Effective board practices

Question 1

What does the overall effectiveness of the board depend on?

Answer 1

Depends on a wide range of factors - company or industry specific - that cover several broad areas

e.g. board composition, governance, monitoring, processes and evaluations

Question 2

BOARD EFFECTIVENESS - BOARD STRUCTURE

What are the 3 UK CG Code board composition requirements?

How often should board meetings be held?

How should board meetings be conducted?

Answer 2

1. Principle G = board should comprise both EDs and NEDs
2. Provision 11 = at least 1/2 board excluding the chair should be INEDs
3. Provisions 17/24/32 = a majority of board committee members should be INEDs

Each board is free to decide

MA 19 (plc) and 16 (ltd) = as directors see fit

Question 3

BOARD EFFECTIVENESS - BOARD STRUCTURE

Where meetings are held on a regular basis the board should establish board processes.

Name 4 things this should include.

Answer 3

1. Standing agenda items
2. Circulation of the board pack
3. Tracking and circulating actions
4. Drafting and commenting on draft minutes

Question 4

BOARD EFFECTIVENESS - BOARD PROCESSES AND INTERACTIONS

How can cosec help make board packs more effective?

What 4 things ensure that board papers are well set out?

Answer 4

= by working with managers who prepare board papers to ensure they are well set out

1. Includes an executive summary if the paper is lengthy
2. Includes a recommendation if a decision by the board is required
3. Succinct whilst not omitting important information
4. Purpose of the paper (e.g. for discussion, for approval) is clear

Question 5

BOARD EFFECTIVENESS - BOARD EVALUATIONS

Are board evaluations a statutory requirement?

What does Principle L UK CG Code say? (What 3 things should be evaluated?)

What does Provision 21 of the UK CG Code say? (2)

Answer 5

No, but are good practice = directors need to know how well they are performing, both individually and collectively, if they are to improve their own performance

Principle L = Annual evaluation of the board should consider its composition, diversity, and how effectively members work together to achieve objectives

Provision 21 = (1) should be a formal and rigorous annual evaluation of performance of board, committees, chair and individual directors

(2) FTSE350 board reviews should be conducted by an external evaluator at least once every 3 years

Question 6

BOARD EFFECTIVENESS - BOARD EVALUATIONS

What 2 things should the board evaluation include?

Who should board evaluations be overseen by?

Who should evaluate the performance of the company chair?

Should evaluations follow the same format and cover the same topics each year?

Answer 6

The evaluation, however undertaken, should include:
1. Elements of self-assessment and peer review by the individual directors

2. Qualitative and quantitative measures

The chair facilitated by the Cosec

The NEDs led by the senior independent director, considering the views of the EDs

No

Question 7

BOARD EFFECTIVENESS - BOARD EVALUATIONS

The fundamental key to an evaluation exercise is for the board to understand what the purpose of the evaluation is expected to achieve.

What are 5 questions the board should ask itself when considering an evaluation exercise?

Answer 7

1. What is the objective and focus of the evaluation?
2. What is to be evaluated?
3. Which, if not all directors, will be evaluated?
4. What form will the evaluation take?
5. What will be done with the results of the evaluation?

Question 8

BOARD EFFECTIVENESS - BOARD EVALUATIONS

What are 4 benefits to the board of an effective board evaluation process?

Answer 8

1. Improved meeting efficiency
2. Improved trust and relationships at meetings = active discussions and participation
3. Identifying barriers to effective decision-making
4. Identifies good and weak characteristics of the board chair

Question 9

BOARD EFFECTIVENESS - INTERNAL BOARD EVALUATIONS

Name 3 examples of internal board evaluation methods.

What are 4 advantages of internal board evaluations?

Answer 9

(1) Questionnaires created in-house, (2) one-to-one interviews, and (3) group discussions

Advantages;
A. Cheaper and quicker not to have bring somone up to speed

B. Those undertaking the evaluation will be familiar with the company and industry

C. Those participating in the discussions may be more willing to speak to someone they know

D. Issues may well already be known to the evaluator = saves time establishing the problems instead focus on finding solutions

Question 10

BOARD EFFECTIVENESS - INTERNAL BOARD EVALUATIONS

What are the 5 disadvantages of internal board evaluations?

