Role and membership of the board of directors

Question 1

What is the overarching role of the board?

Answer 1

• Principle A = overarching role of the board is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society

Question 2

Under Principle B what 2 things should the board do?

Which FRC Guidance supports this?

Answer 2

Principle B = establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned

○ FRC Guidance on Board Effectiveness (Para 11) = an effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by company’s values

Principle B = act with integrity, lead by example and promote the desired culture

FRC Guidance on Board Effectiveness (para 19)

Question 3

Under Principle C what 2 things should the board do?

Give examples of each of what this will entail.

Answer 3

Principle C = Ensure necessary resources are In place for the company to meet its objectives and measure performance against them

The Board will need to appoint the right people in senior management positions

Principle C = Establish a framework of prudent and effective controls to assess and manage risk

The Board will need to:
1. establish internal controls and risk management procedures; and
2. set the company’s risk appetite.

Question 4

Under Principle D what should the board do?

Answer 4

Principle D = Ensure effective engagement with, and encourage participation from, shareholders and other stakeholders

Question 5

Under Principle E what should the board do?

Which FRC Guidance supports this?

Answer 5

Principle E = Ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success

FRC Guidance on Board Effectiveness (para 47 and 48) = involves reviewing policies and practices that have an impact on the experience of the workforce and drive behaviors

Question 6

Name 3 things that boards are required to deal with by law.

Where should these be reflected?

Answer 6

1. Approval of accounts
2. Adoption of anti-bribery policies
3. Adoption of health and safety policies

should be reflected in the schedule of matters reserved for the board

Question 7

What does Wates Corporate Governance Principles for Large Companies say on the role of the board?

Which principle does it most closely relate to?

Answer 7

Should establish and maintain CG policies aimed at delivering long-term value and cover areas such as delegation of authority, accountability, conflict of interests, etc.

Principle 3 = the board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge

Question 8

What does FRC Guidance on Board Effectiveness say about matters reserved for the board?

Why should boards do this? (3)

Answer 8

• para 28 = Boards should adopt a formal schedule of matters specifically reserved for their decision

1. helps clarify for Board members which matters are reserved for them / helps the Executive Team determine which decisions require Board approval
2. Simplifies delegation process = easy to delegate if expectations are set out in schedule
3. Adopting one allows company-wide changes to be made without having to alter the terms of the delegation for each individual or committee

Question 9

Which ICSA Guidance relates to matters reserved for the board?

What are 10 matters included in the draft schedule?

Answer 9

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
2. Financial reporting and controls = approval of annual accounts
3. Internal controls = maintain internal control and risk management systems
4. Delegation of authority =establishing board committees
5. CG matters = determine independence of NEDs
6. Policies = whistleblowing
7. Contracts = approving major investments
8. Communication = approval of resolutions to be out to shareholders
9. Remuneration = determining remuneration on NEDs
10. Board membership = appointment and removal or secretary

Question 10

Who will typically sit on the Board of Directors for a listed company? (5 group(s))

Answer 10

1. Chair (and possibly a deputy chair)
2. CEO
3. Other executives = finance director
4. NEDs
5. Senior independent director (SID) (who may also be the deputy chair)

Question 11

What does Principle G say in relation to the composition of the board?

What does Provision 11 say?

Answer 11

• 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

Question 12

What are the reporting requirements for listed companies on board composition? (1 law, 3 provisions)

Answer 12

• 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

Question 13

What is the role of the chair as described in Principle F?

What should the chair demonstrate?
What should they promote?
What should they facilitate?
What should they ensure?

Which guidance expands on this?

Answer 13

• Principle F = summaries the role of chair of a listed company = leads the board and is responsible for its overall effectiveness in directing the company
• The Chair should:
1. demonstrate objective judgment
2. promote a culture of openness and debate
3. facilitate constructive board relations and the effective contribution of all non-executive directors
4. ensure that directors receive accurate, timely, and clear information.

FRC Guidance on Board Effectiveness para 61

Question 14

What is the role of the chair as described in FRC Guidance on Board Effectiveness (3)

(Shaping what?
Encouraging who to do what?
Provide what to who?)

