Chapter 6 - Role of the Board & Membership of the Board of Directors Flashcards
(51 cards)
1
Q
What is the overarching role of the board according to the UK Corporate Governance Code?
A
Principle A
“to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”
2
Q
What does the Code suggest boards do in order to fulfil their role as defined by Principle A of the UKCGC?
A
Principle A is similar to s.172 of CA 2006 - it is fleshed out by Princ. B - E, stating that directors should:
- Establish company purpose/values/strategy and satisfy itself that these are aligned with the culture (B)
- Act with integrity, lead by example, promote desired culture (B)
- Estabish framework of prudent and effective controls, which enables risk to be assessed and managed (C)
- Effective engagement with/encourage participation from shareholders and other stakeholders (D)
- Ensure workforce policies/practices consistent with company’s values and support its long-term sustainable success (E)
3
Q
How does FRC’s Guidance on Board Effectiveness flesh out Principle E regarding workforce policies and practices?
A
- Boards should keep both under review to ensure they are consistent with company values and support its long-term success.
- Aspects such as remuneration policies, rewards and incentives can impact on the experience and drive behaviours
4
Q
What is a purpose/values/strategy statement?
A
- Purpose Statement : encapsulates company’s purpose for the outside world. Can be hard to condense into 20 or so words, especially with groups with diverse business activities
- Values Statement - highlights main qualities company views as critical for achieving its purpose
- Strategy Statement - sets out what company aims to achieve supported by targets for measuring success
5
Q
How can boards achieve the “necessary resources to meet objectives and measuring performance against them” per Princ. C?
A
- Budgets
- Any financing required = in place
- Appoint right people
- Set targets and review management and operational performance
6
Q
How can boards ensure they ‘establish a framework of prude and effective controls’ per pt.2 of Princ. C?
A
- Approve delegation levels, including limits
- Establish committes which have clear ToR
- Adopt schedule of matters reserved for the board
- Establish IC/RM procedures
- Set risk appetite
7
Q
What Principle of Wates applies to the role of the board and individual directors?
A
PRINCIPLE 3
* Board and individual directors to have clear understanding of their accountability & responsibilities
* Should be policies/procedures in place to support effective decision-making and independent challenge
8
Q
Over which matters does the board retain ultimate control within the remit of its corporate governance committees
A
- Appointments ( NomCo make recommendations)
- Appointment of auditor (AudCo make recommendations)
- Directors’ remuneration policy (RemCo make recommendations)
- Ensuring a framework of prudent and effective controls are in place (AudCo review/make recommendations)
- Approve accounts/other financial statements (AudCo will review, prior to board approval)
<br></br>
- Delegation to comittee allows indepedent non-execs to set agenda which reduces influence of Exec Directors
- Board having final say means it still has a key role to play
9
Q
In practice, do boards delegate all management power?
A
No.
UKCGC expects that directors will retain control/decision-making of certain critical management decisions
Board may also insist on final say on certain important matters (ex. major capital investment project)
Thresholds for board approval can be set out in a formal ‘schedule of matters reserved for the board’
10
Q
Which matters must the board legally retain control/decision-making over?
A
By law - the board must deal with certain other matters, this is also set out in schedule of matters reserved for the board
For example:<br></br>
* Approval of financial statements
* Adoption of anti-bribery and health and safety policies
11
Q
Why is setting a formal schedule of matters reserved for the board beneficial?
A
- Clarity, especially for NEDs & new directors, what role of board is
- Clarity (for executive team) – which decisions need board approval
- Without one, matters may appear to fall within delegated authority of executive directors /board committee
- Acts as internal safety net to ensure matters referred to the board
-
Simplifies delegation
* Broad powers delegated easily if subject to restrictions which are set out in such a schedule
* Company wide changes are possible without having to alters terms of any delegations in place.
12
Q
What matters should be reserved for the board?
A
PER ICSA Guidance on Matters Reserved for the Board (2013)
* Strategy and Management
* Structure and Capital
* Financial Reporting and controls
* Contracts
* Internal controls
* Communication
* Board Membership
* Corporate Governance
* Remuneration
* Delegation of Authority
* Policies
Other Misc. Matters per company (what constitutes ‘high level management decision’ is subjective to each individual company)
13
Q
To what extent does the board manage the company’s business?
A
- The board can be said to have a supervisory role in the management of the company’s business.
