KCB revision - SLIDE DECK 6 - Board Composition Flashcards
Board composition is dependant on the size of the company, the complexity of the business and the industry or sector in which it operates. Unless a company’s articles of association specify a minimum or maximum number of directors, the size is left to the board.
What factors should be considered during board composition?
- The requirements for a BALANCED board
- The requirements of the UK CODE on the composition of the board (Principle K)
- The need to SERVICE board committees
- The ABILITY of the board to hold productive, constructive discussions and make prompt rational decisions
- The COMPLEXITY and size of the company
BUSAC
What does the guidance state about the requirements for a balanced board?
NB - You’ll be able to access this but need to know roughly where for ease.
‘The board and its committees should have a combination of skills, experience and knowledge.’
Principle K, UKCG Code
‘…able to make a positive contribution is one of the key elements of board effectiveness. Directors will be more likely to make good decisions and maximise the opportunities for the company’s success if the right skillsets and a breadth of perspectives are present in the boardroom.’ (Para 87)
‘Diversity in the boardroom can have a positive effect on the quality of decision-making by reducing the risk of ‘group think’. With input from shareholders, boards need to decide which aspects of diversity are important in the context of the business and its needs.’ (Para 88)
‘…a diversity of personal attributes is equally important. It suggests that the nomination committee should seek to ensure that the board is comprised of individuals who display a range of softer skills, such as sources of intellect, critical assessment and judgement; courage; openness; honesty; tact; ability to listen; ability to forge relationships; ability to develop trust; and strength of character.’ (Para 91)
FRC Guidance on Board Effectiveness
Summary what a balanced board will include.
A balanced board will include:
- Separate roles of chair and CEO
- An appropriate balance of executive, non-executive and independent directors
- Appropriate skills, experience and knowledge
- Gender balance
- Diversity
What areas are covered in board composition when diversity is referenced?
- Gender diversity
- Ethnic diversity
What did the ‘women on boards 2011’ report say on gender diversity in boards?
FTSE 350 companies should publicly adopt targets for the percentage of women on their boards and report on their compliance with those targets.
FTSE 100 companies should be aiming for a minimum of 25% female board representation by 2015.
Also recommended that:
Companies should periodically advertise non-executive board positions to encourage greater diversity in applications.
Executive search firms should draw up a voluntary code of conduct addressing gender diversity and best practice which covers the relevant search criteria.
Recognition and development of two different populations of women who are well-qualified to be appointed to UK boards needs to be considered:
(i) executives from within the corporate sector, for whom there are many different training and mentoring opportunities; and
(ii) women from outside the corporate mainstream, including entrepreneurs, academics, civil servants and senior women with professional service backgrounds
What were the 3 main recommendations from the Hampton Alexander review of 2016?
- a 33% target for women on FTSE 350 boards by the end of 2020
- a 33% target for women on FTSE 100 executive committees and direct reports to the executive committee on a combined basis by 2020
- that FTSE 350 companies increase the number of women in the roles of chair, senior independent director and into executive director positions on their boards.
Following the publication of the Hampton Alexander review, what were the results of this come 2020?
2020 Report showed
33% of all FTSE 100 companies’ board members are now women (increased from 12.5% in 2011)
29.6% of FTSE 250 board positions are held by women
What were the main recommendations following the Parker review on ethnic diversity on boards in 2016?
Recommended
- Each FTSE 100 board should have at least one director of colour by 2021; and each FTSE 250 board should have at least one director of colour by 2024
- Nomination committees of all FTSE 100 and FTSE 250 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered for board appointment when vacancies occur
- The Standard Voluntary Code of Conduct for executive search firms should be extended to apply to the recruitment of minority ethnic candidates as board directors of FTSE 100 and FTSE 250 companies
- Greater transparency and disclosure on ethnic diversity
Also recommended:
FTSE 100 and FTSE 250 companies should develop mechanisms to identify, develop and promote people of colour within their organisations in order to ensure over time that there is a pipeline of board capable candidates
Existing board directors of FTSE 100 and FTSE 250 companies should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally, or non-executive board positions externally
Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on board roles internally (e.g., subsidiaries) where appropriate, as well as board and trustee roles with external organisations (e.g., educational trusts, charities and other not-for-profit roles)
Following the publication of the Parker report, what were the results of this come 2020?
