CHAPTER 5

BOARD OF DIRECTORS
AND RELATED ISSUES

Mai Phuong Thao

Faculty of Accounting and Auditing
University of Economics and Law

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 Contents
5.1. Development of corporate governance regarding to the board of
directors

5.2. Board of directors – roles and responsibilities

5.3. Board meetings & Board structures

5.4. Board committees

5.5. Non-executive directors

5.6. Chairman and CEO

5.7. Directors' induction and Continuing Professional Development – CPD

2 5.8. Directors – performance evaluation

 5.1. Development of corporate
governance regarding to the board of
directors
Cadbury report (1992)
The board required constant monitoring and assessment
Recommendations:
• There was a need to split the chairman/CEO role
• Necessary to ensure the chairman is an independent
person at the time of appointment.
Higgs report (2003)
It is the role of NEDs to represent the needs of shareholders
and operate as cautionary voice of the board
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 5.1. Development of corporate
governance regarding to the board of
directors (cont.)
Conclusions:
• At least half of the board should be made up of NEDs
• They should be remunerated appropriately
• They should act as a link between the board and
shareholders to reduce agency problem
• They should communicate regularly to important
shareholders

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5.1. Development of corporate
governance regarding to the board of
directors (cont.)
Tyson report (2003)
Developed from the Higgs report. It dealt with
recruitment and development of NEDs

Conclusions:
• Diversity in background, skills and experience
enhances board effectiveness
• Diversity improves communication and
relationships with stakeholders and shareholders
 5.1. Development of corporate
governance regarding to the board of
directors (cont.)
Financial Reporting Council FRC (2010):
4 revisions of the Code
• Announced that the Code would in future be known as the
UK CG Code
• Section A in 2008 code has been divided into two new
sessions called “Leadership” and “Effectiveness”.

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 5.1. Development of corporate
governance regarding to the board of
directors (cont.)
Four new principles:
- The chairman’s responsibility for leading the board
- The non-executive directors’ role in challenging and
developing strategy
- The need for the board to have balance of skills,
experience, independence, knowledge of the company
and
- The need for all directors to have sufficient time to
discharge their responsibilities effectively

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 5.2. Board of directors -
Roles and Responsibilities
• Provide entrepreneurial leadership of the company
• Represent company view and account to public
• Determine the company’s mission and purpose (strategic aims)
• Select and appoint the CEO, chairman, and other board members
• Set the company’s values and standards
• Ensure that the company’s management is performing its job correctly
• Establish appropriate internal controls that enable risk to be assessed
and managed
• Ensure that the necessary financial and human resources are in place
for the company to meet its objectives.

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 5.2. Board of directors –
Roles and Responsibilities (cont.)
• Ensure that its obligations to shareholders and other stakeholders are
understood and met.
• Meet regularly to discharge its duties effectively
• For listed companies:
- Appoint appropriate NEDs
- Establish remuneration committee
- Establish nominations committee
- Establish audit committee
• Assess its own performance and report annually to shareholders

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 Examples of Mission statement
Could you please give some examples of mission statements?

Coca-cola:
 To refresh the world...
 To inspire moments of optimism and happiness...
 To create value and make a difference.

Nike: "To bring inspiration and innovation to every athlete in the

world”.

Starbucks: to inspire and nurture the human spirit one person,

10 one cup and one neighborhood at a time.
 Examples of Mission statement
(cont.)
1. Tầm nhìn
Trường Đại học Kinh tế - Luật phát triển theo định hướng đại học nghiên
cứu, đến năm 2020 trở thành:
- Cơ sở đào tạo đạt chuẩn quốc tế, được xếp hạng trong số các trường
đại học có uy tín khu vực ASEAN, người học có đủ năng lực làm việc
trong môi trường toàn cầu.
- Trung tâm nghiên cứu khoa học và tư vấn chính sách có uy tín hàng
đầu Việt Nam trong lĩnh vực kinh tế, luật và quản lý.

2. Sứ mạng
Thúc đẩy sự phát triển và tiến bộ xã hội thông qua nghiên cứu, đào tạo
và cung ứng dịch vụ chất lượng cao trong lĩnh vực kinh tế, luật và quản
lý.
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 Examples of Mission statement
(cont.)
3. Giá trị cốt lõi
- Chất lượng và hiệu quả;
- Năng động và sáng tạo;
- Hội nhập và phát triển;
- Sức mạnh liên ngành.
http://www.uel.edu.vn/ArticleId/3a25aa4a-646b-4267-b618-
2c0929bfc259/su-mang-tam-nhin-va-gia-tri-cot-loi

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 5.3. Board meetings

• Agenda should strike a balance between short and long -

term issues and every director should have the
opportunity to place items on the agenda;

• All topics should have supportive information, including

risk and alternatives identified and be distributed in the
right time;

• Meeting should be regular and attendance expected;

• Where necessary board away-day to strategic sites.

