BBDM 3294 SBL L3

CG: The Board of Directors

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 STUDY
BBDM 3294 SBL L3 GUIDE
The Board of Directors
B) Governance
B5 The board of directors
a) Assess the major areas of organisational life affected by issues in governance.
(i) duties of directors and functions of the board (including setting a responsible “tone”
from the top and being accountable for the performance and impacts of the
organisation)
(ii) the composition and balance of the board (and board committee)
(iii) relevance and reliability of organisation reporting and external auditing
(iv) directors’ remuneration and rewards
(v) responsibility of the board for risk management systems and internal control
(vi) organisation social responsibility and ethics
b) Evaluate the cases for and against, unitary and two-tier board structures
c) Describe and assess the purposes, roles and responsibilities and performance of NEDs
d) Describe and assess the importance and execution of, induction and continuing
professional development (CPD) of directors on board of directors
e) Explain the meaning of “diversity” and critically evaluate issues of diversity on boards of
directors.
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 Board of Directors (BoD): Roles and responsibilities
UK CG Code (2016) spelt out the roles and responsibilities of
directors
• (1) provide entrepreneurial leadership of the company
• (2) represent company view and account to the public
• (3) decide on a formal schedule of matters to be reserved for
board decision
• (4) determine the company’s mission and purpose (strategic
aims)
• (5) select and appoint the CEO, chairman and other board
members
• (6) establish appropriate internal controls that enable risk to be
assessed and managed
• (7) ensure that the necessary financial and human resources
are in place for the company to meet its objectives 3
 BoD – “Tone at the top”
• The term refers to how an organisation’s
leadership create an environment or
atmosphere in the workplace
(ethical/unethical working practice)
• Management’s “tone” has a trickle-down
effect on employees. If top managers uphold
ethics and integrity so will employees.
• Employees will follow the examples of their
bosses
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 BoD - Composition
Effective board characteristics
• A sufficient number of directors appropriate to the size and complexity of
the company’s operations
• The necessary breath of skills, experience and personal qualities to
understand, manage and grow the company
• A appropriate diversity (eg gender,age and ethnicity) to ensure that all
appropriate views and stakeholders interests can be considered
• A balance of executive directors and non-executive diectors (NEDs) so
that no individual or group can dominate the board’s decision-making
• UK code – half the board should be NEDs, other codes require NEDs
must be in the majority (eg SOX).
• OECD Principles do not specify the number of NEDs but they are
assigned to tasks where there is potential conflict of interest if
performed by executives. These tasks include: ensuring the integrity of
reporting, reviewing related party transactions, nominating board
members and recommending the remuneration of executive directors.
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 BoD composition - diversity
• It concludes not just age, gender and ethnicity
but personality types, functional expertise and
industry experience.
• Personality types – promote active discussions of
business activities and courses of action, and
breath of perspective
• Functional expertise – marketing, finance, HR and
industry-specific experience reinforce board’s
ability to rank and address strategic priorities
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 BoD composition – diversity (2)
Women on the board
• In 2010, women made up only 12.5% of the members of the
corporate boards of FTSE 100 companies. This was up from 9.4%
in 2004. But the rate is slow!
• Women are successful at university and in their early careers but
attrition rate increase as they progress through an organisation.
• Evidence suggests that companies with a strong female
representation at board and top management level perform
better than those without and that gender-diverse boards have a
positive impact on performance. The mix of voice must include
women.
• https://
www.telegraph.co.uk/women/womens-business/11492476/Dav
ies-report-Women-on-British-boards-double-in-4-years.html 7
 BoD composition – diversity (3)
NEDs diversity
• The Higgs Review found that majority of NEDs in UK companies are
white, middle-aged males of British origin with previous plc director
experience. Non-British only accounted for only 7% of NED
positions, while British citizens from ethnic minority backgrounds
accounted for only 1% of such position.
• (http://
www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-govboard2)

