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Overview of areas covered in thispresentation Structure of the board Independence Board Committees Evaluation of performance Boardroom Behaviour Conflict of interest Role of the Regulator
Structure of the Board Directors Chairman Chief Executive Management
Structure of the Board The Board should be diverse. The structure should allow for the board to work effectively and collaboratively as a team. Boards with 8-12 members are ideal Facilitates constructive debate There should be a balance of expertise, skills and experience Appointment of Non Executive Directors “NEDs” Distinction between roles In particular, the board should have a clear division of responsibilities and the posts of Chairman and Chief Executive should not be combined in one individual
Role of the Chairman Runs and leads the board in the determination of its strategy Ensures board has adequate information to perform its role Ensures effective relationships are maintained Ensures the right and common values
Role of the CEO Leading the executive directors and the senior executive team in the day to day running of the firm. Chairing the Executive Committee and communicating its decisions/recommendations to the board. Ensuring effective implementation of board decisions. Regularly reviewing the operational performance and strategic direction of the firm. Ensures effective communication with shareholders
Role of the Non Executive Director There is no distinction between the position of executive and non executive directors. If a breach of duty is to be attributed to a board on the basis that all of its members were present at a meeting which had approved a wrongful act, then the liability of each director is joint and several and no allowance is made for the fact that some are part timers and may have acquiesced in a situation which they did not fully understand Re Lands Allotment Co. (1894) 1 Ch 616 63 LJ Ch 291 CA
Role of the NED The NED role is complex and demanding. It requires skills, experience, integrity, and particular behaviours and personal attributes Integrity and high ethical standards – these are a prerequisite for all directors Sound judgement and an inquiring mind.
The effective NED NED’s should: question intelligently; debate constructively; challenge rigorously; and decide dispassionately Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. Be responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.
Independence of Directors A director’s independence may be compromised for a variety of reasons including if he/she: Is an employee of the company or group within the last five years; Has material business relationship with the company has received or receives additional material remuneration from the company has close personal relationships holds cross-directorships represents a significant shareholder; or has served on the Board for more than nine years from the date of his first appointment. The board should be aware of these circumstances and make a conscious decision to record where any of these, or other reasons, may lead to the director not being considered to be independent.
Examples of the types of Board Committees and the functions eachcommittee should undertakeUseful to look at the ICSA Terms of Reference published for ImprovingBoard Effectiveness which can be found online at the following URL;http://www.icsaglobal.com/about-icsa/latest-from-icsa/article/icsa-publishes-new-terms-of-reference
Board Committees Committees play an important role in the governance process. The board can effectively governs through clearly mandated board committees, Risk Nomination accompanied by monitoring and reporting systems. Each committee should have specific written terms of reference issued by the board and adopted in committee. Audit Remuneration The exact compliment of committees will vary from firm to firm
Nomination CommitteeFormal and transparent process for the appointment of new directors tothe boardBefore making an appointment, evaluate the balance of skills, knowledgeand experience on the boardGive full consideration to succession planningRegularly review the structure, size and composition (including the skills,knowledge and experience) of the boardShould consist of a majority of executive directorsRecommend appointments to the board
Audit CommitteeReview accounting principles, policies and practicesEnsure all financial statements follow accounting practice and give an accuraterepresentation of the companies situationScope, examine and follow up audits (especially on controls)Develop and monitor internal auditConsider the appointment and remuneration of auditorsShould consist of non executive directors
Remuneration CommitteeApprove service contracts for executive directors (and senior management)Recommend to the board the remuneration for executive and seniormanagementReview and recommend employee share schemesReview pensionsApprove arrangements for retirement or terminationChairman of the board (if independent) may be a member but not chair.
Risk CommitteeAdvise the board on the firms overall risk appetite, tolerance and strategyOversee and advise the board on the current risk exposures of thecompany and future risk strategyReview the firms capability to identify and manage new risk typesConsider and approve the remit of the risk management function
“It is best practise that the performance of the board as a whole, of its committeesand of its members, is evaluated at least once a year... Companies should disclosein their annual report whether such performance evaluation is taking place.” The Review of the role and effectiveness of non-executive directors 2003 (the Higgs Review)
Evaluation Formal and and that of its rigorous annual committees evaluation of and individual its own directors. performance
Evaluation methods Self evaluation Peer evaluation Evaluation by the chair 360 Feedback External facilitator
When to choose external assistance? For new chairmen Every so For old often boards When you When have a challenged problem
“Appropriate boardroom behaviours are an essential component ofbest practice corporate governance; and that the absence of guidance on appropriate boardroom behaviours represents a structural weakness in the current system” Boardroom behaviours - A report prepared for Sir David Walker by the Institute of Chartered Secretaries and Administrators (‘ICSA’)
Boardroom behaviour Appropriate board behaviour can be defined as functioning in accord with the boards roles and responsibilities. Thus, board members should know the difference between governance and management. Appropriate behaviour also has key characteristics, the first of which is respect—for the organization, the management the employees, and other members of the board. Respect is basic, but it doesnt always exist. Respect leads to two additional behavioural characteristics that are needed: openness in the board discussions and confidentiality. Conflicts of interest also fall in the category of behaviour. “Theres no evil in conflict of interest; the evil lies in the hiding of it”. All boards need to have a policy about conflict of interest. Usually this policy requires all members to disclose potential conflicts and to abstain from voting on such matters. Another behavioural element is distinguishing between the important and the unimportant. The board has limited time. If it spends hours and hours on trivial matters, it wont be able to address significant and strategic matters.
Conflicts of interests may arise where an individual’s personal orfamily interests and/or loyalties conflict with those of the firm.Such conflicts may create problems they can: • inhibit free discussion; • result in decisions or actions that are not in the interests of the firm; and • risk the impression that the firm has acted improperly.
Policy The development of a conflicts of interest policy protects both the organisation and the individuals involved from any appearance of impropriety. Board members should declare their interests, and any gifts or hospitality received in connection with their role in firm. A declaration of interests form should be provided for this purpose, listing the types of interest you should declare. To be effective, the declaration of interests needs to be updated at least annually, and also when any changes occur
Our Aim: To protect the reputation of Gibraltar by ensuring that the boards of licensees act in compliance with modernstandards of corporate governance, so significantly reducing the risks of failure and client loss
Why the regulatory focus on corporategovernance? Virtually every failure in the current crisis has stemmed from poor corporate governance/Board oversight Lehman Brothers Holdings Inc Northern Rock RBS MF Global
The basis for our perspective The FSC has not reinvented the wheel but rather uses established and accepted principles such as: A review of corporate governance in UK banks and other financial industry entities - (The Walker Review) (2009) FRC Guidance On Board Effectiveness (2011) FRC UK Corporate Governance Code (2012)
Not one size fits all Not all firms alike in size or complexity Some elements like board committees may not be appropriate for small private companies however all firms should consider those elements applicable to them and apply them Important to establish principles rather than proscriptive rules Principles to be on a “comply or explain” basis Underlying everything is the principle that the FSC holds the whole board accountable not just the executive members.
The problems with regulatory assessment ofgood corporate governance It is subjective involving both quantitative and qualitative information Board policies and procedures can be assessed; Board papers and board minutes can be reviewed; Frequency of board meetings can be checked; BUT Board behaviour cannot be objectively measured; THEREFORE The role of the NED is vital to ensure the board operates effectively Therefore the FSC encourages the appointment of NED’s and especially independent NEDs.