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 5.3. Board structures

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 5.3. Board structures (cont.)
UNITARY
Structure 1: The all executive director board

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 5.3. Board structures (cont.)
UNITARY
Structure 2: The majority executive director board

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 5.3. Board structures (cont.)
UNITARY
Structure 3: The majority non-executive director board

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 5.3. Board structures (cont.)
UNITARY
Structure 4: The all non-executive director board

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 Two-tier board
Germany and other European countries

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 Two-tier board (cont.)
1. Lower-tier: management board
• Responsible for day to day running of enterprises
• Generally only include executives
• The CEO co-ordinate activities

2. Upper-tier: supervisory (corporate) board

• Appoints, supervises, advises member of management board
• Strategic oversight of the organisation
• Include employee representatives, environment groups and
other stakeholders’ management representatives.
• The chairman coordinates the work
• Member are elected by shareholders at AGM (annual general
meeting)
20 • Receive information and reports from the management board
 Two-tier board (cont.)

Advantages

• Clear separation between those manage the company

and those that own it
• Implicit shareholder’s involvement in most cases,
including the use of worker representation
• Independence thought, discussion and decision since
board meetings and operation are separate

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 Two-tier board (cont.)
Problems

• Dilution power through stakeholder involvement

• Isolation of supervisory board through non-participation of
management meeting
• Added bureaucracy and slow decision making
• Reliant upon an effective relationship between chairman
and CEO

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 Composition of the board
Executive directors are directors who also have executive
management responsibility in the company. They are normally full-time
employees of the company. Eg: CEO, CFO

Non-Executive directors (“NEDs”) are directors who do not have any

executive management responsibility in the company (They might be an
executive director in a different company)
- NEDs are not employees of the company
- They are not full-time employees.

Independent directors: an independent director is an individual who:

- Has no link to a special interest group or stakeholder group
- Has no significant personal interest in the company such as a

23 significant contractual relationship of the company.

 5.1.4. Board committees

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 5.1.4. Board committees (cont.)

Nomination committee
- To identify candidates to fill vacancies on the board
- To select a preferred candidate for nomination, and
recommend this individual to the board for appointment
- Identify the skills, knowledge and experience that the new
director should have
- Consider succession planning
- Review regularly the size and composition of the board
and make recommendation for change where
appropriate.

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 5.1.4. Board committees (cont.)
Remuneration committee
- The committee should agree with the main board a policy
for remuneration
- Where there is a performance-related pay scheme, the
committee should decide on the targets for performance
- The committee should decide on pension arrangement
- Negotiate and agree the remuneration of each individual
executive director

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 5.1.4. Board committees (cont.)
Audit committee

- Monitor the integrity of the company financial statement and any other
formal statement relating to the company’s financial performance
- Review the company’s internal financial controls
- Review the company’s internal and risk management system (unless
this responsibility is given to risk committee)
- Make recommendations to the board about the appointment, re-
appointment or removal of audit firm
- Approve the remuneration and terms of engagement of the external
auditors.
- Review and monitor effectiveness of the audit process

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 5.1.4. Board committees (cont.)

Risk committee
- Review of internal controls and risk management

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 5.1.5. Non-executive directors
(NEDs)

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 5.1.5. Non-executive directors
(NEDs) (cont.)
Criticism of NEDS

Lack of knowledge about the company, the industry and the markets it
operates in. NEDs often lack of the information about the company that
they need to make well-informed decision.

Insufficient time with the company: NEDs might not spend as much
time with the company as they need to, in order to perform their role
effectively

Accepting the view of executive directors. The NEDs might be too

willing to accept the views and opitions of executive directors, because
the executive directors know more about the company’s operation-> do
30 not contribute as much as they should to discussions on strategy.
 5.1.6. Chairman and CEO

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 Responsibilities
Chairman
• Ensure that the board sets and implements the
company’s direction and strategy effectively, and
• Act as the company’s lead representative, explaining aims
and policies to the shareholders

CEO
• Take responsibility for the performance of the company,
as the determine by the board’s strategy
• Report to the chairman and/or board of directors

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 Comparison between
Chairman and CEO’s roles
CEO
Executive Director. Full-time employee
Reporting lines
 All executive manager report,, directly or
indirectly, to the CEO
 The CEO report to the chairman (as leader of
the board generally)
Main responsibilities
 Head the executive management team
 To draft proposed plans, budgets and
strategies for board approval
 To implement decision of the board
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Chairman
Part-time. Usually independent
Reporting lines
 No executive responsibilities. Only the
company secretary and the CEO report to
the chairman directly or matters relating to
the board
 The chairman reports to the company
shareholders, as leader of the board
Main responsibilities
 Leader of the board, with responsibility for
its effectiveness
 To make sure that the board fulfills its role
successfully
 To ensure that all directors contribute to
work of the board
 Reasons for splitting the role
• Representation: the chairman is clearly and solely a
representative of shareholders with no conflicts of interest
having a role as a manager within a firm;

• Accountability: The existence of the separate chairman

role provides a clear path of accountability for the CEO
and the management team;

• Temptation: the removal of joint role reduces the

temptation to act more in self-interest than purely interest
of shareholders.