• The survey also found that although about 30% of managers in the
UK corporate sector are female, women hold only 6% of NED
positions.
• The homogeneity of board suggest that many UK companies are not
searching broadly for talent, or at least have not done so in the past.
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 BoD diversity - Recommendations
Lord Abersoch (commissioned by government) in Feb 2011 recommended:
• All chairman of FTSE 350 companies should set out the percentage of
women they aim for their boards in 2013-2015
• FTSE 100 boards should aim for a minimum of 25% female representation
by 2015
• Chairman should announce their aspirational goals by Sept 2011
• The consideration of the diversity of the board should be the role of the
nomination committee
• Investors should pay close attention to diversity when considering
appointments.
• UK boards need to consider a wide pool of recruits including
entrepreneurs, academics and civil servants
• A steering board will meet every six months to consider progress against
these measures and will report annually with an assessment of whether
sufficient progress is being made. 9
• https://en.wikipedia.org/wiki/FTSE_350_Index

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 BoD Composition – CEO and Chairman
• CEO and Chairman are two key roles in companies
• The Chairman heads the BoDs and CEO leads the
management team
• The OECD and many other corporate codes
recommend separating the roles of CEO and
chairman to avoid excessive power of either one of
them
• Other governance codes also require the chairman
to be an independent NED
• A good example is BHS (British Home Stores), UK.
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 BoD – Splitting the role
• UK Code (2010) stated that “a clear division of responsibilities must
exist at the head of the company. No individual should have
unfettered power of decision”
Reasons for splitting the role:
• Representation: the chairman is solely a representative of
shareholders with no conflict of interest having a role as a manager
within the 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 the joint role reduces the temptation to
act more in self-interest rather than purely in the interest of
shareholders.

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 BoD – Splitting the role (2)
Reasons against splitting the role
Unity: the separation of the role create two leaders
rather than the unity provided by a single leader
Ability“: both roles require an intricate knowledge
of the company. It is far easier to have a single leader
with this ability rather than search for two individuals
Human nature: conflict between two-high-powered
executive offices.

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 Illustration : BHS
• BHS went into liquidation in 2016
• A Parliamentary Committee revealed that “ Sir Phillip
chose to run these companies as his own personal
empire, with boards taking decision with reference to
a shared understanding of his wishes rather than the
interests of each individual company. This weak
governance arrangements allowed the overarching
interest of the Green family to prevail and facilitated
the flow of money offshore to the ultimate beneficial
owner of the parent company, Lady Green…

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BHS image

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BHS image

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BHS – Store closing

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 BoD – Directors’ Remuneration
A good remuneration scheme should:
• (1) attract individuals with the right skills
• (2) align the directors’ interests with those of
other stakeholders (eg awarding share options to
encourage goal congruence between directors
and shareholders)
• (3) encourage directors to take a long-term view
• (4) align the risk profiles of directors with those
of other stakeholders
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BoD – Board Structures

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 BoD – Board Structures
• Unitary and two-tier board
• Which structure to use depends on historical, legal and cultural factors

Unitary board:
• Most common in UK and US.
• Includes both executive and NEDs who take decisions as a unified
group and are held legally responsible for their actions and success of
the company
• Not equal in terms of the organisational hierarchy but all are equally
responsible and accountable for board decisions.
• Advantages and disadvantages of unitary board (refer to BPP Workbook
page 63)

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 Illustration: St Andrew’s Healthcare
• Case study: An example of a completely unitary board (St Andrew’s Healthcare) St
Andrew’s is the UK’s largest not-for-profit mental health care charity. They offer
men, women, adolescents and older people specialist services across mental
health care, learning disability, acquired brain injury and progressive and
neurodegenerative conditions.
• In 2004, St Andrew’s realised a requirement for a more efficient approach to the
organisation’s governance in order to compete successfully for business with
private organisations. They decided that the best way to promote organisational
effectiveness was to have a unitary (business) board bringing together the non-
executives and executive management. This was part of a wider organisational
change as St Andrew’s was also seeking to restructure as a registered charity.
• They engaged with the Charity Commission in articulating these changes and
carefully worked through the practical complexities of their expression. A key
aspect in succeeding with the unitary board was St Andrew’s commitment to the
Combined Code.

