A3-The board of directors

Board Of Directors
NEDs
Role of CEO
Role of the Chairman
Directors Service Contract
Conflicts of Interest
Director's removal
Frameworks for assessing the performance of boards
Diversity on boards of directors
Board Of Directors

The board of directors

Roles and Responsibilities

1. Provide entrepreneurial leadership
2. Represent company view and account to the public
3. Determine the companys mission and purpose
4. Select and appoint the CEO, chairman and other board members
5. Establish appropriate internal controls
6. Ensure that the necessary financial and human resources are in place
7. Ensure that its obligations to its shareholders and other stakeholders are
understood and met
8. Set the company's strategic aims
In the UK listed companies have to state in their accounts that they comply
with the following regulations:
1. Separate MD & chairman
2. Minimum 50% nonexecutive directors(NEDs)
3. Independent chairperson
4. Maximum one-year notice period
5. Independent NEDs (three-year contract, no share options)
Unitary Board
This is the single board structure with sub-committees.
This is where all directors, including managing directors, departmental
directors and NEDs all have equal legal and executive status in law.
This does not mean that all are equal in terms of the organisational
hierarchy, but that all are responsible and can be held accountable for board
decisions.
Advantages
1. NEDs are empowered, being accorded equal status to executive
directors.
2. The presence of NEDs can bring independence, experience and expertise
3. Board accountability is enhanced as all directors are held equally
accountable under a cabinet government arrangement
4. Reduced likelihood of abuse of power by a small number of senior
directors
5. Often larger than a tier of a two-tier board so more viewpoints are
expressed and more robustly scrutinised
6. All participants have equal legal responsibility for management of the
company and strategic performance

Disadvantages
1. A NED or independent director cannot be expected to both manage and
monitor
2. The time requirement on NEDs may be onerous
Two-tier boards
The board is split into multi-tiers, separating the executive from directors.
These are predominantly associated with France and Germany.
This two-tier approach can take the form of a:
a) Management or executive board
Responsible for managing the enterprise with the CEO to coordinate
activity.
Responsible for the running of the business.
Composed entirely of executive directors.
b) Supervisory board
Appoints, supervises and advises members of the management board.
A separate chairman coordinates the work and members are elected
by shareholders at the AGM
Has no executive function.
It reviews the company's strategy.
Advantages of 2-tier boards
1. Clearly management and owners separation
2. Clear stakeholder involvement
3. Separate meetings means freedom of expression
4. Owners control management by power of appointment

Non-Executive Directors (NEDs)

NEDs have no executive (managerial) responsibilities.
The key role is to reduce the conflict of interest between management
(executive directors) and shareholders by providing the balance to the
board.
NEDs bring an independent viewpoint as they are not full time employees.
Roles and Responsibilities
The Higgs Report (2003) described the function of non-executive directors (NEDs)
in terms of four distinct roles.
1) Strategy role
NEDs are full members and thus should contribute to strategy. They may
challenge any aspect of strategy they see fit, and offer advice
2) Scrutiny role
NEDs should hold executive directors to account for decisions taken.They
should represent the shareholders interests
3) Risk role
NEDs should ensure the company adequate internal controls and risk
management systems
This is often informed by prescribed codes (such as Turnbull) but some
industries, such as chemicals, have other systems in place, some of which
fall under International Organisation for Standardisation (ISO) standards.

4) People role
NEDs should oversee issues on appointments and remuneration, but
might also involve contractual or disciplinary issues.
Independence
The Code states as a principle that the board should include a balance of
NEDs and executives.
The board should ensure any NED is truly independent in character
and judgement by:
not being an employee of the company within the last 5 years
not having a material business relationship with the company in
the last 3 years
not receiving any remuneration except a directors fee
not having any family ties with the firm
not holding cross directorships with other directors
Cross directorships
When two (or more) directors sit on the boards of the other.
In most cases, each directors second board appointment is likely to be
non-executive.
This can compromise the independence of the directors involved. For
example, a director deciding the salary of a colleague who, in turn, may play
a part in deciding his own salary
It is for this reason the cross directorships are explicitly forbidden by many
corporate governance codes
Advantages of NEDs
The main advantages of bringing NEDs onto a board are as follows:
1) Monitoring to reduce the excesses of executives.
2) External expertise
3) Perception: Company is perceived more trustworthy
4) Communication: improvement in communication between shareholders
interests and the company.
5) Independent view
6) compliance with corporate governance code
Disadvantages of NEDs
1) Lack of trust can affect board operations
2) Quality: there may not be many appropriately qualified NEDs around
3) Liability: Poor remuneration and liability in law might reduce potential NEDs
further
Role of CEO

CEO - Chief executive officer

Role of CEO

1) To lead the company and to protect shareholder interests above all others
2) To develop and implement polices and strategies capable of delivering
superior shareholder value
3) To assume full responsibility for all aspects of the companys operations
4) To manage the financial and physical resources of the company, monitor
results, and ensure that effective operational and risk controls are in place

5) To oversee the management team, co-ordinating the interface between

the board and the other employees in the company, and assisting in the
appointment of directors to the board
6) Communicating effectively with significant stakeholders including the
companys shareholders, suppliers, customers and state authorities

