Role and Membership of the Board Flashcards
What is the overarching role of the board?
Principle A = to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society
Which 4 Principles of the UK CG Code relate to the role of the Board under Principle A?
Principle B = Establish the company’s purpose, values and strategy
○ FRC Guidance on Board Effectiveness (Para 11)
Principle B = Act with integrity, lead by example and promote the desired culture
○ FRC Guidance on Board Effectiveness (Para 18,19)
Principle C = Ensure that the necessary resources are in place for the company to meet its objectives
Principle C = Establish a framework of prudent and effective controls
Principle D = Ensure effective engagement with, and encourage participation from, shareholders and other stakeholders
Principle E = Ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success
What does paragraph 28 FRC Guidance on Board Effectiveness say about matters reserved for the board?
Why should boards do this? (4)
para 28 = Boards should adopt a formal schedule of matters specifically reserved for their decision
- helps clarify for Board members which matters are reserved for them / helps the Executive Team determine which decisions require Board approval
- Simplifies delegation process = easy to delegate if expectations are set out in schedule
- Adopting one allows company-wide changes to be made without having to alter the terms of the delegation for each individual or committee
- Provides an internal safety net that important issues and decisions will be raised to board level
Which ICSA Guidance relates to matters reserved for the board?
What are 10 matters included in the draft schedule?
ICSA’s Guidance on Matters Reserved for the Board = includes a draft schedule of matters that companies may put in their own
- Draft schedule includes matters related to:
1. Strategy and management = approving company’s strategy
- Financial reporting and controls = approval of annual accounts
- Internal controls = maintain internal control and risk management systems
- Delegation of authority =establishing board committees
- CG matters = determine independence of NEDs
- Policies = whistleblowing
- Contracts = approving major investments
- Communication = approval of resolutions to be out to shareholders
- Remuneration = determining remuneration on NEDs
- Board membership = appointment and removal or secretary
Which Principle and Provision relate to the balance of EDs and NEDs?
Principle G = board should include an appropriate combination of EDs and NEDs, such that no one individual(s) dominates the board’s decision making
Provision 11 = at least 1/2 the board, excluding the chair, should be non-executives whom the board considers to be independent
What are the reporting requirements for listed companies on board composition? (1 law, 3 provisions)
- CA2006 requires names of directors during the financial year to be disclosed in the directors’ report
- Provision 10 = identify NEDs that the board considers to be independent
- Provision 14 = disclose no. of board and committee meetings and individual director attendance
Provision 14 = disclose responsibilities of the chair, CEO, SID, board, and committees in writing and made public - Provision 18 = disclose reasons why new director’s contribution is, and continues to be, important to the company’s long-term sustainable success
Which Principle summaries the role of the chair?
Which Guidance expands on this?
Which Provision relates to the chair’s independence requirement?
Which Provision in the UK CG Code (1) and paragraphs in the FRC Guidance on Board Effectiveness (2) relate to how long a chair should stay in a post?
What did Glass Lewis identify?
What does paragraphs 95 and 96 FRC Guidance on Board Effectiveness say on the time commitments of the chair? (3)
Principle F = leads the board and is responsible for its overall effectiveness in directing the company
* The Chair should:
○ demonstrate objective judgement
○ promote a culture of openness and debate
○ facilitate constructive board relations and the effective contribution of all non-executive directors
○ and ensure that directors receive accurate, timely and clear information.
- 2018 FRC Guidance on Board Effectiveness para 61 expands on this and suggests the chair’s role includes:
- shaping the culture in the boardroom
- encouraging all board members to engage in board and committee meetings
- providing guidance and mentoring to new directors as appropriate
Provision 9 = the chair should be independent on appointment
Provision 19 and FRC Guidance on Board Effectiveness (para 104 and 105) = recommend chair not stay in a post longer than 9 years
(9 years from first appointed to board (even if not appointed as chair till year 3 etc.) BUT can extend to facilitate succession planning and development of a diverse board
- Glass Lewis identified 21 instances of non-compliance with Provision 19 from FTSE 350 companies AGMs held to July 2020
FRC Guidance on Board Effectiveness (para 95 & 96) = ‘overboarding’
1. directors are expected to undertake that they will have sufficient time to meet what is expected of them effectively
2. Role of chair is demanding and time consuming = multiple roles not advised
3. Nomination committee may wish to set limits on number and scale of other appointments
Which paragraphs of the FRC Guidance on Board Effectiveness suggest what the role of the CEO is? (4)
(How does the FRC Guidance on Board Effectiveness expect the CEO to contribute to board effectiveness?)
Paragraphs 70 - 73 = Suggests CEO should be responsible for:
- proposing strategy to the board, and delivering strategy as agreed;
- setting an example to the company’s employees, and communicating to them the expectations of the company’s culture, values and behaviours;
- Making the board aware of employees’ views
- Making board aware of senior management’s views
What are the 4 reasons why the roles of the chair and CEO should be separate?
Name the relevant Code principles and provisions and FRC Guidance for each.
