KCB revision - SLIDE DECK 3 - Role of the board Flashcards
What is the function of the board?
According to the UK Corporate Governance Code, Principal A, the function of the board is to
‘…promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.’
What is the role of the board?
NB - You’ll have access to this online, page 7 of the UK Code.
- Establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned (Principle B)
- Act with integrity, lead by example and promote the desired culture (Principle B)
- Ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them (Principle C)
- Establish a framework of prudent and effective controls, which enable risk to be assessed and managed (Principle C)
- Ensure effective engagement with, and encourage participation from, shareholders and other stakeholders (Principle D)
- Ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success (Principle E)
The Schedule of Matters Reserved to the Board indicates the items which are not suitable for delegation to a committee of the Board because of Companies Act requirements or the recommendations of the UK Corporate Governance Code.
What areas does the schedule of matters include?
NB - If stuck, you can see this online not in the UK Code but on the FRC Governance handbook as their own companies schedule of matters reserved.
- STRATEGY AND MANAGEMENT
Responsibility for overall leadership of company
Approval of overall strategy and strategic objectives
Approval of annual operating capital and capital expenditure budgets
Oversight of operations
Compliance with legal and regulatory requirements
Management/operational performance review
Extension of the group’s activities into new business or geographic areas.
Any decision to cease to operate all or any material part of the group’s business - STRUCTURE AND CAPITAL
Change in corporate or capital structure
Major changes to the group’s corporate structure, including, but not limited to acquisitions and disposals of shares which are material relative to the size of the group in question
Any changes to the company’s listing or its status as a plc. - FINANCIAL REPORTING AND CONTROLS
Approving the annual report and accounts
Declaring an interim dividend and recommending a final dividend
Approval of any significant changes in accounting policies or practices. - CONTRACTS
Approval of major contracts and investments - INTERNAL CONTROLS
Approving the risk appetite of the company - COMMUNICATION
Approval of formal communications with shareholders
Approval of resolutions and corresponding documentation to be put forward to shareholders at a general meeting
Approval of all circulars, prospectuses and listing particulars - BOARD MEMBERSHIP
Changes to the structure, size and composition of the board, following recommendations from the nomination committee.
Ensuring adequate succession planning for the board and senior management so as to maintain an appropriate balance of skills and experience within the company and on the board.
Appointment, reappointment or removal of the external auditor to be put to shareholders for approval in general meeting, following the recommendation of the audit committee. - RENUMERATION
Determining the remuneration policy for the directors, company secretary and other senior executives. - DELEGATION OF AUTHORITY
Approval of the delegated levels of authority, including the Chief Executive’s authority limits
Establishing board committees and approving their terms of reference - CORPORATE GOVERNANCE
Undertaking a formal and rigorous annual review of its own performance, that of its committees and individual directors, and the division of responsibilities.
Review of the group’s overall corporate governance arrangements
11.POLICIES
Approval of policies, including:
Code of conduct
Share dealing code
Bribery prevention policy
Whistleblowing policy
Health and safety policy
Environment and sustainability policy
Human resources policy
Communications policy [including procedures for the release of price-sensitive information]
Corporate social responsibility policy
Charitable donations policy
Why is having a schedule of matters reserved for the board important?
The FRC guidance on board effectiveness, paragraph 28 states….
Ensuring there is a formal schedule of matters reserved for its decision will assist the board’s PLANNING and
provide CLARITY to all over where responsibility for decision-making lies.
What is the typical composition of a board of a listed company?
- Chair
- Chief Executive Officer
- Exec Directors
- Non Exec Directors
- Senior Independent Director
What guidance does the UK Code provide in terms of board composition?
The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision- making.’
Principle G, UKCG Code
At least half the board, excluding the chair, should be non-executives whom the board considers to be independent.’
Provision 11, UKCG Code
What are the requirements for reporting on board composition?
CA2006 requires the names of those who have served as directors during the financial year to be disclosed in the directors’ report.
UKCG Code requires the annual report:
To identify the non-executive directors that the board considers to be independent together with any necessary explanations (Provision 10)
To set out the number of meetings of the board and its committees and individual attendance by directors (Provision 14)
Responsibilities of the chair, chief executive, senior independent director, board and committees to be set out in writing and made publicly available (Provision 14)
The board to set out in the papers accompanying any shareholder resolution to elect a director ‘the specific reasons why their contribution is, and continues to be, important to the company’s long-term sustainable success’ (Provision 18)
Summarise the the role of the chair of the board?
