Effective board practices Flashcards
What does the overall effectiveness of the board depend on?
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
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?
- Principle G = board should comprise both EDs and NEDs
- Provision 11 = at least 1/2 board excluding the chair should be INEDs
- 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
BOARD EFFECTIVENESS - BOARD STRUCTURE
Where meetings are held on a regular basis the board should establish board processes.
Name 4 things this should include.
- Standing agenda items
- Circulation of the board pack
- Tracking and circulating actions
- Drafting and commenting on draft minutes
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?
= by working with managers who prepare board papers to ensure they are well set out
- Includes an executive summary if the paper is lengthy
- Includes a recommendation if a decision by the board is required
- Succinct whilst not omitting important information
- Purpose of the paper (e.g. for discussion, for approval) is clear
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)
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
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?
The evaluation, however undertaken, should include:
1. Elements of self-assessment and peer review by the individual directors
- 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
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?
- What is the objective and focus of the evaluation?
- What is to be evaluated?
- Which, if not all directors, will be evaluated?
- What form will the evaluation take?
- What will be done with the results of the evaluation?
BOARD EFFECTIVENESS - BOARD EVALUATIONS
What are 4 benefits to the board of an effective board evaluation process?
- Improved meeting efficiency
- Improved trust and relationships at meetings = active discussions and participation
- Identifying barriers to effective decision-making
- Identifies good and weak characteristics of the board chair
BOARD EFFECTIVENESS - INTERNAL BOARD EVALUATIONS
Name 3 examples of internal board evaluation methods.
What are 4 advantages of internal board evaluations?
(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
BOARD EFFECTIVENESS - INTERNAL BOARD EVALUATIONS
What are the 5 disadvantages of internal board evaluations?
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
- Internal facilitators are less likely to be skilled evaluators and lack evaluation expertise
- 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
- Those participating may be unwilling to speak to people more junior in the organisations about their own faults or those of fellow directors
- The review process might lack credibility with external stakeholders (especially if the outcomes are all or mainly positive)
BOARD EFFECTIVENESS - BOARD EVALUATIONS
Why are external board evaluations required?
What are the 5 advantages of external board evaluations?
= can provide useful insight and comparison to how other boards operate and deal with similar issues
Advantages:
1. Evaluator likely to be more objective
- Those participating in the discussions may be more willing to speak to someone they view as independent
- The evaluators will have suitable skills and experience
- The evaluator will have appropriate time to commit to the review process
- An externally facilitated evaluation is likely to have more credibility with external stakeholders
BOARD EFFECTIVENESS - EXTERNAL BOARD EVALUATIONS
Name 3 examples of external board evaluation methods.
What are the 4 disadvantages?
(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
BOARD EFFECTIVENESS - BOARD EVALUATIONS
Are board evaluations required to be reported on?
What 4 things should be included?
Yes = Provision 23 UK CG Code = nomination committee report should explain:
- how the board evaluation has been conducted
- the nature and extent of an external evaluator’s contact with directors
- the outcomes and actions taken
- how it has or will influence board composition
Name 4 things the form of a director induction will depend on.
- Experience of appointee
- Size and operation of the company
- the regulatory framework the company operates within (if listed)
- Exec or non-exec role
DIRECTOR INDUCTIONS
Name 2 examples for each of the following 7 headings.
- The role of a director
- Rules, regulation and guidance
- Operation of the board (3)
- Business background
- Running the business
- 3rd party relationships
- Practical issues
- 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.) - Rules, regulation, and guidance
* Articles
* Overview of LRs, DTRs and UK CG Code - 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 - Business background
* Company business model, products and services, and mission
* Previous annual report and accounts - Running the business
* Key individuals = senior executives = roles, contact details
* Company’s risk appetite and tolerance - 3rd party relationships
* Key stakeholders and major shareholders (recent voting outcomes at AGMs)
* The company’s advisers (lawyers, auditors etc.) - Practical issues
* Premises layout and facilities (e.g. parking and building acces)
* Issue of any company phone number, email address
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?
= 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
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?
= 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
CODE OF CONDUCT
What does a code of conduct do?
Name 4 aspects a code of conduct for directors will typically include.
= sets out the standards of personal behaviour and conduct required of directors and senior managers
- confidentiality
- hospitality and gifts
- conflicts of interest
- induction and continuing professional development
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?
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
- Company’s internal processes to review requests from employees for clearance to deal in the company’s own shares
- 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
WHISTLEBLOWING POLICY
What is whistleblowing?
What is the aim?
Which Principle and Provision in the UK CG Code relates to whistleblowing?
= 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
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.
- Appoint a Senior Manager as whistle-blowers’ champion
- Establish internal whistle-blowing arrangements able to handle all types of disclosure from all types of person
- Tell UK-based employees about the FCA and PRA whistle-blowing services
- Present a report on whistle-blowing to the board at least annually
- Inform the FCA if it loses an Employment Tribunal whistle-blowing case
WHISTLEBLOWING POLICY
A whistle-blowing policy will be tailored to specific circumstances of the company.
Name 5 things it should cover.
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
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?
Principle O UK = boards should define its risk appetite
= the level of risk the company is willing to take in pursuit of its objectives
- risk IDENTIFication = Internal, External, Systemic, Strategic risks
- Assess the impact of the risk event occurring (= impact x probability) and AVOID risks that are too great by not doing that activity
- DEVELOP risk mitigation strategies to REDUCE either the impact or probability of the risk – or both
- Implement risk mitigation to SHIFT the risk through insurance or outsourcing
- 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)