- Responsibility for day-to-day management will be delegated to the executive team.
- Board board will retain control over key management functions, such as setting the company’s culture, strategy, purpose and objectives and monitoring performance against those objectives.
- Most boards will require certain critical management decisions to be referred to them.
- Thresholds for when board approval necessary to be set out in a schedule of matters reserved to the board.
14
Q
What are the main reporting requirements in respect of directors/board commitees?
A
- CA2006 : names of all directors who have served in the financial year to be disclosed in the directors’ report
-
UKCGC
- Prov. 10 - number of NEDs board considers to be independent and any relevant explanations
- Prov.14 - Number of meetings and individual director attendance
- Prov.14 - Responsibilities of CEO/Chair/Board/Committees in writing and made public
- Prov.18 - Papers with resolution to elect/re-elect director, give specific reasons their contribution is/continues to be important to long-term sustainable success of the company
15
Q
What is the role of the Chair in a listed company?
A
PRINCIPLE F
- Lead the board
- Overall effectiveness in directing company
- Demonstrate objective judgement
- Promote culture of openness and debate
- Facilitate constructive board
- Facilitates effective contribution of ALL NEDs
- Ensure directors receive accurate/timely/clear information
16
Q
Examples of the chair’s role from FRC Guidance on Board Effectiveness (which expands on Principle F)
A
- Setting a board agenda (focus on strategy, performance, value creation, culture, stakeholders and accountability, ensures relevant issues are discussed by the board)
- Shaping boardroom culture
- Encouraging all board members to engage in board and committee meetings (by drawing on their skills, experience and knowledge)
- Guidance and mentoring to new directors as appropriate;
- Leading annual board evaluation (spport from SID as appropriate) and acting on the results.
- Considering the requirement for regular externally facilitated board evaluations
- Ensuring:
- time on agenda to discuss all items
- timely flow of accurate high-quality information
- all directors are aware of their duties/responsibilities
- that the board listens to **all views **(inc. shareholders, workforce & other stakeholders)
17
Q
What duties does Chair have under common law?
A
Ensure
- the meeting is properly conducted;
- all shades of view are given a fair hearing;
- the meeting is properly ascertained and recorded; and
- order is preserved.
18
Q
What powers are usually conferred on chair by AoA?
A
- Specific power to make rulings on whether a director is entitled to vote;
- Casting vote at meetings;
- First right to chair board meetings; and
- First right to chair meetings of the members/shareholders.
19
Q
What are the requirements of the Code with regard to the role/independence of the the company chair?
A
- PRINCIPLE F - summarises the role of the Chair which is expanded in FRC Guidance on Board Effectiveness
- PRINCIPLE G - clear division of responsibilities between leadership of the board and executive leadership of the company’s business
- PROV.9 - the chair should be independent on appointment when assessed against the circumstances set out in Prov.10
- PROV.9 - chair and CEO roles should not be exercised by the same person
-
PROV.19 - chair should not remain in post beyond nine years from the date of their first appointment to the board.
This could be extended if it facilitiates effective succession planning / especially if was prev. NED before appointment - clear explanations to be provided
20
Q
Why should the role of the chair and CEO be separate?
A
- PRINC.G - clear division of responsibilities between board leadership and exec leadership of the company’s business to prevent overly dominant influence on decision-making
- PROV.9 - Chair and CEO roles should not be exercised by the same person
- CEO leades management team / Chair leads the board
- FRC GUIDANCE ON BOARD EFFECTIVENESS - when deciding the differing responsibilities of the chair and the chief executive, particular attention should be paid to areas of potential overlap.’
21
Q
Why was it commong historically for outgoing CEO’s to be ‘promoted to Chair?
A
- Seen as a promotion after long time serving on the board
- To retain experience on board
- Often unmerited reward for long/distinguished service
- Sometimes – to induce them to retire as CEO
22
Q
Why should the Chair and CEO be separate people?
A
- Chair leads board. CEO leads company’s management team.
- Stop one domineering personality.
- Stop blur of division of responsiblities by not combining roles.
- Otherwise one person could have undue influence over company’s decision making - perhaps even for their own benefit rather than company as an whole
- If they are the same person, the board will need strong personalities elsewhere to counter/check and balance - ex. the SID or deputy Chair.
23
Q
Why should there be a clear division of responsibilities between Chair and CEO?