Answer 14

• para 61 suggests the chair’s role includes:
1. shaping the culture in the boardroom
2. encouraging all board members to engage in board and committee meetings
3. providing guidance and mentoring to new directors as appropriate

Question 15

Under common law, what 3 duties does the chair have?

Answer 15

• National Dwellings Society v Sykes [1894] = The chair has a duty to ensure that:
1. The meeting is properly conducted
2. All shades of opinion are given a fair hearing
3. Order is preserved

Question 16

What 2 powers do the Articles of Association usually give the chair?

Answer 16

• Articles of Association usually give the chair:
1. Specific power to make ruling on whether a director is entitled to vote on a matter
2. A casting vote at meetings

Question 17

What should the chair be on appointment?

What does FRC Guidance on Board Effectiveness and the Code say on how long a chair should stay in a post?

What did Glass Lewis identify?

Answer 17

• 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

Question 18

What is overboarding in relation to the chair’s time commitments?

What did the Walker Report 2009 suggest?

What does FRC Guidance on Board Effectiveness say? (2)

Answer 18

Overbarding = individuals may not have enough time to devote to the role because of their other commitments

• Walker Report (2009) = suggested chair of a large bank would need to spend 2/3 of time with the company = impossible to chair another FTSE100 company

Para 95 = directors are expected to undertake that they will have sufficient time to meet what is expected of them effectively
Para 96 = recommends letters of appointment should set out the expected time commitment

Question 19

Who appoints the chair?

Who can be the chair?

Do shareholders have any say?

Answer 19

• Art. 12 MA for Plc = allow boards to elect one of them to act as chair
• Code anticipates that the appointment process will be led by the nomination committee

• External candidates for chair must first be appointed as a director and then elected as chair

• Shareholders won’t necessarily have any say but can register their disapproval by voting against the chair’s re-election at the AGM

Question 20

What does FRC Guidance on Board Effectiveness suggest the role of the CEO is? (4)

(How does the FRC Guidance on Board Effectiveness expect the CEO to contribute to board effectiveness?)

Answer 20

• para 70 - 73 suggests CEO should be responsible for:

1. proposing strategy to the board, and delivering strategy as agreed;
2. setting an example to the company’s employees, and communicating to them the expectations of the company’s culture, values and behaviours;
3. Making the board aware of employees’ views
4. Making board aware of senior management’s views

Question 21

What power does the board delegate to the CEO?

Do these powers get delegated further?

Answer 21

Board will give CEO wide delegated powers to perform management functions.
Usually sub-delegate to an executive committee made of senior executives to help manage the business, but retain final decision = Not a committee of the board

Question 22

What are the 3 reasons why the roles of the chair and CEO should be separate?

Name the relevant Code principles and provisions and FRC Guidance for each.

Answer 22

1. 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
2. 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
3. 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)

Question 23

What are the 4 reasons why investors oppose the CEO being ‘promoted’ to chair?

Answer 23

1. Outgoing CEO will not be independent on appointment as chair (required by Provision 9)
2. Outgoing CEO will often retain some of the executive responsibilities = effectively becoming an executive chair (Code envisions role as non-executive) = division of responsibilities become more blurred
3. Incoming CEO’s freedom of action may be restrained by having their predecessor constantly overlooking their shoulder
4. Outgoing CEO may view any changes proposed by the incoming CEO as implied criticism of what happened before under their reign

Question 24

Name 2 cases where the CEO became chair.

Were either successful?

Answer 24

M&S 2000 = CEO was appointed as chair when share prices were failing and was successful in short term
M&S 2008 = CEO was appointed as chair temporarily until a successor to CEO was found - Investors criticised and at AGM 22% voted against re-election

Poly Peck International = company collapsed in 1990 as no internal controls in place = Nadir was chair and CEO and transferred large amounts of money from company to himself with no questions

Question 25

What is the role of EDs? (2) What 2 things may EDs always be inclined to do?