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 Illustration: St Andrew’s Healthcare (2)
• The unitary board now comprises five unpaid trustees (including the non-
executive Chair and Vice-Chair) sitting alongside the five senior executives
(CEO/Medical Director, Director of Nursing, Director of Finance, Director of
Development and the Head of Legal/General Counsel).
• St Andrew’s has found this structure to be very effective in driving the ethos of
a business culture – faster decisions, clearer strategic thinking and an increased
success in the market place - throughout the organisation whilst retaining its
base mission and values.
• As Professor Philip Sugarman, CEO and Medical Director of St Andrew’s,
stated,“In short, St Andrew’s has been very successful since the unitary board
came into being, thriving despite commercial competitors, developing innovative
services no-one else offers, and nearly doubling the number of service users we
help.
• The board upholds the principle of voluntarism, brings in great business
expertise, and allows quick and effective decisions closely involving the charity’s
staff. The charity’s impact on public benefit has never been stronger.
• ” From ACEVO’s Taskforce on Regulation Report – Public Impact Centred
Regulation for Charities (2010). 22
 BoD – Board Structure (2)
Two-tier board
• Usually consists of a management board and a
supervisory board
• France and Germany companies adopt this structure
o Management board made up of executive directors,
headed by the CEO.
oFocus on operational issues.
oResponsibilities include: running the business,
entrepreneurship, compliance with statutory requirements
and regular reporting to the supervisory board on strategy,
account and performance.
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 BoD – Board Structure (3)
Supervisory board:
• Responsible for safeguarding stakeholders’ interests and overseeing the
management board
• Made up of NEDs (headed by the chairman) representing employees,
shareholders and banks
• Shareholders elect their representatives for the supervisory board and
employee representatives are elected by the workforce or appointed by the
trade union.
• Up to half of the supervisory board may consist of employee representatives
• Responsible: approval and evaluation of strategy and policies, monitor
company performance/financial statements, safeguard shareholder interest,
call shh meetings, appointment and dismissal of the management board,
monitor management board’s performance, provide advisory service to
management board and provide a written report for shareholder on audit
results.
• Advantages and disadvantages (refer to BPP Workbook page 63) 24
 BoD - NEDs
• NEDs are directors who have no executive or managerial responsibilities
• UK Code identifies four area of key involvement (roles) for NEDs: Strategy,
Performance, Risk and People.

• Strategy: NEDs should constructively challenge the executive boards’ proposals on

strategy. They have the right and responsibility to contribute to the strategic success of
the organisation
• Performance (scrutiny): NEDs should scrutinise the performance of management in
meeting agreed goals and objectives, and monitor the reporting of performance. They
ensure that executives are working in the best interests of shareholders.
• Risk:: NEDs should satisfy themselves on the integrity of financial information and
financial controls and systems of risk management are robust. Also monitor company’s
legal and ethical performance
• People: Determine appropriate levels of remuneration of exec directors, have prime
role in appointing and removing exec directors and in succession planning. They should
exercise independent judgement to areas where there are potential conflict of
interests.

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BoE – NEDs Role

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 BoD – NEDs (2)
• NEDs skills – integrity and high ethical standards, sound judgement,
ability and willingness to challenge and probe, strong interpersonal
skills
• Independence – it is necessary pre-requisite for the effective
accountability of NEDs to shareholders.
• Threats to independence:
Being a former employee of the company with the last five years
Material business relationships with the company in the past three
years
Holding too many non-executive directorships in various
companies
Not being able to devote enough time to the company

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BoD- NEDs (Threats to Independence)

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 BoD – NEDs (3)
An effective NED need to:
• Build a recognition by executives of their contribution in order to
promote openness and trust
• Be well-informed about the company and the external environment in
which it operates.
• Have a strong command of issues relevant to the business
• Insist on a comprehensive, formal and tailored induction, refresh their
knowledge and skills to remain informed and relevant
• Ensure that information is provided sufficiently in advance of meetings
to enable thorough consideration of the issues facing the board
• Insist that information is sufficient, accurate, clear and timely
• Uphold the highest ethical standards of integrity and probity
• Question intelligently, debate constructively, challenge rigorously and
decide dispassionately
• Promote the highest standards of CG and seek compliance with the
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provisions of the Combined Code
 Illustration: Royal Bank of Scotland (RBS)