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 Reasons for splitting the role (cont.)
 The chairman is responsible for leading the board and
the CEO is responsible for leading the executive
management. Combining the two roles creates a position
of dominant power;

 They are two different roles, requiring different sets of

skills. The same individual may not have the set of skills
required to perform each role well;

 When an individual has a dominant position on the

board, there is a risk that the board will lose the balance
that is required, and NEDs might not be able to
35 contribute as effectively as they should.
 Reasons for splitting the role (cont.)
 In some cases, there may be a risk of the chairman/CEO
being a domineering personality, who disregards the
views and opinions of board colleagues.

 It is also recommended (UK Combined Code) that the

CEO of a company should not go on to become its
chairman even if he or she gives up the position as CEO.

 The UK Combined Code also recommends that the

chairman should be independent at the time of his
appointment, and this is not possible if the person
appointed is the current or former CEO.
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 Reasons for splitting the role (cont.)

• Unity: the separation of the role creates two leaders rather

than the unity provided by single leader

• Ability: both roles require an intricate knowledge of the

company. It is far easier to have a single leader with this
ability than search for two such individuals

• Human nature: There will almost inevitably be conflict

between two high-powered executive offices

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 Group discussion: BrightCo case

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Group discussion: BrightCo case (2)
Group discussion: BrightCo case (3)
Group discussion: BrightCo case (4)
 5.1.7. Directors' induction

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 5.1.7. Directors' induction (cont.)
Purposes:
• Develop an understanding of the company, its business
and the market in which it operates;

• Get to know the people who work for the company;

• Develop an understanding of the company’s main

relationships, for example with key suppliers or customers

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 5.1.7. Directors' induction (cont.)
Program might include:
• Visits to important sites/locations where the company
carries out its operations
• Demonstration of the company’s products
• Meeting with senior and staff
• Possibly, meeting with professional advisers of the
company
• Possibly, meeting with major shareholders (but only the
shareholder wishes to meet with the new directors)

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 Continuing Professional
Development – CPD
The UK Combined Code also states that
• “All directors should regularly update and refresh their
skills and knowledge” and
• “The chairman should ensure that directors regularly
update their skills, knowledge and familiarity required to
fulfill their role…. The company should provide necessary
resources for developing and updating its directors’
knowledge and capabilities”

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 Continuing Professional
Development – CPD (cont.)
Subject areas for training and development might include:
• formal training in business strategy
• corporate governance issues, or
• developments in financial reporting.

Directors should also been given demonstrations of new

products, services or processes that the company has
developed.

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 5.1.8. Directors - Performance evaluation

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 5.1.8. Directors-Performance evaluation
(cont.)
Guidance: at least once a year
• Companies should tailor the evaluation to suit their own
needs and circumstances
• Companies should disclose their annual reports whether
such performance evaluation is taking place
• The chairman is responsible for selection of an effective
process and for acting on its outcome
• It is suggested that the use of external third party to
conduct the evaluation will bring objectivity to the process

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 5.1.8. Directors-Performance evaluation
(cont.)
Guidance:
• The evaluation process will be used constructively as a
mechanism to improve board effectiveness, maximise
strengths, tackle weaknesses
• The result of the board should be shared with the board
as a whole
• The result of individual assessment should remain
confidential between the chairman and the executive/NED
concerned.

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 5.2. Directors’ remuneration

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 5.2. Directors’ remuneration (cont.)

• The Greenbury report (1995) contributed to the existing

code with regards to directors’ remuneration.

• The report focused on providing a means of establishing a

balance between salary and performance in order to
restore shareholder confidence.

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 5.2. Directors’ remuneration (cont.)
Remuneration committee
(i) Role
To have an appropriate reward policy that attracts, retains,
motivates directors to achieve the long term interests of
shareholders.
(ii) Objectives
• Independent with access to its own external advice or
consultants
• It has a clear policy on remuneration that is well
understood and has the support of shareholders
• Performance packages produced are aligned with long
term shareholder interest and have challenging target
52 • Reporting is clear, concise
 5.2. Directors’ remuneration (cont.)
(iii) Responsibilities
• Determine and regularly review the framework, policy and
terms for remuneration and terms and conditions of
employment of the chairman and executive directors
• Recommend and monitor the level and structure of the
remuneration of senior manager
• Establish pension provision policy
• Ensure that the executive directors and key management
are fairly rewarded

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 5.2. Directors’ remuneration (cont.)
(iii) Responsibilities
• Demonstrate to shareholders that the remuneration is set
by individuals with no personal interest in the outcome of
the decisions of the committee
• Ensure that provisions regarding disclosures of
remuneration, including pension, as set out in the
Directors’ Remuneration Report Regulations 2002 and
codes are fulfilled.

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 5.2. Directors’ remuneration (cont.)

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 5.2. Directors’ remuneration (cont.)
Basic salary
Company set salary levels according to:
• The job itself
• Skills
• Individual’s performance
• Individual’s overall contribution to company strategy
• Market rates for that types of job
Performance related elements of remuneration
Should form a significant part of the total remuneration package
Bases for short-term bonus
• Share options are contracts that allow the executive to buy shares at
a fixed price
• If the stock rises above this prize, the executive can sell the shares at
a profit.
56 Pensions
Benefits in kind such as company car, health insurance.
 Q&A

Thank you!

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