Answer 25

1. EDs = full-time employees of the company with executive management responsibilities 2. Bring specialist expertise to the table or may owe their position on the board to their status as head of a major division • Executives may always be inclined to: 1. Support the views of the CEO on all matters = present unified front 2. Mistrust NEDs' views as outsiders who do not know much about the company and its business

Question 26

How does the FRC Guidance on Board Effectiveness expect the executive directors to contribute to board effectiveness? (3)

Answer 26

para 69 and 74 = recommends EDs should: 1. Not see themselves only as members of the CEO's team when engaged in board business 2. 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 3. Welcome constructive challenge from NEDs as an essential aspect of good governance

Question 27

Summarised, what is the role of NEDs? (3) How are NEDs expected to contribute to the effectiveness of the board? (4)

Answer 27

1. Bring outside experience and expertise that may otherwise be lacking on the board 2. Scrutinise and challenge management proposals 3. Perform important governance functions through participation in board committee Principle H: 1. provide constructive challenge 2, provide strategic guidance 3. offer specialist advice 4. hold management to account (links to Provision 13)

Question 28

What particular functions are independent NEDs expected to fulfil under the Code? (3)

Answer 28

1. 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 2. Principles M and N = through participation in AC, satisfy themselves that financial controls and risk management systems are robust and defensible 3. Principle Q and Provision 33 = through their participation RC, determine appropriate levels of remuneration for the chair, executive directors, and senior management

Question 29

What are the independence requirements for NEDs under the UK CG Code? (1) When may their independence be compromised? (6) What should the board do if any of its NEDs do not meet these independence criteria?

Answer 29

Provision 11 = at least 1/2 the board, excluding the chair, should be non-executives whom the board considers to be independent • Provision 10 = independence may be compromised when: 1. NED has been an employee within the last 5 years 2. NED in the last 3 years has had a material business relationship with the company; 3. NED participates in share option or a performance-related pay scheme, or is a member of the company's pension scheme 4. NED has close family ties with the company 5. NED represents a significant shareholder 6. NED has served on the board for 9+ years from the date of their first election Provision 10 = requires boards to identify their INEDs in the annual report and accounts and explain why it considers them independent

Question 30

What 4 things can undermine a NEDs effectiveness in bringing outside experience and independent judgment? How are these addressed in the FRC Guidance on Board Effectiveness? (3)

Answer 30

• The effectiveness of NEDs can be undermined by: 1. A lack of knowledge about the company's business 2. Insufficient time spent with the company 3. Defects in the decision-making process (delays = NEDs may only meet on a monthly basis = stifle the entrepreneurial spirit of the executive team) 4. Ineffective challenge • para 75-78 = to be effective, NEDs should: 1. Have sufficient time available to discharge their responsibilities effectively (Principle H) 2. Devote time to develop and refresh knowledge and skills 3. Insist on receiving high-quality information in advance to thoroughly consider issues prior to board meeting

Question 31

What does the UK CG Code say in relation to NEDs' time commitments? (2) What 3 preventative measures does Provision 15 recommend on ensuring NEDs have sufficient time commitments?

Answer 31

1. Principle H = ‘Non-executive directors should have sufficient time to meet their board responsibilities.’ 2. 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

Question 32

What does the FRC Guidance on Board Effectivenesssay in relation to NEDs' time commitments? (3)

Answer 32

• 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 2. Letters of appointment should set out the expected time commitment 3. NCs are encouraged to consider whether to set limits on the number and scale of other appointments to address 'overboarding'

Question 33

What does the UK CG Code say the chair's responsibility is in relation to NEDs' possible lack of effective challenge? What does the FRC Guidance on Board Effectiveness say the EDs should do in relation to NEDs' possible lack of effective challenge? What suggestion could be made to help ensure the opinions of NEDs are properly considered?

Answer 33

• Principle F = primary responsibility on the chair to facilitate constructive board relations and the effective contribution of all NEDs FRC Guidance on Board Effectiveness para 61 expands on this • para 74 = EDs should welcome constructive challenge from NEDs as an essential aspect of good governance Having a SID could help ensure the opinions of NEDs are properly considered

Question 34

What is the SID's role? (3) What are the 2 requirements in the UK CG Code in relation to SIDs? When is the role of an SID more important?

