Chapter 8 - Board Effectiveness Flashcards
What are the main topics covered by FRC Guidance on Board Effectiveness?
Follows the layout/setout of UKCGC
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk, internal control
- Remuneration
According to FRC Guidance on Board Effectiveness, what are the characteristics of an effective board?
- Provides direction for management;
- Demonstrates ethical leadership, displaying (and promoting throughout the company) behaviour that is consistent with the culture and values it has defined for the organisation;
- Creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction;
- Makes well-informed and high-quality decisions based on a clear line of sight into the business;
- Creates the right framework for helping directors meet their statutory duties under the CA2006, and other relevant statutory and regulatory regimes;
- Is accountable, particularly to the providers of the company’s capital (shareholders); and
- Thinks carefully about its governance arrangements and embraces evaluation of their effectiveness.
What does Pearse Trust identify as key qualities that make a successful chair?
- Ability to chair meetings
- Understanding the business
- Ability to influence others, without dominating
- Strong and resilient personality
- Good comms skills and able to comm overall strategy to external stakeholders.
Provide actions that the Chair can undertake to improve boardroom dynamics
- Create a positive environment
- Facilitate decision-making
- Steer to consensus
- Stimulate debate- encourage all to contribute
- Promote airing/resolution of disagreements
- Set an example with respect to conflicts of interest
- Maintains control but does not dominate
- Encourage discussion and contribution
How can NEDs contribute to board effectiveness?
- Attend regularly, prepares to be an effective decision-maker
- Objective - open to other perspectives
- Does not dominate
- Recognises collective decisions
- Fosters constructive challenge
- Shares information
- Provides checks and balance
- Gives access to networks
What should all information be per Code/FRC Guidance?
Accurate, timeley, high quality
What is the CoSec’s role in the supply of information?
- Responsible, under direction of chair, for good information flows.
- Implement processes required to achieve the objective of accurate, timely and high quality information that flows all levels.
- CoSec is the facilitator, promoter and guardian of high standards.
What are the 4 main stages in the developing a board pack?
1) Identify information the board needs
2) Commission board papers
3) Writing board papers
4) Collate and distributing the board pack
What is the Company Secretary’s role regarding ‘board effectiveness’?
Facilitate discussion on future priorities, type and format of info required and coordinating planning
Responsible, under direction of chair, for good information flows - implement processes required to achieve flow of high quality, accurate and timley information at all levels..
Plan schedule - maintain provisional agenda
Coordinate prep of board pack (commission papers, ensure authors/sponsors ok regarding requirements on them, timetable and tracking)
Support those writing/presenting papers - ex. check understandable to a non-specialist
Act as guardian of house-style/format for papers
Ensure submitted on time
Coordinate collation, storage and distribution of board pack
With Chair/other board members - review whether the board papers meet their needs
What are the typica beneficial features of bespoke software packages (electronic board portals)?
- Secure tools to facilitate distribution and use of electronic agenda papers and board packs
- Archive facilities enabling directors to refer back to papers/minutes for previous meetings (especially beneficial for NEDs)
- Secure tools enabling directors to annotate & make notes on the agenda papers
- Tools to enable secure access to additional papers of interest to board members;
- Voting tools;
- Tools to facilitate the circulation and approval of minutes
- Quicker to draft, collate and distribute board packs
- Easier access/portability of documents
- Easier navigation of papers during meetings
- Secure messaging facilities
What is corporate culture?
A company’s behaviours and the ways in which it conducts its business and espouses its values.
Why is it important to set a company’s corporate culture?
A healthy corporate culture is a valuable asset which can be a source of competitive advantage and vital to the creation and protection of long-term value
What are some ways in which a company can monitor culture?
- Site visits by NEDs
- Hosting town-halls - open meetings
- Becoming a customer/mystery shopper
- Talking to external stakeholders
- Meetings with jr managers without bosses
- Review/follow up customer complaints
- Review/follow up on reports/breaches from whistleblowing-process
- Others as listed in FRC G.B.E para 23
What Watest Principle is applicable, and what does it recommend, re corporate culture?
PRINCIPLE 1
Company’s purpose and values should inform expected behaviours/practices throughout organisation
- Values should be explained/integrated into the diff functions and operations of the business
- Board, SHs & mgmt must make & maintain committment to embedding the desired culture throughout organisation
- Boards should consider how culture can be monitored effectively.
How is corporate culture related to a company’s strategy, values and purpose?
FRC G.B.E : ‘An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.
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A company’s values and behaviours (its culture) should therefore be aligned with its purpose.
Why, in particular, might pay and performance structures lead to a bad corporate culture?
Pay incentives may reward employees for behaviour that is not in the best interests of the company’s clients and customers leading to a breakdown of trust, e.g. the payment protection insurance mis-selling scandal in the UK (ex. PPI)
What is business ethics?
‘… application of ethical values to business behaviour’
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Business ethics is relevant both to the conduct of individuals and conduct of the org as a whole. It applies to any aspect of business conduct…beyond the legal requirements…therefore, about discretionary decisions and behaviour guided by values’
What are the stages for developing a Code of Ethics?
