Board Composition and Succession Planning Flashcards
What 4 things should boards consider when deciding the size of the board?
What is the average size?
Board should consider:
1. The requirements of a balanced board
- The requirements of the UK CG Code on composition of the board
- The need to service board committees
- The ability of the board to hold proactive, constructive discussions and make prompt rational decisions
Spencer Stuart 2018 Board Index = average Board of a top FTSE 150 company has 10.1 directors
What are the 5 requirements for a balanced board / requirements under the UK CG Code?
- Separation of the roles of CEO and chair (Provision 9)
- An appropriate balance of executive, non-executive and independent directors (Principle G and Provision 11)
- Appropriate skills, experience, and knowledge (Principle K)
- Gender balance
- Diversity
What is the requirement of the UK CG Code on the board and its committees’ balance of skills, knowledge, and experience?
What does paragraph 87 FRC Guidance on Board Effectiveness say is one of the key elements of board effectiveness?
What does paragraph 88 FRC Guidance on Board Effectiveness say can reduce group think?
What does paragraph 91 FRC Guidance on Board Effectiveness say about personal attributes and recommend the NC do?
Principle K = the board and its committees should have a combination of skills, experience, and knowledge
p.87 = Appointing directors who are able to make a positive contribution is one of the key elements of board effectiveness
p.88 = Diversity in the boardroom can have a positive effect on the quality of decision-making by reducing the risk of group think.
p.91 = Diversity of personal attributes is equally important = suggests NC should seek to ensure that the board is comprised of individuals who display a range of softer skills like:
○ courage;
○ openness;
○ honesty
What are the requirements of the UK CG Code for each committee composition? (3)
If each INED was only allowed to serve on 1 committee, how many INEDs would need in a large company?
What about a small company?
Can INEDs sit on more than 1 committee?
What is the relevant guidance?
Provision 17 = NC = majority of members should be INEDs
Provision 24 = AC = at least 3 INEDs for large companies and 2 INEDs for small
Provision 32 = RC at least 3 INEDs for large companies and 2 INEDs for small
- If each INED was only allowed to serve on 1 committee, you would need:
- A minimum of 8 INEDs in a large company
- A minimum of 5 INEDs in a small company
- Code doesn’t say that INEDs can only serve on 1 committee
FRC Guidance on Board Effectiveness (para 63) = the chair should ensure that INEDs are not over-burdened when deciding the chairs and membership of committees
What is a skills matrix?
What 2 features could improve its usefulness?
What is a skills gap analysis?
What purpose would a skills matrix serve in the process of appointing a new director? (4)
A skills matrix = table that displays people’s proficiency in specified skills, knowledge, competencies, and attributes to help identify skill or knowledge gaps on the board
- Showing years left to serve highlights which skills may need to be replaced sooner rather than later
- Uppercase ‘X’ shows critical skills held by only one person
- A skills gap analysis will compare what skills and aptitudes the board now has against what it needs either now or in the future e.g. if want to expand overseas may need to appoint a director with previous international business experience
Appointing new directors:
1. to assess whether there are any skills and aptitudes of the board that may be lacking / become lacking if someone leaves
2. to assess whether the board is over-reliant on the skills or aptitudes of certain individuals;
3. to map the existing skillset against that required to execute strategy and meet future challenges; and
4. to draw up a profile of the ideal candidate for any board vacancies
How does the UK CG Code seek to promote diversity? (2 Principles and 1 provision)
Principle J = 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
Provision 17 = NC oversee development of diverse pipeline
- Principle L = Annual evaluation of the board should consider its composition, diversity, and how effectively members work together to achieve objectives
GENDER DIVERSITY (BOARD COMPOSITION)
What 3 targets did the Hampton-Alexander Review set in 2016?
What did Lord Davies ‘Women on Boards’ Report 2011 recommend for recruiting women?
- FTSE 100 = a 33% target for women on executive committees and direct reports by 2020
- FTSE 350 = a 33% target for women on boards by the end of 2020;
- FTSE 350 = increase the number of women in the roles of chair, SID and ED positions on their boards
Recruitment of different populations of women (i) executives from the corporate world and (2) women outside the corporate sector.