A report (Dec 2011) by the UK’s Financial Services Authority into the near collapse of
RBS notes that:

• Deficiencies in RBS management, governance, risk controls and culture led it to

make poor decisions.
• With 17 directors, the board was too big for effective discussion and badly infected
by “groupthink”, leading to little challenge of the CEO’s views
• The NEDs were from the same backgrounds as the executives (education, ethnicity
and experience etc)
• Most on the board did not fully understand the bank’s products and the risks they
created for the bank
• The executive remuneration systems encouraged the CEO and his colleagues to
concentrate in increasing revenue, profits, assets and leverage rather than on capital,
liquidity and asset quality
• https://www.rbs.com/rbs/about/board-and-governance/board-and-committees/gro
up-board.html
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RBS image

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RBS in Scotland

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 BoD – Cross directorship
• Two or more directors sit on the boards of the other. In most
cases, each director’s “second” board appointment is likely to be
NED. Eg: director A is an executive director on the board of Co X
and also holds a non-exec position on the board of company Z.
• It could undermine the NED independence in that a director
reviewing performance of a colleague who, in turn, may play a
part in reviewing his or her own performance, is a clear conflict of
interests
• In practice, such arrangement may also involve some element of
cross shareholdings which further compromises the
independence of the director involved.
• Forbid by many CG codes of best practice.

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 BoD- Induction
• The aim of the induction programme should be to engage new directors with
the company, board and stakeholders
• Induction should include a combination of selected written information
together with presentations and activities such as meetings, site visits and
“shadowing” an existing executive directors
• For new directors, they should fully understand their legal and fiduciary
duties.
• The induction process should cover: communicate vision and culture,
communicate practical procedural duties, reduce the time for a new director to
become productive, make the new director feel welcomes and useful member
of the team and ensure retention of individuals.

See Chemical Company of Malaysia (CCM)

https://www.ccmberhad.com/induction-procedure-for-new-directors

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 BoD- Induction (2)
The induction process
• Every company should develop its own formal induction programme and it
should:

• be comprehensive
• be tailored to the needs of the company and individual directors
• contain selected written information plus presentations and activities such
as meetings and site visits
• give new appointees a balanced and real-life overview of the company
• not overload the new director with too much information
• provide the new director with a list of all the induction information that is
being made available to them so that they may call up items if required
before these are otherwise provided.

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 BoE: CPD
• Companies need to provide resources for developing and refreshing the
knowledge and skills of their directors (include NEDs)
• The chairman should address the development needs of the board as
well as individual directors.
• NEDs should devote time to keeping their skills up to date
• Any board members of a professional body also need to meet their
professional body’s annual continuing profession development (CPD)
requirements.

See UK Brefi Group

• https://www.brefigroup.co.uk/index.html
• Brefi Group operates internationally, providing an integrated package of
strategy consultancy, facilitation, coaching and training 37
 BoD: CPD (2)
Objectives of CPD
• To ensure directors have sufficient skills and
ability to be effective in their role.
• To communicate challenges and changes within
the business environment effectively to directors.
• To improve board effectiveness and, through this,
corporate profitability.
• To support directors in their personal
development.
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 BoD- Performance Appraisal
• The appraisal aimed to improve effectiveness, maximise strengths
and tackle weaknesses as a whole.
• Under the UK Code: the board should undertake a formal and
rigorous annual evaluation of its own performance and its
committees and individual directors. The chairman should
regularly review and agree with each director on training and
development needs.