Roles of the chairman in corporate governance

Roles and Responsibilities
1) Provide leadership to the board
The chairman is responsible for ensuring the boards effectiveness for
shareholders, by setting the agenda and ensuring meetings occur
regularly
2) The chairman represents the company to investors and other outside
stakeholders/constituents.
3) Effective communication with shareholders
The public face of the organisation So, the chairmans roles include
communication with shareholders.
This occurs in a statutory sense in the annual report and at annual and
extraordinary general meetings.
4) Finally, the co-ordinating of NEDs and facilitating good relationships
between them and executives
5) Ensuring the board receives accurate and timely information

Benefits of separation of roles of Chair & CEO

1) Frees up the chief executive to fully concentrate on the management of the

organisation
2) Allows chair to represent shareholders interests
3) Removes the risks of unfettered powers in one individual
4) Reduces the risk of a conflict of interest in a single person being responsible
for company performance whilst also reporting on that performance to
markets
5) Chairman provides a conduit for the concerns of non-executive directors
6) Ensures the CEO is responsible to someone named directly
7) Agrees with most best practice codes

Importance of the chairmans statement

An important and usually voluntary item, typically at the very beginning of
an annual report.
Conveys important strategic messages
Allows chairman to inform shareholders about issues Legal rights and
responsibilities of Directors (Breach of responsibility can leave director
open to criminal prosecution)

Directors service contract

This should Include:
key dates

duties
remuneration details
termination provisions (notice
constraints
other ordinary employment terms

Directors Induction & CPD

Induction
Depends on their background
It is important, for effective participation in board strategy development, not
only for the board to get to know the new director, but also for the director
to build relationships with the existing board and employees below board
level.
Induction Process
Highly tailored to the individual but will include the following
1) Company structure
2) Company values
3) Company strategy
4) Markets and key players
5) Day to day job details
6) Reporting lines
7) Information about Board operations
It can be given as a presentation by other directors or as an induction pack also
Objectives of CPD
1) Maintain sufficient skills and ability
2) To communicate challenges and changes within the business environment
3) Improve board effectiveness
4) Support personal development of directors
Conflicts of Interest

Conflict and disclosure of interests

Key areas
1. Directors contracting with their own company (However, the articles may
allow if disclosed)
2. Substantial property transactions: These need approval
3. Loans to directors: generally prohibited
Insider dealing/trading
Here a director uses information (not known publicly) which if publicly
available would affect the share price
Trading in own shares with this knowledge is fraud

Directors are often in possession of market-sensitive information ahead of its

publication and they would therefore know if the current share price is
under or over-valued given what they know about forthcoming events.
If, for example, they are made aware of a higher than expected performance,
it would be classed as insider dealing to buy company shares before that
information was published.
Why is insider trading unethical and often illegal?
Directors must act primarily in the interests of shareholders.
If insider dealing is allowed, then it is likely that some decisions would have
a short-term effect which would not be of the best long-term value for
shareholders.
This can become particularly important at times of takeovers where inside
information could mean big profits for the director and not necessarily in the
longer term interests of the shareholder
There is also the potential damage that insider trading does to the
reputation and integrity of the capital markets in general which could put off
investors who would have no such access to privileged information and who
would perceive that such market distortions might increase the risk and
variability of returns beyond what they should be.
Director's removal

Director's removal

There are 3 main methods

1. Retire by Rotation
At AGM, every 3 years
Longest serving director retires first
Means a nice phased retirement of directors
Directors can be replaced in an orderly manner
2. Termination
Death
Resignation
Not seeking re-election (see above)
Bankruptcy
Disciplinary procedures
3. Disqualification
The reasons can be:
Wrongful trading - allowing the company to trade while knowing its
insolvent
Not keeping proper accounting records
Failing to prepare & file accounts. 3+ defaults in filing documents in 5
years
Failing to send tax returns and pay tax
Frameworks for assessing the performance of boards

Frameworks for assessing the performance of boards

Appraisal of the board's performance is an important control over it.

Aimed at:
improving board effectiveness,
maximising strengths and
tackling weaknesses.
The UK Corporate Governance Code recommends that performance of the board,
its committees and individual directors should be formally assessed once a year.
Ideally the assessment should be by an external third party who can bring
objectivity to the process.
The appraisal of the board should include:
1. A review of the boards systems (conduct of meetings, work of committees,
quality of written documentation)
2. Performance measurement in terms of the standards it has established,
financial criteria, and non- financial criteria relating to individual directors
3. Assessment of the boards role in the organisation (dealing with problems,
communicating with stakeholders)

Diversity on boards of directors

DEFINITION OF BOARD DIVERSITY
means having a range of many people that are different from each other.
factors like age, race, gender, educational background and professional
qualifications of the directors to make the board less homogenous.
In implementing policies on board diversity, both the companys chairman
and the nomination committee play a significant role.
The chairman, being the leader of the board, has to facilitate new members
joining the team and to encourage open discussions and exchanges of
information during formal and informal meetings.
The nomination committee should give consideration to diversity and
establish a formal recruitment policy concerning the diversity of board
members with reference to the competencies required for the board, its
business nature as well as its strategies.
The committee members have to carefully analyse what the board lacks in
skills and expertise and advertise board positions periodically.
BENEFITS OF BOARD DIVERSITY
1. More effective decision making.
2. Better utilisation of the talent pool (not only male involved, also woman).
3. Enhancement of corporate reputation and investor relations.