Answer 10

Disadvantages:
1. An internal evaluator is likely to have pre-conceived ideas and lack of objectivity = may be influenced by or have a vested interest in the outcome

2. Internal facilitators are less likely to be skilled evaluators and lack evaluation expertise
3. A well-run evaluation is a time-consuming process and an internal evaluator may not be able to commit the appropriate time to the task
4. Those participating may be unwilling to speak to people more junior in the organisations about their own faults or those of fellow directors
5. The review process might lack credibility with external stakeholders (especially if the outcomes are all or mainly positive)

Question 11

BOARD EFFECTIVENESS - BOARD EVALUATIONS

Why are external board evaluations required?

What are the 5 advantages of external board evaluations?

Answer 11

= can provide useful insight and comparison to how other boards operate and deal with similar issues

Advantages:
1. Evaluator likely to be more objective

2. Those participating in the discussions may be more willing to speak to someone they view as independent
3. The evaluators will have suitable skills and experience
4. The evaluator will have appropriate time to commit to the review process
5. An externally facilitated evaluation is likely to have more credibility with external stakeholders

Question 12

BOARD EFFECTIVENESS - EXTERNAL BOARD EVALUATIONS

Name 3 examples of external board evaluation methods.

What are the 4 disadvantages?

Answer 12

(1) Bespoke questionnaires, (2) observation of board/committee meetings, and (3) review of board pack/meeting material

Disadvantages:
A. Evaluators will be less familiar with the company and industry

B. More difficult for an external evaluator to identify key issues and might suggest solutions that are not appropriate or relevant to the company’s situation

C. Those participating in the discussions may be unwilling to speak to people they do not know about their own faults or those of fellow directors

D. Expensive

Question 13

BOARD EFFECTIVENESS - BOARD EVALUATIONS

Are board evaluations required to be reported on?

What 4 things should be included?

Answer 13

Yes = Provision 23 UK CG Code = nomination committee report should explain:

1. how the board evaluation has been conducted
2. the nature and extent of an external evaluator’s contact with directors
3. the outcomes and actions taken
4. how it has or will influence board composition

Question 14

Name 4 things the form of a director induction will depend on.

Answer 14

1. Experience of appointee
2. Size and operation of the company
3. the regulatory framework the company operates within (if listed)
4. Exec or non-exec role

Question 15

DIRECTOR INDUCTIONS

Name 2 examples for each of the following 7 headings.

1. The role of a director
2. Rules, regulation and guidance
3. Operation of the board (3)
4. Business background
5. Running the business
6. 3rd party relationships
7. Practical issues

Answer 15

1. The role of a director
   * Introduction to role, rights and duties (D&O Insurance)
   * Policies relevant to the director (independent professional advice, reporting gifts and hospitality etc.)
2. Rules, regulation, and guidance
   * Articles
   * Overview of LRs, DTRs and UK CG Code
3. Operation of the board
   * Composition = board and committee membership, matters reserved for the board, ToR
   * Meetings = copies of last years minutes and dates for future meetings
   * Procedures = evaluation processes
4. Business background
   * Company business model, products and services, and mission
   * Previous annual report and accounts
5. Running the business
   * Key individuals = senior executives = roles, contact details
   * Company’s risk appetite and tolerance
6. 3rd party relationships
   * Key stakeholders and major shareholders (recent voting outcomes at AGMs)
   * The company’s advisers (lawyers, auditors etc.)
7. Practical issues
   * Premises layout and facilities (e.g. parking and building acces)
   * Issue of any company phone number, email address

Question 16

Why is continuous professional development (CPD) important?

How will CPD be delivered? (3)

Is it better for directors to receive training all in one session or spread out during the year?

Who will have responsibility for compliance and governance briefings?

Who will have responsibility for company and industry briefings?

What external resource should directors be encouraged to make use of?

Answer 16

= CPD helps directors keep their knowledge and skills up to date and fill any knowledge gaps particularly where new legislation, regulation, or technology are introduced

In various formats:
1. written or verbal board briefing
2. formal briefing notes
3. internally and externally delivered board presentations

It is better to drip feed the updates rather than overload

The cosec

The appropriate executive director or senior managers

Directors should attend relevant seminars/webinars

Question 17

Why does the UK CG Code recommend that boards formally adopt written policies covering key governance matters?