• * UK Code under “Effectiveness” -The board should undertake a

formal and rigorous annual evaluation of its own performance
and that of its committees and individual directors

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 BoD – Performance Appraisal (2)
Some of the questions that should be considered in a performance evaluation of the board include, inter alia:
• How well has the board performed against any performance objectives that have been set?
• What has been the board's contribution to the testing and development of strategy?
• What has been the board's contribution to ensuring robust and effective risk management?
• Is the composition of the board and its committees appropriate, with the right mix of knowledge and
skills to maximise performance in the light of future strategy?
• Are relationships inside and outside the board working effectively?
• How has the board responded to any problems or crises that have emerged and could or should these
have been foreseen?
• Are the matters specifically reserved for the board the right ones?
• How well does the board communicate with the management team, company employees and others?
• How effectively does it use mechanisms such as the AGM and the annual report?
• Is the board as a whole up to date with latest developments in the regulatory environment and the
market?
• How effective are the board's committees? (Specific questions on the performance of each committee
should be included such as, e.g. their role, their composition and their interaction with the board.)

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 BoD – Performance Appraisal (3)
Some specific issues relating to the chairman (which should be
included as part of an evaluation of the board's performance)
include:

• Is the chairman demonstrating effective leadership of the

board?
• Are relationships and communications with shareholders well
managed?
• Are relationships and communications within the board
constructive?
• Are the processes for setting the agenda working?
• Do they enable board members to raise issues and concerns?
• Is the company secretary being used appropriately and to
maximum value? 41
Recap! Professional skills

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 (1) Professional Skills - Communication

• A strategic leader must be able to communicate to a range

of audiences (e.g. a colleague, an external stakeholder or
a client) using a tone and style of communication tailored
to that audience, ensuring that the leader can effectively
inform, persuade or clarify. The leader should also be
sensitive to the needs of the intended audience.

• (1) Inform—to convey knowledge of a fact or

circumstance.
• Inform Exam context: Inform concisely, objectively and
unambiguously, while being sensitive to cultural
differences, using appropriate media and technology.
• The candidate may be required to convey relevant
information, and to use an appropriate tone (e.g. for an
organisation's board of directors).
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 (1) Professional Skills - Communication

• (2) Persuade
• To cause somebody to do or believe something through sound
reasoning
• Exam context: The candidate may be required to persuade using
compelling and logical arguments demonstrating the ability to
counterargue when appropriate (e.g. persuade the chairman of
the board to appoint more non-executive directors).
• (3)Clarify
• To make a statement or situation less confusing and more
comprehensive
• Exam context: The candidate may be asked to clarify and simplify
complex issues to convey relevant information in a way that
adopts an appropriate tone and is easily understood by the
intended audience (e.g. clarifying the agency relationships
affecting the organisation).
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(2) Professional Skill – Commercial Acumen
• A strategic leader must show awareness of
wider business and external factors affecting an
organisation and use commercially sound
judgement and insight to resolve issues.
(1)Demonstrate Awareness
To clearly show knowledge or perception of a
situation or fact
• Exam context: The candidate may be required
to demonstrate awareness of organisational or
wider external factors affecting an organisation
(e.g. the key risks affecting it).
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 (2) Professional Skill – Commercial Acumen
(2) Use Judgement
• To demonstrate a deep and accurate understanding of a situation.
• Exam context: To identify key issues when determining how to
address or resolve problems and in proposing and recommending
the solutions to be implemented (e.g. the candidate should use
judgement when evaluating the relative merits of applicants for
the position of chief executive).

(3) Show insight

• To demonstrate a deep and accurate understanding of a situation.
• Exam context: The candidate may be required to show insight and
perception to identify problems and demonstrate acumen in
suggesting appropriate solutions (e.g. to resolve).

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 (3) Professional Skill : ANALYSIS

A strategic leader must be able to select relevant information from a variety of sources,
deeply analyse that information and then reflect on what is discerned.
• (1) Investigate
• To carry out a systematic inquiry to discover the facts of a situation.
• Investigate Exam context: The candidate may be required to review information from a
wide range of sources and use a variety of analytical techniques to establish the causes
of problems, or to identify opportunities. The examiner may also award professional
skills marks for using the most appropriate framework for analysing the situation.
• (2) Scrutinise
• To inspect closely, thoroughly and critically.
• Exam context: The candidate may be required to look at something in detail and judge it
(e.g. to scrutinise the performance of an organisation's senior management).
• (3) Consider
• To reflect deeply before coming to a conclusion, making a decision or giving a
recommendation
• Exam context: The candidate may be required to consider information, evidence,
analysis and findings carefully, reflecting on their implications for the organisation (e.g.
to consider the outlook for an organisation).

