Chapter 7 - Board Composition & Succession Planning Flashcards
(32 cards)
What are six factors the board should take into consideration when determining its size?
- Need for a balanced board
- Any provisions/requirements/restrictions in Articles
- Ability to service board committees
- Size of the organisation an complexity of the business and industry in which it operates.
- Requirements of the Code (Principle K)
- Ability to hold productive, constructive discussions and make prompt rational decisions.
What are the Code requirements regarding the composition of the board?
Not overly dictated except that:
- Per PROV 11 - at least half the Board, excluding the Chair, should be NEDs who the Board considers independent
Therefore each additional director or non-independent NED must be matched by at least one independent NED.
What are the key factors in ensuring a ‘balanced board’?
- Diversity
- Separation of Chair and CEO roles
- Balance of executive, NED and independent directors
- Gender balance
- Appropriate mix of skills, knowledge and experience
What are the code requirements for composition of the 3 main board committees?
Prov.24 - Audit Committee
- At least 3 independent NEDs (2 in smaller companies)
- Chair cannot be a member
Prov.14 - Nomination Committee
- Majority independent NEDs
- Chair allowed but cannot chair re matter of their successor
Prov.32 - Remuneration Commitee
- At least 3 independent NEDs (2 in smaller companies)
- Chair allowed (if independent on appointment) but cannot chair the committee itself
Per research - what are the main issues with having too large of a board?
- UNWIELDUY - hard to manage.
- INEFFECTIVE DECISION MAKING - more viewpoints, may lead to too many comprimises
- LONGER MEETINGS- everyone needing their turn
- LACK OF CONTRIBUTION- may feel someone else will make the same contribution and so don’t themselves.
What does the Wall Street Journal GMI Ratings suggest are the benefits of smaller boards?
- More oversight of management
- More likely to dismiss a poorly performing CEO
- More likely to be “decisive, cohesive and hands-on”
What is a skills matrix?
Table that displays people’s proficiency in specified skills, knowledge, competencies and aptitudes.
How can a skills matrix aid with the director appointment process?
A skills matrix can be used:
- assess whether if any areas skills / aptitudes of the board may be lacking, or may become lacking as a result of (a) director(s) departure
- to assess whether the board is over-reliant on the skills or aptitudes of certain individuals in any particular area
- to map existing skillset against that required to execute strategy and meet future challenges
- to draw up a profile of the ideal candidate for any board vacancies.
How does the 2018 UK Corporate Governance Code seek to promote diversity?
PRINC. 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.
<br></br> PRINC.L
Annual board evaluation should consider diversity.
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Main tool to promote diversity is to require disclosure in the report of the nomination committee on diversity issues. These disclosure requirements effectively mean that the board must adopt a diversity and inclusion policy for board and senior executive appointments, which could include diversity targets, and succession policies that promote diversity. Can be part of oveall d&i policy for the workforce, or in addition to it.
Provide 3 recommendations from the Women on Boards Review (2011)
- Companies should periodically advertise non-executive board positions to encourage greater diversity in applications.
- Executive search firms should draw up a voluntary code of conduct addressing gender diversity and best practice which covers the relevant search criteria.
- Recruitment of different populations of women (i) executives from the corporate world and (2) women outside the corporate sector.
Provide 3 recommendations from Hampton-Alexander Review (2016)
- 33% target- FTSE100 - exec/direct reports combined by 2020
- 33% target - FTSE250 boards by end of 2020
- FTSE350s to increase women in the role of Chair, SID and as exec directors generally
What are the key disclosure requirements regarding diversity?
CA2006
- s.414(c) - quoted companies should include breakdown in their strategic report, number of person of each sex who were directors, senior managers, employeees
- Business/charity/certain public body with over 250 employees- gender pay gap reporting (in line with EU regulations)
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CODE (disclosures in NomCo report)
- Appointment process
- Approach to succession planning
- How both develop a diverse pipeline
- How board evaluation has/will influence composition
- Policy on D&I - how implementated and progress
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DTR 7.8.2A
- Policy applied to re admin, management and supervisory bodies with regard to ‘age, gender or educational and professional backgrounds
- Objectives of the policy
- How policy has been implemented
- Results within the reporting period
What are some recommendations of the Parker Review 2016?
- FTSE100: at least 1 by 2020 / FTSE250: at least 1 by 2024
- NomCo of all FTSE100/250 require HR/search firms to identify/present qualified candidates when vacancies
- Standard voluntary code of conduct expanded to ethnic minorities
- Greater transparency and disclosure - describe policy in AR / explain non-compliance
- FTSE250 companies to have mechanisms to identify/develop and promote - ensure pipeline of board capable candidates
- Mentor/Sponsor - readiness for internal snr management role or external role (ex. NED position)
- Encourage/support - internal board roles (e.g. subsidiaries) or BoD/Trustee roles within external organisations
Give some examples of recommendations (throughout the years) to encourage recruitment of NEDs from under-represented backgrounds.