What should the board do to avoid potential conflicts of interest?

What does FRC Guidance on Board Effectiveness say regarding this?

What did the CGI publish to help?

What does Provision 14 of the UK CG Code say?

Answer 17

= to ensure a clear division of responsibilities exists between the board, committees and executive team, and the CEO and chair

The board should have a schedule of matters reserved for the board

Para 28 = provide clarity to all over where responsibility for decision-making lies

CGI published “Guidance on Matters Reserved for the Board” = includes a draft schedule of matters that companies may put in their own schedule

Provision 14 = responsibilities of the chair, CEO, SID, board and committees should be clear, set out in writing, agreed by the board, and made publicly available

Question 18

CODE OF CONDUCT

What does a code of conduct do?

Name 4 aspects a code of conduct for directors will typically include.

Answer 18

= sets out the standards of personal behaviour and conduct required of directors and senior managers

1. confidentiality
2. hospitality and gifts
3. conflicts of interest
4. induction and continuing professional development

Question 19

SHARE DEALING POLICY

Must listed companies have a share dealing policy? Why?

What is the specimen dealing code?

What are the 2 sections of this code?

Answer 19

No obligation under MAR because the responsibilities fall largely on PDMRs

many market participants agreed it would be beneficial for a single, market-led dealing code to exist = ICSA drew up a model code

1. Company’s internal processes to review requests from employees for clearance to deal in the company’s own shares
2. Guidance to the company’s PDMRs covering clearance to deal and the need to formally notify the company and the FCA on details of the trade

Question 20

WHISTLEBLOWING POLICY

What is whistleblowing?

What is the aim?

Which Principle and Provision in the UK CG Code relates to whistleblowing?

Answer 20

= reporting by employees of suspected illicit behaviour

Aim = to encourage employees who have serious concerns to come forward and voice those concerns

Principle E = the workforce should be able to raise any matters of concern

Provision 6 = there should be a means for the workforce to raise concerns in confidence and – if they wish – anonymously

Provision 6 = board should routinely review and ensure that proportional arrangements are in place for investigation and follow-up

Question 21

WHISTLEBLOWING POLICY

For companies in the financial services industry and regulated by the FCA, the Senior Managers and Certification Regime (SMCR) requires companies to take 7 steps, which would usually be contained in a whistle-blowing policy.

Name 5 of the 7 steps.

Answer 21

1. Appoint a Senior Manager as whistle-blowers’ champion
2. Establish internal whistle-blowing arrangements able to handle all types of disclosure from all types of person
3. Tell UK-based employees about the FCA and PRA whistle-blowing services
4. Present a report on whistle-blowing to the board at least annually
5. Inform the FCA if it loses an Employment Tribunal whistle-blowing case

Question 22

WHISTLEBLOWING POLICY

A whistle-blowing policy will be tailored to specific circumstances of the company.

Name 5 things it should cover.

Answer 22

Should cover the following areas:
A. that the company takes malpractice seriously

B. that employees have the option to raise concerns outside of line management

C. that employees are able to access confidential advice from an independent body

D. that the organisation will respect the confidentiality of a member of staff raising a concern and that concerns can be raised anonymously

E. that whistle-blowers are protected under legislation and may not suffer any harm as a result of raising a concern

Question 23

RISK MANAGEMENT POLICY

What does Principle O of the UK CG Code say?

What are the 5 elements a risk management policy should contain?

What are the 7 steps in the risk management cycle?

Answer 23

Principle O UK = boards should define its risk appetite
= the level of risk the company is willing to take in pursuit of its objectives

1. risk IDENTIFication = Internal, External, Systemic, Strategic risks
2. Assess the impact of the risk event occurring (= impact x probability) and AVOID risks that are too great by not doing that activity
3. DEVELOP risk mitigation strategies to REDUCE either the impact or probability of the risk – or both
4. Implement risk mitigation to SHIFT the risk through insurance or outsourcing
5. Review effect of mitigation = the resulting risks are ACCEPTable (for now) but the end review is also the start of the next cycle to IMPROVE

(Identify, Avoid, Develop, Reduce, Shift, Accept, Improve)