37% of FTSE 100 companies (31 out of 83) had no ethnic minority representation on their board.
69% of the FTSE 250 companies analysed (119 out of 173 companies) had no ethnic diversity on their boards.
What were the main recommendations following the Higgs review on NED recruitment in 2003?
Recommended:
- The nomination committee should be tasked with considering candidates from a wide range of backgrounds.
- It should draw more actively from areas such as human resources, change management, customer care and the professions where women tend to be more strongly represented
- It should also consider recruiting candidates from private companies, charities and public sector bodies.
- If operating in international markets, could benefit from having at least one international non-executive director with relevant skills and experience on their board; and
- should consider bringing onto the boards of subsidiary companies talented individuals from wider and more diverse backgrounds to give them exposure to the operation of a board as a possible stepping-stone to the board of a listed company
Where would you find information on diversity in the UK CG Code?
NB - You’ll be able to access this but need to know roughly where for ease.
Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.’
Principle J, UKCG code
‘Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives.’
Principle L, UKCG code
What does legislation and guidance provide around reporting on diversity?
- CA2006 requires quoted companies to include in their strategic report a breakdown showing at the end of the financial year the number of persons of each sex who were:
directors;
senior managers; and
employees of the company (s. 414C). - The ANNUAL REPORT should describe the work OF THE NOMINATION COMMITTEE, including:
* the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
* how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition;
* the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives; and
* the gender balance of those in the senior management6 and their direct reports.
Provision 23, UKCG code - DTR 7.2.8A(1) requires listed companies to disclose:
the diversity policy applied to the company’s administrative, management and supervisory bodies with regard to aspects such as ‘age, gender or educational and professional backgrounds’;
the objectives of the diversity policy;
how the diversity policy has been implemented; and
the results in the reporting period.
In connection to appointment to the board, what does the UK CG Code provide?
NB - You’ll be able to access this but need to know roughly where for ease.
Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management.
Principle J, UKCG Code
The board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. A majority of members of the committee should be independent non-executive directors. The chair of the board should not chair the committee when it is dealing with the appointment of their successor
Principle 17, UKCG code
An annual report should describe the work of the nomination committee, including:
the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition;
the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives; and
the gender balance of those in the senior management and their direct reports.
Provision 23, UKCG Code
Recommend due diligence that a NED should undertake ahead of their appointment.
- Look at the company’s annual report and website to see how it articulates its business model, governance, the market environment and dynamics, recent operational performance, strategy, risks and uncertainties, sustainability and financial performance;
- Review regulatory and media announcements issued since the last annual report was published
- Arranging to meet the chair, CEO, CFO, company secretary and all members of the nomination committee, if not the entire board, before accepting an appointment;
- If taking on the role of company chair or the chair of the audit or remuneration committees, arranging meetings with the auditors, the head of internal audit or the remuneration consultants as appropriate;
- Talk with any other external advisers, senior management, employees, suppliers and customers; and
- Check scheduled board dates for the year ahead at an early stage in the due diligence process to ensure free to attend.
What does the UK CG Code and guidance provide around succession planning?
NB - You’ll be able to access this but need to know roughly where for ease.
‘…an effective succession plan should be maintained for the board and senior management.’
Principle J of the 2018 Code
‘…ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession’.
Provision 17, UKCG code
‘Board evaluations should inform and influence succession planning. They are an opportunity for boards to review skills, assess their composition and agree plans for filling skills gaps, and increasing diversity. They can help companies identify when new board appointments may be needed and the types of skills that are required to maximise board effectiveness.’
Para109, FRC Guidance on Board Effectiveness
Succession plans should cover:
Contingency planning – for sudden and unforeseen departures
Medium-term planning – the orderly replacement of current board members and senior executives
Long-term planning – the relationship between the delivery of the company strategy and objectives to the skills needed on the board now and in the future.
FRC Guidance on Board Effectiveness
