Role and membership of the board Flashcards
Matters reserved for the board?
Matters reserved for the board?
Purposes:
- Clarifies the role of the board
- Clarifies for the executive team which decisions need approval
- Simplifies the process of delegation
Paragraph 28, 2018 FRC Guidance on Board Effectiveness:
Meeting regularly is essential for the board to discharge its duties effectively and to allow adequate time for consideration of all the issues falling within its remit.
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.
Matters reserved for the board?
Matters reserved for the board:
- Strategy and Management
- Structure and capital
- Financial reporting and controls
- Contracts
- Risk
- Communication
- Remuneration
- Board membership
- Delegation of authority
- Corporate governance
- Policies
- Others (political donations, appointment of professional advisers; material litigation, insurance; pension schemes)
Board Composition?
Board Composition:
- Chair (and possibly a deputy chair)
- Chief Executive Officer (CEO)
- Other executive directors (Finance Director)
- Senior Independent director (SID) (may alos be deputy chair)
- Independent non-executive directors
- Non-executive directors (NEDs)
Board Composition?
Principle J – Appointments to the board should be subject to formal, rigorous and transparent procedure. Appointment should be based on merit and objective criteria – should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
Principle K – Board and committees should have combination of skills, experience and knowledge. Length of service of the board should be considered and membership regularly refreshed.
Provision 11 – At least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent
Division of Responsibilities
Principle F – chair leads the board, responsible for overall effectiveness in directing the company. Demonstrate effective judgement and promote a culture of openness and debate.
Facilitates constructive board relations, effective contribution of all NEDs and ensures directors receive accurate, timely and clear information.
Principle G – Board should include appropriate combination of executives and NEDs (in particular independent NEDs) so no one individual/small group dominates the board’s decision-making. Clear division of responsibilities between leadership of board and executive leadership of company’s business.
Principle H – NEDs should have sufficient time to meet their board responsibilities. Should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.
Principle I – Board, support by the company secretary, should ensure it has policies, processes, information, time and resources needed in order to function effectively and efficiently.
Role of the Chair (para 61, FRC Guidance)
Role of the Chair (para 61, FRC Guidance):
The chair is pivotal in creating the conditions for overall board and individual director effectiveness, setting clear expectations concerning the style and tone of board discussions, ensuring the board has effective decision-making processes and applies sufficient challenge to major proposals.
It is up to the chair to make certain that all directors are aware of their responsibilities and to hold meetings with the non-executive directors without the executives present in order to facilitate a full and frank airing of views.
The Chair’s role includes:
The Chair’s role includes:
- setting a board agenda
- 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 (para 61, FRC Guidance)
Chief Executive Officer
Chief Executive Officer:
Code Provision 9
A CEO should not become chair of the same company.
If, exceptionally, this is proposed by the board, major shareholders should be consulted ahead of appointment.
The board should set out its reasons to all shareholders at the time of the appointment and also publish these on the company’s website
Chief Executive Officer
Para 70, FRC Guidance:
As the most senior executive director, the chief executive is responsible for proposing company strategy and for delivering the strategy as agreed by the board. The chief executive’s relationship with the chair is a key influence on board effectiveness.
Para 71, FRC Guidance:
…primary responsibility for setting an example to the company’s workforce, for communicating to them the expectations in respect of the company’s culture, and for ensuring that operational policies and practices drive appropriate behaviour.
… supporting the chair to make certain that appropriate standards of governance permeate through all parts of the organisation.
….ensure the board is made aware of views gathered via engagement between management and the workforce.
Chief Executive Officer duties:
Chief Executive Officer duties:
- Leads executive team
- Proposes strategy to the board
- Implements strategy agreed by the board
- Acts as spokesperson for Executive Directors
- Communicates the expectations of the board with regards to the company’s culture and values
- Ensures the appropriate standards of governance are applied within the organisation
Executive Directors
All directors on a unitary board have same duties and are not the CEOs executive team when engaged in board business.
Finance Director has particular responsibility for providing board with high quality financial information.
Specific and defined responsibilities as part of the executive management team.
Non Executive Directors
- Constructively challenge and help develop proposals on strategy
- Scrutinise the performance of management
- Should satisfy themselves about the integrity of financial information and that the financial controls are ‘robust and defensible’
- Responsible for remuneration of exec directors
- Significant role in appointment of exec directors and succession planning
Independence of NEDs – compromised where…
Independence of NEDs – compromised where…
- Has been an employee of the company in the last 5 years
- Material business relationship (including via previous/current audit firm) within last 3 years
- Receives additional remuneration in addition to NED fees (including via company pension scheme)
- Has close family ties with company’s advisers, directors or senior employees
- Has cross directorships or significant links with other directors
- Represents a significant shareholder
- Has served on the board for more than 9 years
Effectiveness of NEDs
Effectiveness can be undermined by:
- a lack of knowledge about the business operations and the company/industry
- insufficient time spent with the company/ unable to commit sufficient time to the company
- the weight of opinion of the executive directors on the board
- defects (including delays) in decision making
- ineffective challenge
Senior Independent Director
Senior Independent Director
Code Provision 12
- Sounding board for the Chair and intermediary for other NEDs
- Lead the annual performance evaluation of Chair (with other NEDs)
FRC Guidance
Para 66 – sounding board for Chair; part of succession planning for Chair
Para 67 - available to shareholders if Chair, CEO, Execs is inappropriate
Para 68 – examples of when SID might intervene in times of stress, where the role becomes critically important