A
- Code/FRC Guidance definitions of Chair & CEO gives some indication
- Areas of overlap likely if chair has executive management responsibilities
- This blurs areas of responsibilities
- Role for chair under code is NED in nature – leadership of board not company business
- Chair with exec responsibilities is more likely to clash with CEO
- Dominant CEO– may infringe chair as BoD leader by manipulating board agendas
24
Q
What are the risks of a CEO acting as chair?
A
- Mark own homework : can set own targets and influence appointments to reinforce their own position
- Over time - less likely to listen to advice of the board leading to a less effective board
- CEO’s tend to have strong personality/confidence in own abilities - if left unchecked = over-domineering
- Without checks on power - may simply run company for their own personal benefit rather than interests of shareholders
25
Key points on time committments of the Chair per UKCGC/FRC Guidance on Board Effectiveness
* **Previously** stated that **no** individual should chair **> 1** FTSE100 (**deleted** but **investor concern remains**)
* **Walker Rep (CG Banks)** – chair **should** be spending **2/3** time on company - **impossible** to chair another FTSE100
* **FRC GUIDANCE ON BOARD EFFECTIVENESS** * Should have **sufficient** time... meet what is **expected** of them **effectively** * Role of chair is **demanding**, multiple roles not advisable * **NomCo** could **consider limits** on number/scale of other appointment so as not to comprimise effectiveness (this could help **ease** shareholder **concerns** regarding **overboarding** ) * Recommends **letters of appointment formally set out in writing** expected time committments (NEDs and Chair) and these are made **available to inspect.**
* **Walker Rep (CG Banks)** – chair **should** be spending **2/3** time on company - **impossible** to chair another FTSE100
* **FRC GUIDANCE ON BOARD EFFECTIVENESS** * Should have **sufficient** time... meet what is **expected** of them **effectively** * Role of chair is **demanding**, multiple roles not advisable * **NomCo** could **consider limits** on number/scale of other appointment so as not to comprimise effectiveness (this could help **ease** shareholder **concerns** regarding **overboarding** ) * Recommends **letters of appointment formally set out in writing** expected time committments (NEDs and Chair) and these are made **available to inspect.**
26
Key points on appointment of the Chair (PLC model articles / UKCGC).
**Articles** MA PLC Art 12 = appointment from one of their numbers - who can remove
* **Most Articles** = Chair must be a **director first**
* Does not preclude an **external** candidate
* **External** candidate must be **appointed** as director **first**
* In practice **over 3/5 FTSE** chairs are made from **external** candidates
**UKCGC anticipates appointment will be led by NomCom** * **Difficulty** where **incumbent/candidates** are members * If so, may be be led by someone else – ex. **SID**/a **bespoke comm** of independent NEDs * **Final** decision to be made by **full board** in **view** of procedures of **Articles** * **Shareholders** have **no** certain **say** but can register disapproval by **voting against Chair's re-election** at next AGM
**UKCGC anticipates appointment will be led by NomCom** * **Difficulty** where **incumbent/candidates** are members * If so, may be be led by someone else – ex. **SID**/a **bespoke comm** of independent NEDs * **Final** decision to be made by **full board** in **view** of procedures of **Articles** * **Shareholders** have **no** certain **say** but can register disapproval by **voting against Chair's re-election** at next AGM
27
What can the CEO do to contribute to board effectiveness?
***Per paras.70-73 FRC Guidance on Board Effectiveness***
* **Propose strategy** - **deliver** as agreed
* Set **example**
* **Communicate** the board's **expectations** (culture, values and behaviours)
* **Support chair** to ensure **appropriate levels of CG permeate**
* Make **board aware** of the **views of employees** on issues of **relevance**
* Ensure **board knows exec director views** on business issues to **improve standard of discussion** in the boardroom
* **Prior** to any **final decisions**,**explain** in a **balanced way any divergeant view(s) in the exec team**.
28
Why should an outgoing CEO not become chair (per investor studies) ?
* Outgoing CEO won’t be **independent** on appointment (per Prov.9 )
* Outgoing CEO may **retain** some **executive responsibilities** (effectively becomes executive Chair)
* Due to this, **division** of responsibilities is **blurred**.
