Board Composition and Sucession Planning Flashcards
(16 cards)
Board size: How big should the Board of Directors be?
The UK Corporate Governance Code (2018) makes no recommendation on the size of the Board of Directors. It depends on the size of the company, the complexity of the business and the industry or sector in which it operates. Unless a company’s Articles of Association specifies the min/max. number of Directors, it is left to the Board to decide how big it should be.
Board size: What should the Board consider in determining the size of its Board?
- B = The requirements for a Balanced board;
- U = The requirements of the UK Code on the composition of the board;
- S = The need to Service board committees; and
- A = The Ability of the board to hold productive, constructive discussions and make prompt rational decisions.
What are the requirements for a ‘balanced’ board?
- Separation of the roles of Chair and CEO (prov. 9, UKCGC);
- An appropriate balance of executive, non-executive and independent directors (prov. 11, UKCGC);
- Appropriate skills, experience and knowledge (e.g. referring to a skills matrix) (Principle K, UKCGC);
- Gender balance; and
- Diversity (including social and ethnic backgrounds, cognitive and personal strengths).
What principles relate to diversity in the UKCGC?
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.
Principle L = Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives.
Women on Boards Review 2011*
“FTSE 350 companies should publicly adopt targets for the percentage of women on their boards and report on their compliance with those targets. FTSE 100 companies should be aiming for a minimum of 25% female board representation by 2015.”
Higgs Report 2003
Recruiting NEDs from diverse backgrounds
- The nomination committee should be tasked with considering candidates from a wide range of backgrounds.
- It should draw more actively from areas such as human resources, change management, customer care and the professions where women tend to be more strongly represented.
- It should also consider recruiting candidates from private companies, charities and public sector bodies.
- If operating in international markets, could benefit from having at least one international non-executive directors with relevant skills and experience on their board; and
- Should consider bringing onto the boards of subsidiary companies talented individuals from wider and more diverse backgrounds to give them exposure to the operation of a board as a possible stepping stone to the board of a listed company.
Hampton-Alexander Review 2016*
Recommendations:
- 33% targets for women on FTSE 350 boards by the end of 2020
- that FTSE 350 companies increase the number of women in the roles of chair, senior independent director and into executive director positions on their boards.
Parker Review on Ethnic diversity of UK Boards*
Recommendations:
- each FTSE 100 board should have at least one director of colour by 2021; and each FTSE 250 board should have at least one director of colour by 2024.
- nomination committees of all FTSE 100 and FTSE 250 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered for board appointment when vacancies occur.
- The standard voluntary code of conduct for executive search firms should be extended to apply to the recruitment of minority ethnic candidates as board members of FTSE 100 and FTSE 250 companies.
- greater transparency and disclosure on ethnic diversity.
Reporting on diversity*
CA2006 requires quoted companies to include in their strategic report a breakdown showing at the end of the financial year the number of persons of each sex who were directors, senior managers and employees of the company (s. 414c, CA2006).
Provision 23, UKCGC states that the annual report should describe the work of the nomination committee, including:
- the process used in relation to appointments, it’s approach to succession planning and how both support developing a diverse pipeline;
- the policy on diversity and inclusion, it’s objectives and linkage to company strategy how it has been implemented and progress on achieving the objectives; and
- the gender balance of those in the senior management and their direct reports.
Board appointments
Principle J, UKCGC = Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management.
Nomination Committee
Principle 17, UKCGC = The board should establish a nomination committee to lead the process for appointments, 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. A majority of members of the committee should be independent non-executive directors. The chair of the board should not chair the committee when it is dealing with the appointment of their successor.
Nomination Committee Report - Provision 23, UKCGC
Annual annual report should describe the work of the committee, including:
- the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
- how the board evaluation has been conducted, the nature and extent of an external evaluator contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition;
- the policy on diversity and inclusion, it’s objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives; and
- the gender balance of those in senior management and their direct reports.
If a NED is accepting an offer of appointment, they should (learn 5 of these):
- look at the company’s annual report and website to see how it articulates its business model governance, the market environment and dynamics, recent operational performance, strategy, risks and uncertainties, sustainability and financial performance;
- review regulatory and media announcements issued since the last annual report was published;
- meet the chair, CEO, CFO, company secretary and all members of Nomco or entire board, before accepting an appt;
- if taking the Chair or Auditco or Remco chair role, meet the auditors, head of internal audit or the remuneration consultants;
- talk with any external advisors, senior management, employees, suppliers and customers; and
- ## check scheduled meeting dates for the year ahead to check you are able to attend.
Succession planning
Principle J, UKCGC - ‘…an effective success plan should be maintained for the board and senior management’.
Provision 17, UKCGC - ‘…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’.
Para109, FRC Guidance on Board Effectiveness - ‘Board evaluations should inform and influence succession planning. They are an opportunity for boards to review skills, assess their composition and agree plans for filling any skills gaps and increasing diversity. They can help companies identify when new board appointments may be needed and the types of skills that are required to maximise board effectiveness’.
Succession planning for listed companies
Succession plans should cover:
- Contingency planning - for sudden and unforeseen departures
- Medium-term planning - the orderly replacement of current board members and senior management (e.g. independence/tenure/retirement)
- 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. if going into different markets will need different skills)
Refreshing board membership and annual re-election
Principle K, UKCGC - ‘Consideration should be given to the length of service of the board as a whole and membership regularly refreshed’.
Provision 18, UKCGC - ‘All directors should be subject to annual re-election. The board should set out in the papers accompanying the resolutions to elect each director the specific reasons why their contribution is, and continues to be, important to the company’s long-term sustainable success’.
