Corporate Governance – Who sits where?

The Board

Roles:

The roles of chairman and CEO should not be held by the same individual.

Chairman runs the Board and ensures its effectiveness. The CEO runs the company.

One NED should be the senior independent director who is directly available to shareholders, if they have concerns which cannot be dealt with through the CEO, Chairman or CFO.

Balance:

There should be a balance between Execs and NEDs: The Board should consist of half independent NEDs excluding the chair

              What makes an NED independent?

·       Not an employee in the last 5 years

·       No material relationship with the company in the last 3 years

·       No cross directorships

·       Only receive a directors fee (no share options and bonuses etc)

·       No close family ties with other directors

·       Not a shareholder

·       Has not served on the Board for more than 9 years.

Three compulsory committees

·       Audit

At least 3 independent NEDs (or two for companies outside the FTSE 350. The chairman of a smaller company may be an additional member of the committee provided he was regarded as independent when he was appointed chairman, but he should not chair the committee).

Though the auditors or FD may be invited to certain meetings, the composition of the AC is meant to be NEDs only. However, they will not have the right to attend or vote; they are only there by invitation.

The Code also says that the board should ‘satisfy itself’ that at least one member of the committee has recent and relevant financial experience. The Code is not specific about what constitutes ‘relevant experience’. Failure to satisfy this requirement is one of the more common disclosures in company reports when detailing their compliance with the Code. 

Often, the ‘expert’ will be a retired finance director from another company or a former partner of an accountancy firm. To comply with the Code’s recommendations for independence, the board should, of course, exclude its own former finance directors and auditors. In any event, it must justify its choice in the annual report.

·       Remuneration

           At least 3 independent NEDs (or two for companies outside the FTSE 350. The chairman of a smaller company may be an additional member of the committee provided he was regarded as independent when he was appointed chairman, but he should not chair the committee).

A remuneration committee will, in accordance with the Code’s provisions, commonly have delegated authority to set executive pay. Its proposals will be discussed with the chairman and/or chief executive, and there may be a broad policy on directors’ pay agreed with the board, but the responsibility will lie with the committee, not the board.

The head of HR will often be needed at remuneration and nomination committee meetings. But will not have the right to attend or vote; they are only there by invitation.

·       Nominations

Majority of members should be independent non-executive directors.

There is no ban on the chief executive being a member. The committee should be chaired by one of the independent non-executives or the company chairman, though he should stand aside when it comes to appointing his successor.

The committee makes recommendations for executive as well as non-executive appointments.

The nomination committee will usually make recommendations to the full board and leave the final decision to the board as a whole

NB Individuals who are non-executives in one company will often be executive directors in another – and vice versa. It is generally thought to be a good thing that an executive gets experience of the workings of another company and another industry. However, it is important that the demands on the individual are realistic – a major corporate dispute or a takeover can demand huge amounts of non-executive time. The Code says that the board should not agree to a full-time executive taking on more than one FTSE 100 company non-executive directorship or the chairmanship of such a company.