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 (4) Professional Skill - Scepticism
• Scepticism
• An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of evidence.
• The concept of professional scepticism is assumed
knowledge from earlier studies of Audit and Assurance:
• This professional skill is closely inter-related to the
fundamental principle of objectivity, which applies to all
professional accountants. A strategic leader must exercise a
healthy degree of scepticism and not just accept
information at its face value. A leader should probe issues,
question assumptions and challenge the status quo. He
should express any scepticism in a courteous manner,
explaining any concerns clearly.
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 Professional Skill - Scepticism
• (1) Probe - to search into or examine something thoroughly
• Probe Exam context: The candidate may be required to probe
deeply into the underlying reasons for issues and problems, beyond
what is immediately apparent

• (2) Question - to express doubt about something or somebody.

• Exam context: The candidate may be required to question facts,
opinions and assertions, by seeking justifications and obtaining
sufficient evidence for their support and acceptance (e.g. to question
assertions made by the chief executive during a company's board
meeting).

• (3) Challenge - To dispute the truth or validity of something

• Exam context: The candidate may be required to challenge
information presented or decisions made, where this is clearly
justified, in a professional and courteous manner.
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 (5) Professional Skill - Evaluation

• Evaluation
• A strategic leader needs to make valid assessments of
available information and to forecast future trends.
Evaluation also involves being able to appraise
proposals, leading to appropriate conclusions and
recommendations.
• (1)Assess-to judge the amount, value, quality or
importance of something.
• Assess Exam context: The candidate may be required
to assess organisational issues or the implications of
decisions made (e.g. assess the role and value of non-
executive directors). An assessment often requires a
discussion of the advantages and disadvantages of
something, before reaching a conclusion. 51
 Professional Skill - Evaluation

• (2) Estimate
• To roughly calculate the amount or value of something
• Exam context: The candidate may be required to estimate
trends or make reasoned forecasts of the effects of external
and internal factors on the organisation or about the
outcomes of decisions available to the organisation (e.g. to
estimate the effect of fraud).
• (3) Appraise
• To place a monetary value on something
• Exam context: The candidate may have to consider facts,
opinions and findings objectively with a view to balancing
the costs, risks, benefits and opportunities before making or
recommending solutions or decisions (e.g. to appraise a
project's benefits, costs and risks).
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 Case Scenario: BrightCo
 
• Three years ago, the outgoing CEO/Chairman of BrightCo decided to retire having served in the combined role for over
ten years of a full 30 years BrightCo career. Succession was not an issue since John Tan had been operating as
second as second in command for a number of years and had recently stepped firmly into “the old man’s” shoes.

•  What followed was a roller coaster ride for investors, where the minor dips were more than compensated by the
exhilarating rise in share price. Tan trebled the size of the company through his aggressive “slash and burn”
acquisitive strategy, taking the company into uncharted markets around the globe where he bought, stripped and
resold huge companies, reaping profits in the process.

• The board of directors are rightfully pleased with their CEO’s performance and the part they played in that success,
seven out of ten board members being company executives. The remaining three were drafted in by the ex-
CEO/chairman due to their key expertise in BrightCo’s traditional markets. None have regular contact with
shareholders. The board meets irregularly and do not tend to do more than simply review current performance. Mr Tan
has complete freedom to act and this is widely seen as the reason for the company’s positive trading position.

• Shareholders are also pleased with performance. However, some institutional investors have aired their concerns as to
the sustainability of the current strategy, whether finances exist within BrightCo to support it and whether risks
associated with unknown markets make the company overexposed and vulnerable.
 
• At the last board meeting Mr Tan brushed aside any criticism stating that he was going to take the firm to new heights,
a pronouncement met with loud applause from all those in attendance.

• REQUIRED:

• (a) With reference to the scenario, discuss changes to governance structure that you would recommend for this
company. (15 marks)
 
• (b) Assuming the changes recommended in part (a) are carried out, determine the possible role of a new board of
directors. (10 marks)
 
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• END OF LECTURE 3

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