* **Incoming** CEO **freedom** maybe **restrained** - if predecessor still there **looking over shoulder**
* **Outgoing** CEO may view changes proposed by incoming as **IMPLIED CRITICISM**
29
How does FRC G.B.E expect other executive directors to contribute to board effectiveness?
Should
- **Not only** see themselves only as **members** of the **CEO's team**;
- **Broaden** their **understanding** of board responsibilities by taking up a **NED position on another** board
- Welcome **constructive challenge from NEDs** as an **essential aspect** of good governance
- **Encourage** their **NED** colleagues to **test proposals** in the light of their wider experience outside the company.
30
What is the function of an executive committee?
* Usually act as a **sounding board** for the CEO
* As a **forum** to receive and discuss **operational updates** and **progress reports.**
* **Not** usually a **formal** committee of the **board**, but one established by CEO to **assist in management** of the business.
31
Why have NEDs?
To bring to the board
* Outside **experience**
* **Independent judgement**
* **Specialist expertise** that may be lacking on Board
32
What does the UKCGC say about NEDs' role?
* **PRINC. H** – provide constructive **challenge**, strategic **guidance**, specialist **advice**, hold management **to account.**
* **PROV. 13 -** **Scrutinise** and hold to **account** **performance** against **agreed performance objectives** / prime role in **appointment** and **removal** of **executive** directors
* **PRINC.J / PROV. 17** - participation in **NomCo** - lead **appointment** process/**succession** planning/development of a **diverse pipeline**
* **PRINC. N & M** – participation in **AudCo** - satisfy themselves with the **integrity** of **financial info/controls** and that systems of **RM** are **robust and defensible**
* **PRINC. Q / PROV.13** – RemCo – determine appropriate levels of **remuneration** for Chair, exec directors & senior management
33
What does FRC Guidance on Board Effectiveness say about NEDs?
Should
- **Devote time** to formal **induction**, and to **refreshing** of **skills**
- Make **sufficient time** available to carry out their responsibilities
- Receive a **letter of appointment** specifying the amount of **time to be spent** on company business
- **Insist** on **receiving** **timely and accurate information** (seek **amplificiation/clarification** where they consider information received inadequate and/or unclear)
- Take **opportunities** to **meet** **shareholders/key stakeholders at all levels** to gain an **understanding** of the business and relationships with significant stakeholders
34
What factors may impede an NEDs independence per Prov.10 UKCGC 2018?
- **Employment** (within last 5 years)
- Material **business relationship** (within last 3 years)
- Additional **remuneration** (other than fee) / participation in company in **share option** or **incentive** / **pension** scheme
- **Family** ties
- **Cross-directorships** / **significant links** with other directors via other companies or legal bodies
- Represents a **significant shareholder**
- Served **> 9 years** since date of first election
35
What does Principle H state regarding effectiveness of NEDs?
**PRINCIPLE H** – NEDs should have sufficient time to meet board responsibilities and provide:
* Outside **experience**
* **Independent** judgement
* **Specialist** expertise
* Hold **management** to account
36
What are the main criticisms of NEDs?
- Lack of **knowledge** on company’s business
- Insufficient **time** spent with company
- **Defects** in decision-making **process**
- Ineffective **challenge**
37
What should the board do if any of its NEDs do not meet the independent criteria (prov.10)?
- **Identify** and **explain** in AR **which** NEDs it considers **indepedent** for the purposes of the **code**
- Will often be in **CG statement**, or with other statements/reporting on **non-compliance**
- **Shareholders** could reasonably expect **reasons** for non-indepedence to be explained **on appointment**
- If **not identified** as independent - should be **assumed** **not** to be **indepedendent**
- **Board can decide** an NED is indepedent **despite** meeting **comprimising** factors - but should set out a **clear explanation** for their reasoning in the **Annual Report and Accounts**
38
To comply with the UKCGC, what measures should be taken if a company appoints an NED who is not considered independent?
- When considering membership of committees, ensure that **undue reliance is not placed on particular individuals**
- Only individuals able to **attend committee meetings are the members of those committees**, unless by invitation
39
What measures does Provision 15 of the code set out to reduce the risk of 'over-boarding' of NEDs?
- **New** appointments- **disclose** other commitments **before** (including indication of time involved)
- **Additional external** appointments to require **PRIOR approval** of board
- **Reasons** for **permitting** SIGNIFICANT (additional) appointments **explained in annual report**
40
What will the effectiveness of NED(s) ultimately depend on (despite requirements on them, the chair and criticisms from those such as Lord Young in 2002)?
