IRM ERM M1U6.2 Board structures Flashcards
Board of directors, or trustees definition and structure
Boards of directors or trustees oversee nearly all organizations, representing shareholders or members.
The board is the highest governing authority responsible for the organization’s governance structure.
Boards can include executive directors (full-time employees) like the CEO or CFO, and non-executive directors (not involved in day-to-day operations).
Non-executive directors roles and responsibilities
Non-executive directors provide independent oversight and constructive challenge to executive directors, aiming to offer a creative contribution to the board.
Good practice suggests having more non-executive directors than executive directors, and they should be independent of the organization and its connected businesses.
Legal responsibilities are the same for all directors, but for unquoted or non-regulated businesses, having non-executive directors is often optional, though considered valuable for their external perspective and experience.
Pros and Cons of different models for board structures
Unitary boards: Executive and non-executive directors serve together on one board, common in the UK, US, Australia, and South Africa.
Advantages: Board receives detailed information, greater involvement in organization, closer to organizational strategy.
Disadvantages: Little distinction between management and supervision externally, potential conflicts of interest and loss of independence.
Two-tier boards: Responsibility for supervision (non-executives) separated from day-to-day operations (executives), common in many continental European countries.
Advantages: Supervisory board oversees long-term strategic planning and decision making, reduction in bias in decision-making process.
Disadvantages: Larger board size, potential for executives to have more control over appointment of non-executive directors.
Three most common committees required by the UK Code
Three most common committees required by the UK Code are:
Nomination: Appointing new directors and ensuring succession plans are in place.
Remuneration: Setting executive pay to attract and retain talent while avoiding overpayment.
Audit: Overseeing financial reporting, internal controls, risk management, and handling whistle-blowing and misconduct issues.
Combinations of board committees
Some organizations appoint a separate risk management committee to advise on risk-related matters, including risk appetite, principal risks, and effectiveness of risk management.
Other combinations of board committees include Nomination and Remuneration, Audit and Risk, and Finance, Audit, and Risk, depending on the organization’s size and governance arrangements.
Additional committees may include Operations, Sustainability, Finance, and Members, with the structure evolving based on organizational changes and objectives.
Supervisory Board
Board with Non Executives Directors Only
Removing a board member
An individual is likely to be removed from a board if they violate foundational rules, for instance, if they engage in a conflict of interest transaction or strike a deal with a third party to influence board decisions.
Five specific board positions
Chair of the Board:
Highest-ranking position on the board responsible for leadership and governance.
Conducts board meetings, appoints committees, and oversees other tasks outlined by bylaws.
Collaborates with CEOs to shape organizational culture.
Vice-Chair:
Supports the chair and assumes their role during absences.
Assists in board assessments and works with CEO to implement board policies.
Handles conflicts of interest among board members.
Secretary:
Ensures compliance with regulations and maintains administrative tasks.
Records, documents, and distributes meeting minutes.
Provides notice of meetings and ensures activities align with bylaws.
Treasurer:
Manages financial reporting and prepares reports for board meetings.
Presents information on company viability and stability.
Prepares draft versions of the annual budget for board approval.
Board Members and Non-Executive Directors:
Serve on committees, attend meetings, participate in discussions, and vote on matters.
May be elected to more advanced roles after their board service.