HIGGS
- NomCo tasked to consider candidates from wide range of backgrounds
- Draw from areas women more represented (ex. HR, customer care)
- Consider recruiting from the private company, charity and public sectors
- Consider bring on talented individuals from wider/diverse backgrounds to subsidiary boards (gain experience/stepping stone)
- If in international markets - consider having 1 international NED with relevant skills and experience
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TYSON
- NomComs should look at the marzipan layer of management in PLCs for future NEDs
- Advice now to identify and recruit broad range of NEDs
- Range of backgrounds and experience can improve board effectiveness
- NED’s of UK companies tend to be domestic citizens despite globalisation of business - may be mismatch between international issues and the knowledge domestic members bring
- Optimising board membership is vital for performance/competitiveness and restoring shareholder/public trust in UK boardrooms
DYNAMIC BOARDS
- Indentify gaps
- Proportionate advert
- Advertise openly
z
What are the three main roles of the nomination committee?
PROV.17<br></br>
- Lead in appointment process
- Ensure plans in place for orderly succession (board and senior management positions)
- Oversee the development of a diverse pipeline for succession
What are the membership requirements for the nomination committee?
- Majority independent NED
- Company chair can join but should not chair on deciding their succcesor
- Common that the company chair will be a member
- Rare anyone other than company chair / independent NEDs will serve on it
- Where company chair a member- take care for requirement to be majority independent
What work of the NC should be described in AR?
- Process for appointment, succession planning and supporting a diverse pipeline
- Conduct of board evaluation (nature and extent of external evaluator’s contact with board and individual directors / outcomes of actions taken / how it has or will influence board composition)
- D&I policy - objectives and linkeage to strategy (how implemented/progress on achieving objectives)
- Gender balance of those in senior management and their direct reports
What do the Code and FRC G.B.E say about time committments?
PROV. 15 (avoidance of “over-boarding”)
- Take time commitments into account when making appointments (demands on their time)
- Prior to appointment - any signif commits should be disclosed w/indication of time involved
- Additional appointments should be approved by board
- Reasons for permitting significant other appointments should be disclosed in the AR
- Full time exec directors should not take on more than 1 NED role in FTSE100/other significant appointment
FRC G.B.E -
- Directors expected to undertake will have sufficient time to meet what expected effectively
- Chair role, in particular, is demanding - multiple appointments are not advisable
- Board may considering if setting appointment limits
What are the inspection rights in realtion to director service contracts/letters of appointment?
s.228 CA 2006 –
- Directors’ service contracts to be available for inspection by members at the company’s RO or SAIL.
FRC G.B.E (authority derived from CA2006)
- All terms of appointment available to inspect by ANY person at RO (normal business hours) & at AGM
List tasks (as recommended by ICSA) that NEDs should undertake as due diligence prior to accepting an appointment to the board?
- Review company’s annual report/website and how it articulates governance, operational performance, strategy, risks etc.;
- Review regulatory and media announcements since last annual report;
- Meet Chair, CEO, CFO and CS and all members of the Nomination Committee;
- Talk with external advisers, stakeholders both internal and external.
- If joining to chair/chair AC or RC - meet with auditors/head of internal audit/rem consults
- Check scheduled board date - ensure they can attend- part of early due diligence
Outline the process for appointing an NED.
- NC evaluate current skills, experience and knowledge on the board, the future challenges affecting the business, and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.
- NC then agree process to be undertaken to identify, sift and interview suitable candidates, ensuring that a proper assessment of values and expected behaviors is built into the recruitment process. This will typically involve engaging recruitment consultants.
- NC will interview a selection of candidates put forward by the recruitment consultants and use these interviews to narrow down the list of candidates or ask for further candidates to be proposed.
- In the final stages, NC may invite the final candidate(s) to meet other members of the board.
- After taking soundings from other board members, committee will make its final recommendation to the board, which will then make the final decision.
- As the Code requires all directors to be re-elected annually, the shareholders will have the opportunity to confirm or reject the appointment at the next AGM.
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How might the process for appointment differ when seeking to appoint a new chair or chief executive (rather than an NED)?
- The appointment of a new chair or CEO may involve the **consideration of internal candidates. **
- An existing independent NED could be elected as the chair and an existing senior executive could be promoted to become CEO.
- In contrast, the appointment of a NED will always involve recruiting external candidates if they are to be considered independent.
Why is it desireable for the board to plan for succession?
- PRINCIPLE J - 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.
- “both..based on merit and objective criteria and, within this context, should promote diversity of gender, social and
- PROVISION 17 - NomCo to lead the process for appointments, ensure plans are in place for orderly succession to
- PROVISION 23 - AR should describe the work of the NC, including the process used in relation to appointments, its approach to succession planning and how both support a diverse pipeline.
- Avoids disruptions to the company’s decision-making processes or changes in policy or direction.
- Newly appointed individuals have** opportunity to learn** about their role prior to the actual succession date.
- Positions such as CEO, Chairman, CFO are all important positions and it is therefore undesirable to have these vacant for more than a short time.
What are the three time horizons a succession plan should cover?
- Contingency planning (sudden/unseen departures)
- Medium-term (orderly replacement current members/snr execs, ex. retirement.)
- Long-term (rship between delivery of co strategy and objectives to skills req on board now/future)