The chair LEADS the board and is responsible for its OVERALL EFFECTIVENESS in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair FACILITATES CONSTRUCTIVE BOARD RELATIONS and the EFFECTIVE CONTRIBUTION of all non-executive directors, and ensures that directors receive accurate, timely and clear information.’
Principle F, UKCG Code
Detail the role of the chair and advise where this information can be found.
The FRC Guidance on Board Effectiveness details the role of the chair stating their role should include …
- Setting a board agenda primarily focused on strategy, performance, value creation, culture, stakeholders and accountability, and ensuring that issues relevant to these areas are reserved for board decision;
- shaping the culture in the boardroom;
- encouraging all board members to engage in board and committee meetings by drawing on their skills, experience and knowledge;
- fostering relationships based on trust, mutual respect and open communication – both in and outside the boardroom – between non-executive directors and the executive team;
- developing a productive working relationship with the chief executive, providing support and advice, while respecting executive responsibility;
- providing guidance and mentoring to new directors as appropriate;
- leading the annual board evaluation, with support from the senior independent director as appropriate, and acting on the results;
- considering having regular externally facilitated board evaluations.
What provisions does the code state about chair independence?
The Chair should be independent on appointment.’
Provision 9, UKCG Code
This implies that, thereafter, the chair need not be independent. It is argued that the time commitments of a non-executive chair and the fees they are paid automatically compromise their independence
Companies sometimes appoint an executive chair who will never satisfy the independence criteria in Code Provision 10.
Detail the role of the CEO and advise where this information can be found.
The Code does not define the role of the chief executive officer (CEO). However, the FRC Guidance on Board
Effectiveness (paras. 70 to 73) suggests that the CEO, as the most senior executive director on the board, should be responsible for:
- proposing strategy to the board, and for delivering the strategy as agreed;
- setting an example to the company’s employees, and communicating to them the expectations of the board in
relation to the company’s culture, values and behaviours; - supporting the chair to make certain that appropriate standards of governance permeate through all parts of the
organisation; - making certain that the board is made aware, when appropriate, of the views of employees on issues of relevance to the business; and
- ensuring the board knows the executive directors’ views on business issues in order to improve the standard of
discussion in the boardroom and, prior to final decision on an issue, explain in a balanced way any divergence of
view in the executive team
What does the code provide around the separation of the Chair and CEO role?
There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business’.
Principle G, UKCG Code
‘The roles of chair and chief executive should not be exercised by the same individual’.
‘A chief executive should not become chair of the same company.’
Provision 9, UKCG Code
When an individual holds the positions of both chair and CEO, they are likely to be able to exercise a dominant influence on the board. They are effectively allowed to ‘mark their own homework’, set their own targets and influence board appointments, thus reinforcing their own position. Over time, they may become less and less likely to listen to advice from board colleagues and the board may eventually cease to function as an effective body.
What is the role of other executive directors on the board?
All directors on a unitary board have same duties
Not CEOs exec team when engaged in board business
Requires understanding of Directors responsibilities
CFO has particular responsibilities for providing board with high quality financial information
FRC Guidance on board effectiveness (Para 69)
Summarise the purpose of the role of Non Executive Directors on the board
Non - Executive directors play a central role in the corporate governance process. They are expected to bring outside experience and independent judgement to bear on the major matters and decision by the board and to performance certain governance function through their participation in board committee’s.
Detail the role of the NED and advise where this information can be found.
- Provide constructive challenge, strategic guidance, offer specialist advice and hold management to account (Principle H UK CG Code)
- Scrutinise and hold to account the performance of management and individual executive directors against agreed performance objectives (Provision 13 UK CG Code)
- Have a prime role in appointing and removing executive directors (Code Provision 13 UK CG Code)
- Through their participation in the nomination committee, lead the process for board appointments, succession planning and ensuring the development of a diverse pipeline (Code Principle J and Provision 17 UK CG Code);
- Through their participation in the audit committee, satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible (Code Principles M and N UK CG Code)
- Through their participation in the remuneration committee, determine appropriate levels of remuneration for the chair, executive directors and senior management (Code Principle Q and Provision 13) UK CG Code.