- combined could become an overly dominant influence on decision making = no counterweight
Principle G = clear division of responsibilities between chair and CEO
Provision 9 = role of chair and CEO should be separate - combined could try to run the company for their own benefit
Provision 14 = responsibilities of chair and CEO should be clear, in writing, agreed by board, and made public - dominate CEO may infringe chair’s role as board leader by manipulating the agenda for board meetings
* FRC Guidance on Board Effectiveness (para 70) = when deciding responsibilities of chair and CEO, particular attention should be paid to areas of potential overlap
(Areas of overlap are most likely to arise if the chair has executive management responsibilities) - Require different skills
What is the role of EDs?
What 3 things do paragraphs 69 and 74 of FRC Guidance on Board Effectiveness recommend EDs do?
= bring specialist expertise to the table or may owe their position on the board to their status as head of a major division
para 69 and 74 = recommends EDs should:
- Not see themselves only as members of the CEO’s team when engaged in board business
- Broaden their understanding of their board responsibilities by taking up a NED position on another board
○ Provision 15 = should not be on more than one FTSE 100 Board - Welcome constructive challenge from NEDs as an essential aspect of good governance
What are the relevant Principles (4) and Provisions (4) in the UK CG Code on the role of NEDs?
Which Provisions (2) relate to the independence requirements for NEDs under the UK CG Code?
Principle H = should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account (Provision 13).
Principle J and Provision 17 = through participation in NC, lead the process for board appointments, succession planning, and ensuring the development of a diverse pipeline
Principles M and 25 = through participation in AC, satisfy themselves that financial controls and risk management systems are robust and defensible
Principle Q and Provision 33 = through their participation RC, determine appropriate levels of remuneration for the chair, executive directors, and senior management
Independence = provision 10 and 11
What 4 things can undermine a NEDs effectiveness in bringing outside experience and independent judgment?
How are these addressed in paragraphs 75 and 78 FRC Guidance on Board Effectiveness? (3)
- A lack of knowledge about the company’s business
- Insufficient time spent with the company
- Defects in the decision-making process (delays = NEDs may only meet on a monthly basis = stifle the entrepreneurial spirit of the executive team)
- Ineffective challenge
- para 75-78 = to be effective, NEDs should:
1. Have sufficient time available to discharge their responsibilities effectively (Principle H)
- Devote time to develop and refresh knowledge and skills
- Insist on receiving high-quality information in advance to thoroughly consider issues prior to board meeting
Which Principle (1) and Provisions (2) of the UK CG Code relate to NEDs’ time commitments?
Which paragraphs (2) of the FRC Guidance on Board Effectiveness relate to NEDs’ time commitments?
- Principle H = ‘Non-executive directors should have sufficient time to meet their board responsibilities.’
- Provision 14 = requires annual report to set out the individual attendance by directors at board and committee meetings
- Provision 15 = preventative measures:
1. When making new appointments, the board should take into account other demands on directors’ time
2. significant commitments should be disclosed with an indication of the time involved prior to appointment
3. Additional external appointments should not be undertaken without prior approval of the board
para 95-96 tackles time commitment and ‘overboarding’:
1. NEDs are expected to undertake that they will have sufficient time to meet what is expected of them effectively
- Letters of appointment should set out the expected time commitment
- NCs are encouraged to consider whether to set limits on the number and scale of other appointments to address ‘overboarding’
Which Provisions in the UK CG Code (2) and paragraphs (3) in the FRC Guidance of Board Effectiveness relate to the SID’s role?
When is the role of an SID more important?
Provision 12 = requires board to appoint 1 of the INEDs as the SID
Provision 12 = SID’s role is to:
1. Act as a sounding board for the chair and an intermediary for other directors and shareholders
2. Take the lead in the NED’s annual assessment of chair’s performance
3. Act as a mediator in circumstances where the board fails to function properly
Provision 14 = the role of the SID should be clear, set out in writing, agreed by the board, and made publicly available
para 66-68 = suggests the SID:
1. Might take responsibility for an orderly succession process for the chair along with the NC
2. Should be available to shareholders if they have concerns and contact with chair, CEO, or other EDs has failed to resolve or is inappropriate
3. Should work with the chair and other directors and/or shareholders to resolve significant issues when company is undergoing a period of stress
= at times when board is under stress or there has been a breakdown of communication
What are the 3 board committees the code recommends listed companies establish?
Is there a 4th?
Why does the code recommend these?
Are any of the committees mandatory and if so, for which companies?
Do committees make final decisions?
3 board committees made of wholly INEDs or a majority thereof;
1. nomination committee
2. audit committee
3. remuneration committee
- Financial services sector boards are also expected to establish a risk committee
- Designed to avoid conflict of interest that may arise if executives were involved e.g. directors setting their own pay
- EU Statutory Audit Directive 2008 DTR 7.1 = listed and quoted companies must have an audit committee
FRC Guidance on Board Effectiveness (para 62) = the final decision on all matters within the committee’s remit rests with the board
