P1 - 3. Effective board practices Flashcards
What happens to the role of directors as a company grows?
Role of directors evolves from technical guru to management and strategy
What happens to directors of large companies in terms of ownership?
Almost always have a smaller percentage of ownership of the company they manage
What is another word for board evaluation?
Board appraisal
Who is the board evaluation an obligation for?
Listed companies
Benefits of board evaluation?
Key to long term success of the business
To maximise effectivness should be regularly reviewed
The evaluation can assess the skills, knowledge and working practices of the Board and can consider which areas need to be improved
Effective tool that helps to ensure employees understand, are motivated and aligned to the corporate objectives
Resolves issues or grievances, on either side, at an early stage.
Informs directors of how they are performing, individually and collectively
How often should the Boards of listed companies conduct an evaluation?
Listed companies = The UK Corporate Governance code recommend Boards should undertake an annual, formal and rigorous evaluation
Of its: performance and that of its committees and individual directors
FTSE 350 = Review should be conducted by an external facilitator at least once every three years
How should evaluations be publicly disclosed?
Details of how the evaluation was undertaken should be included in the company’s annual report (usually in the corporate governance section)
Together with a summary of any issues found and steps being taken to address them
What should be reviewed as part of the board evaluation?
Board structure, composition and processes
What recommendations does The Governance Code make for listed companies in reference to the composition of the board?
- board to comprise both executive and NEDs (Governance Code principle G);
- in the FTSE350 at least half the board should be independent NEDs, excluding the chair (Governance Code
provision 11). - Companies outside the FTSE350 should have at least two NEDs; and
- a majority of board committee members should be independent NEDs (Governance Code provision 17).
Where meetings are held on a regular basis the board should establish board processes (often by the chair with the cosec) relating to what?
- establishing a schedule of future dates for board meetings;
- standing agenda items;
- the structure and format of board papers;
- the process for calling for board papers;
- circulation of the board pack;
- the process for non-standard items to be added to the agenda for the next meeting or any meeting scheduled for the future;
- a robust process for tracking and progressing outstanding actions from previous meetings; and
- drafting and commenting on draft minutes.
What are some of the key roles of the board?
Set corporate strategy
Establish relevant and appropriate systems and policies of governance
Adequately monitor the performance of those policies and systems
Provide a framework to provide support and advice to the executive management team.
What activities should the board monitor?
Financial performance
Internal control
Risk management
Processes to manage related party or controlling shareholders
Whistle-blowing processes.
What should the evaluation include a combination of?
Elements of self-assessment and peer review by individual directors
Who should carry out a review of the chair?
The NED’s, led by the senior independent NED, considering views of the directors
Advantages of an internally facilitated board review?
- Those undertaking the evaluation will be familiar with the company, its culture and objectives.
- Those participating in the discussions may be more willing to speak to someone they know.
- Less financial cost.
Disadvantages of an internally facilitated board review?
- Those undertaking the evaluation are likely to be in junior roles and may be influenced by or have a vested interest in the outcome.
- Internal facilitators are less likely to be skilled evaluators.
- A well-run evaluation is a time-consuming process and an internal evaluator may not be able to commit the appropriate time to the task.
- Those participating in the discussions may be unwilling to speak to people more junior in the organisations about their own faults or those of fellow directors.
- Especially if the outcomes are all or mainly positive the review process might lack credibility with external
stakeholders.
What are the forms (including combinations) an internal evaluation can take place?
- questionnaires created in-house;
- questionnaires created from third-party question banks;
- one-to-one interviews; and
- group discussions.
What are the required actions if an evaluation is undertaken by an external facilitator?
They should be identified in the annual report and any other connections to the company disclosed (Governance Code provision 23).
Advantages of an externally facilitated board review?
- Those undertaking the evaluation are likely to be more objective and freer from internal pressures.
- Those participating in the discussions may be more willing to speak to someone they view as independent.
- The evaluators will have suitable skills and experience.
- The evaluator will have appropriate time to commit to the review process.
- An externally facilitated evaluation is likely to have more credibility with external stakeholders.
Disadvantages of an externally facilitated board review?
- Those undertaking the evaluation will be less familiar with the company, its culture and objectives.
- Internal facilitators are less likely to be skilled evaluators.
- Those participating in the discussions may be unwilling to speak to people they do not know about their own faults or those of fellow directors.
- Externally facilitated evaluations have a financial cost.
