Lesson 5 Board Composition, Succession Planning, Board Effectiveness

Question 1

Board size

Answer 1

The size of the board depends on the SIZE of the COMPANY , COMPLEXITY of the BUSINESS and the INDUSTRY

Unless stated in the company’s ARTICLES , the size shall be determined by the board

Consideration must be given to:
BUSA

1-requirement for a BALANCED BOARD

2- UK CG PROVISION K

3-the need to SERVICE Board Committees

4-the ABILITY of the Board to hold
PRODUCTIVE, CONSTRUCTIVE DISCUSSIONS and make RATIONAL DECISIONS

Question 2

UK Corp Gov Code Provision K - the Board and its committees should have a combination of skills, experience and knowledge

Answer 2

To make POSITIVE CONTRIBUTIONS the following are key

1-the right SKILL SETS and breadth of perspectives are present

2-DIVERSITY in the boardroom can have a positive effect on the quality of decision making by reducing the risk of ‘GROUP THINK’

3-DIVERSITY of PERSONAL ATTRIBUTES attributes is equally important (eg SOFT SKILLS)

Question 3

Explain a ‘balanced board’

Answer 3

A balanced board includes
1- SEPARATE chair and ceo roles
2 - balance of ED, NED and INED
3 - appropriate SKILLS, EXPERIENCE, KNOWLEDGE
4 - GENDER balance
5 - DIVERSITY

Question 4

Recruiting NEDs from diverse backgrounds

Answer 4

The Nomination Committee should recruit from a WIDE RANGE of BACKGROUNDS

And DRAW FROM AREAS where WOMEN ARE STRONGLY REPRESENTED

They should ALSO consider recruiting candidates from PRIVATE COMPANIES and CHARITIES

Question 5

Diversity and UK corporate governance code

Answer 5

Per UK Corporate Governance code, appointments and succession plans should be based on merit AND within this context should PROMOTE DIVERSITY of gender, social, ethnic backgrounds

An evaluation of the board should consider its COMPOSITION, DIVERSITY and HOW EFFECTIVELY members WORK together

Question 6

Diversity on the board

Answer 6

In 2003 Tyson report (Derek Higgs Report) report on recruitment and development of NEDS found that boards were too ‘male, pale and stale’.

Let’s consider recent reports and initiatives which led to updates to FRC guidance and reporting requirements

There have been two waves of initiatives 1- gender and 2- ethnicity

• Women in Board Review 2011
• Hampton Alexander Rev. 2016
• Parker Review Ethnic Div. 2016

Spencer Stuart Report 2023
6% FTSE 100 no ethnic minority

Question 7

Women in Board Review 2011

Answer 7

Women in Board review 2011

FTSE 350 companies
Should publicly adopt targets
For percentage of women on their boards and report on compliance

FTSE 100 companies
Should aim for minimum
25% female board by 2015

Periodically advertise NED board positions

Search firms should draw up voluntary code of conduct addressing diversity

Recognition that there are two populations
-execs in corporate sector
-execs outside mainstream corporate sector - academics, civil servants, etc

Question 8

Hampton Alexander Review 2016

Answer 8

Hampton Alexander Review
Recommend

FTSE 350 boards
Target 33% female representation by end 2020

FTSE 350 companies increase
Number women in chair and SID roles and Executive Director roles on Boards

FTSE 100 executive committees/direct reports (combined)
Target 33% female representation by end 2020
(Target met - previously 12.5%)

Spencer report -
2023 female representation 40%
HOWEVER
This 40% is comprised of
46% female NEDs
16% female EDs

Question 9

Parker Review on Ethnic Diversity 2016

Answer 9

FTSE 100 and 250 companies
Should DEVELOP and PROMOTE
People of colour

board directors should MENTOR
And/or sponsor people of colour

Companies should ENCOURAGE and support candidates drawn from diverse backgrounds including
People of colour to take Board roles

As of 2020
37% FTSE 100 no ethnic minority

69% FTSE 250 no ethnic minority

As of 2023
6% FTSE 100 no ethnic minority

Question 10

Reporting on Diversity CA 2006

Answer 10

Company’s Act 2006
Requires quoted companies
To include breakdown by gender
For

Directors
Senior managers
Employees (s414c)

Question 11

Reporting on Diversity UK corp gov code

Answer 11

Annual report should
Describe the work of Nomcom

Process to appoint
How evaluation conducted
Policy on diversity & inclusion
Gender balance in sr mgt

Question 12

FCA DTR 7.2.8A(1)
Reporting on diversity

Answer 12

The FCA requires listed companies to disclose

Diversity policy applied to admin, management and supervisory bodies with regard to age, gender, educational and professional backgrounds

The objectives of diversity policy

How the diversity policy was implemented

Te results in the reporting period

Question 13

Board Appointments
UK Corporate Governance Code

Answer 13

Appointments to Board should be subject to formal, rigorous, and transparent procedure and effective succession plan

Appointments to the board are managed by the nomination committee.