Answer 34

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 1. Provision 12 = requires board to appoint 1 of the INEDs as the SID 2. Provision 14 = the role of the SID should be clear, set out in writing, agreed by the board, and made publicly available = at times when board is under stress or there has been a breakdown of communication

Question 35

What 3 things does the FRC Guidance on Board Effectiveness suggest the role of the SID might include? (Take responsibility for? Be available to who for what? Work with who, when?)

Answer 35

• 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

Question 36

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?

Answer 36

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

Question 37

What is the function of the nomination committee? What is the composition? Can the board chair sit on the committee? Can the board chair the committee when dealing with the appointment of their successor?

Answer 37

Function = leading the process for board appointments, ensuring plans are in place for orderly succession to both board and senior management positions and overseeing the development of a diverse pipeline Composition = majority of members should be independent NEDs. No minimum number specified. Board chair = can serve on the nomination committee and chair it No

Question 38

What is the function of the audit committee? What is the composition? Can the board chair sit on the committee? What are 2 other requirements?

Answer 38

Function = monitoring the integrity of financial statements, reviewing internal controls and risk management, ensuring independence and effectiveness of internal and external audit functions. Composition = all independent NEDs – in large companies, at least 3, in smaller companies at least 2. Board chair should not be a member. 1. at least 1 members should have ‘recent and relevant financial experience’. 2. committee as a whole should have ‘competence relevant to the sector in which the company operates’.

Question 39

What is the function of the remuneration committee? What is the composition? Can the board chair sit on the committee? What is another requirement?

Answer 39

Function = determining policy for ED remuneration and setting remuneration for chair, EDs and senior management. Composition = all independent NEDs – in large companies, at least 3, in smaller companies at least 2 Board chair = can only be a member if they were independent on appointment and cannot chair the committee. Before appointment as chair, the appointee should have served on a remuneration committee for at least 12 months

Question 40

What does provision 16 of the UK CG Code say about the governance role of the cosec? (Who should have access) What does principle I of the UK CG Code say about the governance role of the cosec? (What should the cosec ensure the board has)

Answer 40

• Provision 16 = All directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters • Principle I = The board, supported by cosec, should ensure that it has the policies, processes, information, time, and resources it needs in order to function effectively and efficiently

Question 41

What do paragraphs 81-85 or the FRC Guidance on Board Effectiveness say about the governance role of the cosec? (5)

Answer 41

• cosec’s role in CG: p.81 = ensure good information flows p.82 = arrange necessary resources for developing and updating directors’ knowledge and capabilities p.83 = ensure directors have access to independent professional advice at the company’s expense p.84 = assist the chair in establishing the policies and processes for it to run effectively p.85 = build relationships of mutual trust with the chair, SID and NEDs while maintaining the confidence of EDs

Question 42

What does the UK CG Code say about the appointment and removal of the cosec? What is this designed to do? Why is this important? (2)

Answer 42

• Provision 16 = both appointment and removal should be a matter for the board as a whole • Designed to ensure that the cosec's initial appointment and continuing tenure is not dependent on the decision of a single director or group of directors 1. Help reinforce the cosec's position as an impartial advisor to the whole board 2. If cosec could be appointed /removed by an individual, this impartiality could be compromised as they inevitably feel under pressure to demonstrate greater loyalty to that person

Question 43

What does the FRC Guidance on Board Effectiveness say about the reporting lines of the cosec? What does the FRC Guidance on Board Effectiveness say about the remuneration of the cosec? What does the UK CG Code say about the remuneration of the cosec?

Answer 43

• para 80 = recommends cosec should report to the chair on all governance matters but may also report to CEO or other ED in relation to their other executive management responsibilities • para 80 = the remuneration of the company secretary should be determined by the remuneration committee. • Provision 33 = the remuneration committee should be responsible for setting the remuneration of ‘senior management' (including cosec)