The role and membership of the board Flashcards
What is the overarching role of the board according to the UK Corporate Governance Code ?
To promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
Cite the three examples of things that the Code expects boards to do in performing this role
Any three from:
Establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.
Act with integrity, lead by example and promote the desired culture.
Ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them.
Establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
Ensure effective engagement with, and encourage participation from, shareholders and other stakeholders.
Ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success.
List three functions that the board performs through its board committees on which it still has final say?
Examples include:
making new appointments to the board;
approving the accounts and other financial statements;
establishing a framework of prudent and effective controls, which enable risk to be assessed and managed; and
proposing the appointment of auditors.
To what extent does the board manage the company’s business?
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. However, the board will still retain control over key management functions, such as setting the company’s culture, strategy,
purpose and objectives and monitoring performance against those objectives.
In addition, most boards will require certain critical management decisions to be referred to the board. The thresholds for when board approval is necessary will be set out in a schedule of matters reserved to the board.
What is the role of the company chair?
The chair 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.
What are the requirements of the Code with regard to the independence of the the company chair?
The chair should be independent on appointment when assessed against the
circumstances set out in Code provision 10 regarding the independence of nonexecutive
directors. In addition, a chief executive should not go on to be chair of
the same company.
Why should the role of the chair and CEO be separate?
The chair leads the board of directors. The CEO is the leader of the management
team. The Code requires there to be a clear division of responsibilities between
these two functions to prevent one person from having an overly dominant
influence on decision-making in the company.
How does the FRC Guidance on Board Effectiveness expect the CEO
to contribute to board effectiveness?
The CEO is expected to contribute by:
proposing strategy to the board, and for delivering the strategy as agreed;
setting an example to the company’s employees, and communicating to
them the expectations of the board in relation to the company’s culture,
values and behaviours;
supporting the chair to make certain that appropriate standards of
governance permeate through all parts of the organisation;
making certain that the board is made aware, when appropriate, of the
views of employees on issues of relevance to the business; and
ensuring the board knows the executive directors’ views on business issues
in order to improve the standard of discussion in the boardroom and, prior
to final decision on an issue, explain in a balanced way any divergence of
view in the executive team.
How does the FRC Guidance on Board Effectiveness expect the
executive directors to contribute to board effectiveness?
The Guidance suggests that executive directors should:
not see themselves only as members of the chief executive’s team;
broaden their understanding of their board responsibilities by taking up a
non-executive director position on another board; and
welcome constructive challenge from non-executive directors as an
essential aspect of good governance, and encourage their non-executive
colleagues to test proposals in the light of their wider experience outside
the company.
What is the function of an executive committee?
The role of the executive committee is usually to act as a sounding board for the
CEO and as a forum to receive and discuss operational updates and progress
reports. It is not usually a formal committee of the board, but usually one that is
established by the CEO to assist in the management of the business.
How are NEDs expected to contribute towards the deliberations of
the board?
According to the UK Corporate Governance Code, NEDs are expected to:
provide constructive challenge;
provide strategic guidance;
offer specialist advice; and
hold management to account (2018 Code principle H).
What particular functions are independent NEDs expected to fulfil
under the Code?
The UK Corporate Governance Code expects independent NEDs to:
lead the process for board appointments, succession planning and ensuring
the development of a diverse pipeline, through their participation in the
nomination committee;
satisfy themselves on the integrity of financial information and that
financial controls and systems of risk management are robust and
defensible, through their participation in the audit committee; and
set the directors’ remuneration policy and determine appropriate levels of
remuneration for the chair, executive directors and senior management,
through their participation in the remuneration committee.
List six circumstances in which a NED would not normally be considered independent.
Any six out of:
is or has been an employee of the company or group within the last five years;
has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a
performance-related pay scheme, or is a member of the company’s pension scheme;
has close family ties with any of the company’s advisers, directors or senior employees;
holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
represents a significant shareholder; or
has served on the board for more than nine years from the date of their first election.
What should the board do if any of its NEDs do not meet these
independence criteria?
The board should identify, in the annual report and accounts, the non-executive
directors it considers to be independent for the purposes of the Code. If a
NED is not identified as being independent, the assumption must be that the
board does not consider them to be independent. Boards can decide that a
NED is independent even though that individual does not comply fully with the
independence criteria. However, where this is the case, they must provide a clear
explanation in the report and accounts
List the main criticisms regarding non-executive director
effectiveness.
The main criticisms of NEDs include:
a lack of knowledge about the company’s business;
insufficient time spent with the company;
defects in the decision-making process; and
ineffective challenge.