1) CoSec asked to develop
2) When drafted, consults with employees and share feedback with the board
3) Board approve
4) Pilot for around 6 months (CoSec with HR and IT)
5) CoSec and HR collect input and feedback during pilot and feed back to board - with suggested amendments to ensure employee buy-in
6) CoSec/HR to roll out the code- posters, workshops and information on company intranet
7) Once operational - CoSec and IA monitor compliance (breaches raised under whistleblowing procedure - via Audit Committee)
8) CoSec recommend any ammendments based on result of stage.7 and due to changes in societal norms
9) When revised code approved - HR/CoSec to communicate to employees
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Changes should only be made where absolutely necessary - too many/too frequent may confuse employees
How can a company go about setting its ethical values/corporate culture?
- Agree and develop ethical values - consider how purpose and strategy aligned
- Develop/adopt a company Code of Conduct/Ethics - setting out values and behavioural expectations
- Ensure values and a code are communicated to the board, management and employees and taken into account when developing operational policies and procedures - ensure message is clear to senior management
- Publicise / implement training to ensure values & code embedded within org values & behaviours
- Ensure values integrated into all functions/operations of the company
- Ensure organisation performance management/rewards incentivise behaviour in line with the values and the code
- Ensure culture of openness and accountability (open environment) where employees feel they can raise unethical practices
- Ensure code of ethics reviewed from time to time taking into account changes in societal norms.
-Set tone from the top - transparency and integrity of the board and senior management
What does a standard / general Code of Ethics typically contain?
- Company values
- Company ethical principles
- Company ethical values (stakeholder groups)
- Implementation (statement of responsibility re compliance, means to obtain advice and any applicable training required/available)
What can the company do to measure that its Code of Ethics is effective?
- Staff surveys
- Report of customer complaints
- Reports/feedback re whistle-blowing procedure/pollicy and how effectively issues addressed via whilstleblowing helpine.
- Have this as a topic when engaging other stakeholders such as customers
- Having the Code of Ethics as a standing item for Board meetings
Provide ways in which the company secretary can assist the board in maintaining an ethical culture
BOARD
- Suggesting that discussions about corporate culture are (standing items) on the board’s agenda
- Organising site visits so that members of the board can get out and about and meet employees to assess for themselves the culture embedded within the organisation
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STAKEHOLDERS
- Suggesting culture indicators selected based on the expectations of the org’s stakeholders;
- Assisting in developing the reporting to stakeholders on the organisation’s culture
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INDICATORS & INFORMATION
- Developing a dashboard for the culture indicators that should be reviewed from time to time by the board
- Ensure information drawn from wide range of sources (to support/monitor perception of performance for selected indicators)
Assist establishing an ethics management management programme aligning with organisation’s mission, vision and values.
What is the difference between ethical principles & ethical values?
- Ethical principles – guidance and direction for behaviour, relate to issues such as fairness, equality and justice etc, are universal and set boundaries to be respected
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- Ethical values – shape context in which ethical principles are implemented, guide the board and management’s choices, frame the organisation’s behaviour norms and incorporate into the organisational culture.
How might the company secretary be involved in the procedures to enable the directors to obtain independent professional advice?
- CoSec should propose board adopts a procedure
- This could be done by way of a board resolution or as part of a board procedures manual.
- If procedure sets certain conditions or imposes any financial limits, some sort of pre-approval mechanism will be required.
- The secretary could be the person whose approval is required.
- However, this could compromise the secretary’s impartiality, particularly if the conditions require difficult judgement calls to be made.
- In these circumstances, it makes more sense for the chair or the senior independent director to be the person who makes the decision.
- Even if the secretary is not personally involved in the approval process, it may be sensible for the initial application by a director to be made through the secretary, who then forwards it on to the appropriate person for approval.
- Someone will need to record the fact that an application has been made and whether the necessary approval has been given (or refused).
- This information will also need to be reported to the board, particularly where approval has been given and advice has been obtained.
- Somebody also needs to authorise the payment of any invoices to the independent advisers. These task will typically fall to the CoSec.
**Prov.21** * Should extend not only to performance of boards and directors but also board committess and the chair.
A company that **does not comply** will need to **include an explanation in CG report**.
In certain circumstances the **SID may lead the whole** evaluation **process**, for example where the **CEO** is **acting as** the company **Chair**.
para 107 - **induction** should be **bespoke** in its **formluation** and **delivery** para. 110 - **information** gained **from** board **evaluation** can be **fed back into induction (and other processes)**
May include: - Site **visits** - Product **presentations** - **Meetings** with senior management and staff - Meetings withe **external** advisers - **Meetings** with major **shareholders**, if they , **UKCGC states** as part of the induction process, directors should be offered the **opportunity** **to meet** with the company's major shareholders.
- By becoming NED at a **non-competitor** - 1st hand experience of the exec/non-exec divide - Should aid understanding of NED concerns/make executive directors more likely to cater for NEDs - Gain **experience** of how **other boards** operate - Be able to **compare** different **practices** and **recommend** the **adoption** of those that **appear to be better** - Experience **first-hand** what it is like to be a NED and what NEDs expect and require in order to perform effectively. - Danger that executives will simply **moderate their behaviour** to what they expect of an NED - thus will not offer suitably robust challenge
- **Prov.22** - **chair** should **act** on **results** of evaluation/**directors** should **engage** with the process and take **appropriate action** to any ideas **highlighted** for **development** **FRC G.B.E** - NEDs should **devote time** ...**continue** to make **positive contribution** and **generate respect of the other directors** - **NEDs** need to **understand** **main area's of the company's business** as well as its **organisational culture**
