, with oversight over the devleopment of a diverse succession pipeline (Provision 17, Code).
2. Succession plans should cover contingency/unforeseen planning, medium-term board/exeuctive replacement planning and long-term planning to address relationship between company strategy delivery and current/anticipated board skill requirements (FRC Guidance on Board Effectiveness).

Question 7

What is required by way of Board Re-election?

Answer 7

1. The length of service of the board as a whole together regular membership refreshment should be considered (Principle K, Code).
2. All directors should be subject to annual re-election - the election resolutions should specify why their contributions are and continue to be relevant ot the company’s succession (Provision 18, Code).