Question 14

Nomination Committee

Answer 14

Nomcom should be comprised of primarily INEDs

Board chair can chair NomCom but not when dealing with the appointment of a successor

Nomcom should

• lead the appointment process
• Ensure plans in place for orderly succession
• Develop diverse pipeline for succession

Question 15

Nomination Committee Report within Annual Report - UK Corp Governance Code requirements

Answer 15

Explain appointment process

Board evaluation process

Policy on D&I

Gender balance in senior management

Question 16

Accepting an offer of appointment to the board

Answer 16

Board directors should
1- review the annual report

2-review regulatory and media announcements

3- meet with chair, ceo, cfo, cosec, nomcom, entire board before accepting appointment

4- if chair role or chair of Audi co meet with auditors, internal head audit / RemCom remuneration consultants

Question 17

Succession planning - UK corporate governance code

Answer 17

A succession plan should be maintained for the board or senior management

Ensure plans are in place for orderly succession to board and senior management positions and oversee the development of a diverse pipeline for succession

Question 18

Board Evaluations and Succession planning

Answer 18

Board evaluations should INFORM and INFLUENCE SUCCESSION planning

They are an OPPORTUNITY for boards to REVIEW SKILLS , assess their composition and agree plans to FILL SKILLS GAPS

They can help companies IDENTIFY when new board APPOINTMENTS may be needed and the identify the TYPES of skills required to maximize board effectiveness

Succession plans should cover

Contingency planning - sudden or unforeseen departures

Medium term planning - the orderly replacement of current board members and senior executives

Long term planning - skills needed both now and in the future

Question 19

UK corporate governance code - board membership and Annual re- election

Answer 19

Consideration should be given to the length of service of the board as a whole and membership should be refreshed regularly

Directors should subject to annual reelection

The board should set out the specific reasons why the directors contribution is / continues to be important to the long term sustainable success.

Question 20

Decision making at the board

Answer 20

Many complex decisions depend on JUDGEMENT ,

But the decisions of well intentioned and experienced leaders, in certain circumstances can be distorted

FACTORS which can DISTORT JUDGEMENT include

1- COI- Conflicts of interest
2- EMOTIONAL attachments
3- Unconscious BIAS
4- Inappropriate reliance on PRIOR EXPERIENCE or decisions

Question 21

Factors limiting EFFECTIVE DECISION MAKING

Answer 21

a DOMINANT personality or group of directors on the board which inhibit the contributions of others

EXCESS / INSUFFICIENT focus on RISK

COMPLIANCE MINDSET and failure to treat risk as part of the decision making process

FAILURE to LISTEN and ACT upon concerns raised

Question 22

Boardroom dynamics

Answer 22

NEDs should

ATTEND regularly and PREPARE in order to be an effective decision maker

ACT OBJECTIVELY and be OPEN to other PERSPECTIVES

NOT DOMINATE the discussion

recognize COLLECTIVE decisions

foster CONSTRUCTIVE CHALLENGE

Question 23

CoSec in the boardroom

Answer 23

*Register ATTENDANCE
*determine QUORUM
*maintain record of proceedings to produce MINUTES+ACTION log
*Advise chair on PROCEDURAL matters
* Monitor CLIMATE of meeting
*Advise on GOVERNANCE issues

Question 24

CoSecretary boardroom dynamics

Answer 24

*facilitate discussion between board and management on FUTURE PRIORITIES - PLANNING

*plan a SCHEDULE of MEETINGS + maintain PROVISIONAL AGENDA

*coordinate prep of BOARD PACK

*SUPPORT those WRITING and PRESENTING board papers

*act as guardian for style and FORMAT of papers

*COLATE, store, DISTRIBUTE board packs

*REVIEW with CHAIR and other board members whether PAPERS MEET their needs

Question 25

Board information

Answer 25

CHAIR **ensures that directors receive accurate, timely advice clear information** CEO- ensures MANAGEMENT fulfills its obligation to **provide the board with accurate timely and clear information** NED - should INSiST on receiving HIGH QUALITY INFORMATION and **SEEK CLARIFICATION** from management where necessary COSEC under direction from Chair should ENSURE **GOOD INFORMATION FLOWS** within BOARD and its Committees AND between SR MANAGEMENT and NEDS

Question 26

Board portals

Answer 26

Such as Diligent facilitate secure digital communication between board members Electronic distribution of agenda and board packs Archive facilities Enable directors to annotate and make notes Voting tools

Question 27

Corporate culture

Answer 27

What - the behaviors/ way it conducts it’s business Why - healthy corporate culture is a valuable asset, source of competitive advantage and vital to creating and protecting long term value Per CG Code, Board should establish the company’s purpose, value, strategy and satisfy themselves that these align to culture Directors must ACT with INTEGRITY LEAD by EXAMPLE PROMOTE desired CULTURE