- NED's own **calibre**
- General boardroom **culture** (to be created/nurtured by chair)
- **Quality of information** NEDs are given
41
According to Provision 12 of the Code - what is the role of the SID?
* Act as **SOUNDING BOARD** for the chair
* Act as **INTERMEDIARY** for other directors and shareholders
* **Lead** NEDs in **annual assessment of the Chair's performance**
42
What are other potential responsibilities the SID could take on per FRC G.B.E?
* May take responsibility for **Chair succession process** (with NC)
* Be **available to shareholders** have concerns that contact through **normal channels** of chair/CEO/other executives has **failed** to resolve/would be **inappropriate**
* Work with chair/other directors, and or shareholders, to **resolve significant issues** where company or board undergoing a **period of stress**.
43
According to FRC Guidance on Boasrd Effectiveness when might the SID intervene to protect the stability of the company?
* **Dispute** between **Chair and CEO**
* Shareholders / NEDs **concerns not addresse**d by Chair or CEO
* Strategy not supported by entire board
* **Chair/CEO**relationship is **PARTICULARLY CLOSE**
* **Decisions** made without FULL BOARD APPROVAL
* **Succession planning** has been/is being ignored
44
What are the main criticisms of the role of SID?
* **Chair should be able to resolve** difficulties between company and shareholders themselves
* Position is **SUPERFLUOUS**
* **Recommended role is BROADER** now than simply dealing with dissatisfied shareholders
45
What is the governance role of the Company Secretary as set out in FRC Guidance on Board Effectiveness?
- Ensure board **policies/procedures** complied with
- **Advise** board on all **governance** matters
- Help board/committees **function effectively**
- ENSURE **GOOD INFO FLOWS** - under direction of the chair
- **Facilitate** induction, training, and assist with professional development where required
- Arrange for company to provide the **resources** necessary to update **director knowledge/capabilities**.
- Ensure directors (especially NED) have access to inde professional advice at the company's expense where necessary
- **Assist** chair with establishing **policies/processes** – including **periodic review of board and CG processes** and consideration of any **improvements / initiatives** to be undertaken to **strengthen overall governance**
- **Effectiveness** of cosec can be enhanced by **building relationships of mutual trust** with chair/NEDs/SID
Whilst still **maintaining confidence of exec** directors who are **best placed** re concerns of **workforce**.
46
What does the Code have to say about the Company Secretary's role regarding the board/directors?
**PRINC.I**
- ‘…**board, supported by the CoSec**, should ensure it has **policies/processes/info/time/resources** to function effectively & efficiently”
- **Appointment/removal** should be matter for **board as a whole**
**PROV 16**
‘All directors should have** access to the advice** of CoSec…who is responsible for **advising on all governance matters**’
47
Who should the Company Secretary report to?
## Footnote
-
Per *FRC Guidance on Board Effectiveness:*
- - **Chair** on **governance** matters - Could report to **CEO/other** executive director re **other executive responsibilities** - Chair relies on **impartial adviser role** of CoSec : for CoSec to report to **anyone else on governance** matters could **undermine** the **chair's postion**
- - **Chair** on **governance** matters - Could report to **CEO/other** executive director re **other executive responsibilities** - Chair relies on **impartial adviser role** of CoSec : for CoSec to report to **anyone else on governance** matters could **undermine** the **chair's postion**
48
Who should appoint/remove the Company Secretary?
**Prov.16** - matter for the whole of the board (retains the CoSec's 'impartial adviser' position with the board)
49
Who should set the Company Secretary's remuneration?
* **FRC G.B.E (para 80)** - To be fixed by the **board** or by the **RemCo**
* **PROV.33** - **RemCo** responsible for remuneration of **snr management** (code definition **includes CoSec** in this)
50
What is the role of executive directors?
* All directors on a **unitary board** have same duties
* **Not CEOs exec team** when engaged in board business
* Requires understanding of **Directors responsibilities**
* **CFO** has particular responsibilities for providing board with **high quality financial information**
51
List four of the key elements of the ‘balanced board’?
* Separate roles of **chair and CEO**
* An appropriate **balance** of executive, non-executive and independent **directors**
* Appropriate **skills, experience and knowledge**
* **Gender** balance
* **Diversity**
