Lesson 5 Board Composition, Succession Planning, Board Effectiveness Flashcards
Board size
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
UK Corp Gov Code Provision K - the Board and its committees should have a combination of skills, experience and knowledge
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)
Explain a ‘balanced board’
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
Recruiting NEDs from diverse backgrounds
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
Diversity and UK corporate governance code
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
Diversity on the board
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
Women in Board Review 2011
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
Hampton Alexander Review 2016
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
Parker Review on Ethnic Diversity 2016
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
Reporting on Diversity CA 2006
Company’s Act 2006
Requires quoted companies
To include breakdown by gender
For
Directors
Senior managers
Employees (s414c)
Reporting on Diversity UK corp gov code
Annual report should
Describe the work of Nomcom
Process to appoint
How evaluation conducted
Policy on diversity & inclusion
Gender balance in sr mgt
FCA DTR 7.2.8A(1)
Reporting on diversity
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
Board Appointments
UK Corporate Governance Code
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.
Nomination Committee
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
Nomination Committee Report within Annual Report - UK Corp Governance Code requirements
Explain appointment process
Board evaluation process
Policy on D&I
Gender balance in senior management
Accepting an offer of appointment to the board
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
Succession planning - UK corporate governance code
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
Board Evaluations and Succession planning
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
UK corporate governance code - board membership and Annual re- election
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.
Decision making at the board
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
Factors limiting EFFECTIVE DECISION MAKING
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
Boardroom dynamics
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
CoSec in the boardroom
*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
CoSecretary boardroom dynamics
*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
Board information
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
Board portals
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
Corporate culture
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
How to SET CULTURE
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
MEASURING CULTURE
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
Role of company secretary in relation to culture
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
Code of ethics
Should contain
- COMPANY VALUES
- COMPANY ETHICAL PRINCIPLES
- COMPANY ETHICAL STANDARDS
- INFO ON IMPLEMENTATION
How to implement Code of Ethics
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
INDEPENDENT PROFESSIONAL ADVICE
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
Performance Evaluation
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
Board Evaluations
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
Induction and professional development
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
Induction programs
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
What were the recommendations of the Tyson Report by Derek Higgs 2003
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
How can chair improve Boardroom dynamics
Maintain control of proceedings and do not dominate
Facilitate decision making
Stimulate debate and encourage all to contribute to discussions
Create a positive environment
Co sec arranging induction training
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
Establishing a code of ethics
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
Externally facilitated board evaluations
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
Implementing a company code of ethics
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