ETHNIC DIVERSITY (BOARD COMPOSITION)
What were the Parker Review Committee’s recommendations to increase the ethnic diversity of UK boards? (2)
- FTSE 100 = board should have at least 1 BAME director by 2021
- FTSE 250 = NC should require HR teams to identify and present qualified people of colour to be considered for board appointment when vacancies occur
BACKGROUND DIVERSITY (BOARD COMPOSITION)
What was the Higgs Report recommendation on recruiting NEDs from diverse backgrounds?
= should consider recruiting candidates from private companies, charities and public sector bodies
What types of disclosures are listed companies required to make on diversity under UK CG Code, CA2006, and DTR? (3)
- Provision 23 = listed companies must disclose in the NC’s report:
a. their policy on diversity and inclusion and
b. the gender balance of those in the senior management
2.s.414 CA2006 = quoted companies must include in their strategic report a breakdown showing gender balance for:
* directors;
* senior managers; and
* employees of the company
- DTR 7.2.8 = Listed companies must disclosure in their CG statement their diversity policy or explain why they don’t have one
What are the 5 steps in the process for appointments to the board?
Name the relevant UK CG Code provisions and FRC Guidance on Board Effectiveness.
- Description of role and capabilities required = NC should evaluate the skills, experience and knowledge on the board, the future challenges affecting the business. (Skills matrix)
- Agree process to identify suitable candidates = will typically involve engaging recruitment consultants (Provision 20 and Paragraph 94)
- Interviews = use these interviews to narrow down the list of candidates or ask for further candidates to be proposed. (Paragraph 94 = ensure doesn’t disadvantage those from diverse backgrounds)
- Invite final candidate(s) to meet other members of the board.
- NC makes final recommendation to the board, which will then make the final decision (Paragraph 62 FRC Guidance on Board Effectiveness).
- Shareholders will have the opportunity to confirm or reject the appointment at the next AGM (Provision 18)
What do the Higgs Report 2003 and the ICSA guidance note ‘Joining the Right Board: Due Diligence for Prospective Directors recommend?
What 5 things does this include?
Recommends that prospective directors should conduct their own due diligence process prior to joining a board including:
- reviewing company’s annual report and how it articulates governance, operational performance, strategy, risks etc.;
- meet chair, CEO, CFO, CS, and all members of NC
- Review regulatory and media announcements
- Check scheduled board dates for the year ahead
- Talk with advisors, senior managers, employees, customers and suppliers
What does Principle J, Provision 17, and Principle K of the UK CG Code say about succession planning? (3)
What do paragraphs 109 & 101 of FRC Guidance on Board Effectiveness say about succession planning?
- Principle J = an effective succession plan should be maintained for the board and senior management
- Provision 17 = recommends the NC should ‘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
- Principle K = consideration should be given to the length of service of the board as a whole and membership regularly refreshed (Provision 18 = subject to annual re-election)
para 109 = Board evaluations should inform and influence succession planning
para 101 = Suggests putting a succession plan in writing can help to ensure it is followed through
What 3 time horizons should succession plans cover according to FRC Guidance on Board Effectiveness?
- contingency planning – for sudden and unforeseen departures
○ E.g. CEO sudden departure = assess whether there are any suitable internal candidates
○ E.g. NED sudden departures = Replacement candidates selected, interviewed, and appointed = may take several months = company is temporarily unable to meet some of the requirements of the Code - medium-term planning – the orderly replacement of current board members and senior executives (such as retirement)
○ starting point = creating a succession timetable which shows when each director’s term of office is due to expire (skills matrix can help determine whether it will lead to a skills gap) - 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
○ E.g. realising online platform is essential for business survival in digital age but this might be a skill gap
FRC Guidance on Board Effectiveness (para 101) = Succession plans can help to increase diversity in the boardroom and build diversity in the executive pipeline.
How does the Guidance suggest this in paragraphs 99 and 100? (2)
- para 99 = companies should develop internal talent and capability e.g. middle management development programs and mentoring schemes.
- Para 100 = Talent management can be a strong motivational force for those wishing to develop their career internally = can provide NC with a variety of strong candidates for senior positions