Question 28

How to SET CULTURE

Answer 28

Agree company’s values Ensure purpose + strategy align Develop / Adopt Code Conduct Ensure values incorp in policy Publicize values Integrate values Reward systems should encourage behavior that is consistent with company culture and values Ensure there is a culture of openness and accountability Set tone from the top

Question 29

MEASURING CULTURE

Answer 29

Staff engagement survey Stakeholder engagement survey Culture and value standing agenda item at board Receive report on customer complaints Receive whistleblowing report Ensure board have direct interaction with staff and other stakeholders

Question 30

Role of company secretary in relation to culture

Answer 30

Suggest culture DISCUSSION at board Suggest that culture INDICATORS are selected based on expectations of key stakeholders Develop DASHBOARD for culture indicators Ensure info drawn from VARIETY of SOURCES Assist in DEVELOPING reporting to stakeholders

Question 31

Code of ethics

Answer 31

Should contain * COMPANY VALUES * COMPANY ETHICAL PRINCIPLES * COMPANY ETHICAL STANDARDS * INFO ON IMPLEMENTATION

Question 32

How to implement Code of Ethics

Answer 32

Agree company values Develop adopt code of ethics Ensure values integrate in policies Publicize values Integrate values into operations Reward system must encourage behavior consistent with these ethics Ensure the culture is open and accountable Set tone from top to bottom

Question 33

INDEPENDENT PROFESSIONAL ADVICE

Answer 33

CO SEC is responsible for ensuring directors, particularly Non executive directors, have access to Independent Professional Advice at the Company’s expense where necessary to discharge their director responsibilities Directors must give prior notice of intention to seek independent professional advice Advice should be made available to the entire board

Question 34

Performance Evaluation

Answer 34

There should be a formal and rigorous annual evaluation of the performance of the board, its committees, chair and individual directors FTSE 350 companies should have an external board evaluation every three years

Question 35

Board Evaluations

Answer 35

Items to consider 1-mix of skills, experience, knowledge 2-clarity of leadership 3- succession and development plans 4-how board works together 5-effectiveness of individual directors 6-effectiveness of board committees 7-quality of info provided 8-quality of discussions 9-effectiveness of CoSec 10-process for identifying and reviewing risk 11-how board communicates / listens to / responds to shareholders and other stakeholders

Question 36

Induction and professional development

Answer 36

The chair should ensure - all directors receive full, formal, tailored induction training on joining the board - all directors continually update their skills knowledge and familiarity with the company Under direction of the chair the Company Secretary should facilitate induction arranging board training and assisting with personal development Needs should devote time to comprehensive and formal induction training beyond boardroom NEDs should visit operations and talk with managers and members of workforce

Question 37

Induction programs

Answer 37

Induction programs should include 1-explain the role of the director and the legal framework 2- share key documents 3- provide info on the board and senior management 4- share info on board meetings and procedures 5- company policies and procedures 6- share presentations from senior managers 7- business information 8-shareholder information 9-offer site visits

Question 38

What were the recommendations of the Tyson Report by Derek Higgs 2003

Answer 38

Derek Higgs examined the recruitment of NEDs and he found Boards were male, pale and stale He recommended that 1- Nomination committees consider candidates from a wide range of backgrounds 2- they draw more actively from areas where women tend to be strongly represented 3-companies consider recruiting from private companies, public companies and charities 4 that companies bring on staff from their subsidiary companies as possible stepping stone to their development

Question 39

How can chair improve Boardroom dynamics

Answer 39

Maintain control of proceedings and do not dominate Facilitate decision making Stimulate debate and encourage all to contribute to discussions Create a positive environment

Question 40

Co sec arranging induction training

Answer 40

Consult the new director before devising the induction programme Prioritise and schedule items over a reasonable timeframe to avoid overloading the new director Vary the delivery of information (it should not be solely comprised of written info Organize site visits and meetings with executives, advisors and stakeholders Also consider external training Review the induction with the director midway through and at the end of the process

Question 41

Establishing a code of ethics

Answer 41

Code of ethics should contain: * Company values * Ethical principles * Ethical standards toward employees, customers, suppliers, government, community, environment * implementation of the code including Statement of responsibility Means to obtain advice and training

Question 42

Externally facilitated board evaluations

Answer 42

Per the Code, FTSE 350 companies are required to have externally facilitated board evaluations at least every three years Externally facilitated reviews provide greater objectivity. Methods of review can vary greatly depending on the provider Can include questionnaires, individual meetings with board members, observing meetings, etc There should be a final report listing recommendations and actions Evaluator can share info on best practices

Question 43

Implementing a company code of ethics

Answer 43

Agree the company’s values and consider how the company’s purpose and strategy align to these values Develop and adopt a code of ethics Ensure values are taken into account when developing company policies and procedures