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Role of different individuals & committees under corporate governance

Duties of directors and functions of the board
Formal procedures should be in place for appointments to the board. The chairman should decide on a process of performance evaluation for the board of directors and for individual directors. Key and strategic decisions must be reserved By Laeeq Khan 2 for the board.

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Role of different individuals & committees under corporate governance

Legal rights & responsibilities directors do not have unlimited powers
Articles of association provide framework for how directors to operate and need to reelected on 3 years rotation. Shareholder resolution actions of directors are to be approved by shareholders Board decision board makes the decision in the interest of shareholders.
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Role of different individuals & committees under corporate governance

The composition and balance of the board and board committees
Include a balance of executive and NEDs, so no group can dominate decision making. The chairman and CEO should not be the same person.

NEDs should make up all of the remuneration and audit committees, and the majority of the nomination committee.
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Role of different individuals & committees under corporate governance

Reliability of financial reporting and external auditing
Arrangements should be in place to ensure that an appropriate, independent, relationship with the auditors is maintained, e.g. audit committee. The directors should include in the annual accounts an explanation of their responsibility for preparing the accounts. The auditors should present, in the annual accounts, a statement about their auditing responsibilities. By Laeeq Khan 5

Role of different individuals & committees under corporate governance

Directors remuneration and rewards
A significant element of remuneration should be linked to company performance and rewards for failure should be minimised. Remuneration should be sufficient to attract and retain directors. Formal procedures for developing policy on remuneration should be in place including the appointment of a remuneration committee. No director should be involved in deciding their own remuneration. By Laeeq Khan 6

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Role of different individuals & committees under corporate governance

Responsibility of the board for risk management systems and internal control
The board should maintain a sound system of internal control to safeguard shareholders investment and the companys assets. Risk management is the joint and collective responsibility of the whole board. Management needs to review the effectiveness of internal controls on at least an annual basis. The risks facing the business should be regularly evaluated. The review should include risk management, operation and compliance as well as financial controls.
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Role of different individuals & committees under corporate governance

Salary structure
Basic - it a non performance salary Performance related may be bonus or certain % of pre decided criteria Share option Benefit in kind car, house, health benefit Pension

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Remuneration directors

Mr Smith, an executive director of Company XCX, is paid

1. 2. 3. 4. 5. 6. 7. A salary of 100,000. He receives the use of a company car. He is reimbursed all his travel expenses to and from all the places he has to visit in the course of his work. If the companys share price rises above 5 he is entitled to 10,000 share options at a price of 1 each. He will also receive a bonus of 20% of his salary if company profit before tax rises above 2.5 million. His wife also receives a company car, paid for by the company. He has permanent health insurance paid for by the company and has death-in-service benefits as well.

All of this is contained within his service contract. What elements in the above paragraph constitute the directors remuneration?
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Composition of the board

From the principles in the Combined Code, the key roles and responsibilities of directors are to:
Provide entrepreneurial leadership to the company Represent company view and account to the public Determine the companys mission and purpose (strategic aims) Select and appoint the CEO, chairman and other board members Set the companys values and standards Ensure that the companys management is performing its job correctly Establish appropriate internal controls that enable risk to be assessed and managed

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From the principles in the Combined Code, the key roles and responsibilities of directors are to:
Ensure that the necessary financial and human resources are in place. Obligations to its 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

Directors characteristics and skills

Characteristics
Motivated Proactive Experienced (been there, done that).

Assess its own performance and report it annually to shareholders Submit themselves for re-election at regular intervals (maximum of three years).
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Directors characteristics and skills

Skills required
Listening Questioning Negotiating Leadership (especially the chairman and the CEO) Knowledge in specialist area (executive directors) General business knowledge (executive directors and NEDs).
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Appointment and retirement of directors

All directors, appointed through the nomination committee should be subject to election by shareholders at the first AGM Following their appointment and to reelection at intervals of no more than 3 years.

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Appointment and retirement of directors

NEDs should be appointed for specific terms subject to re-election (as above). Any time over 6 years requires rigorous review and over 9 years requires annual re-election since by this time their independence must be questionable

Appointment and retirement of directors

The most common provisions to be found are as follows: At the first AGM all the directors retire. At each subsequent AGM, one-third of the directors are subject to retirement by rotation. The directors to retire by rotation are those who have been longest in office since their last appointment or reappointment. Directors should be re-elected at least every three years.
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Appointment and retirement of directors

If the company, at the meeting at which a director retires by rotation, does not fill the vacancy the retiring director shall, if willing to act, be deemed to have been reappointed unless:
at the meeting it is resolved not to fill the vacancy or a resolution for the reappointment of the director is put to the meeting but not approved.
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Appointment and retirement of directors

New appointees are either recommended by existing directors or nominated by one/more shareholders. In any case, appointments must be confirmed by shareholder vote.

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Appointment and retirement of directors

The main advantages of a system of retirement by rotation:
ensure that all the directors do not retire at the same time thus creating a vacuum allow the shareholders an annual say in how the board of directors is composed give a vote of confidence (or otherwise!) on the performance of the board stagger the impact of contract termination costs increase director accountability for performance and reduce complacency provide an opportunity to replace the board in an orderly manner.
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Appointment and retirement of directors

Directors service contract
Key dates Duties Remuneration details Termination provisions Constraints Other ordinary employment terms. The notice or contract periods should be set at one year or less. If longer notice or contract periods to new externally-recruited directors need to be offered, such periods should reduce after the initial period.
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Appointment and retirement of directors

Removal of directors
NEDs should be appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of a director, and reappointment should not be automatic.

Appointment and retirement of directors

Removal of directors
Statute Death Under a provision in either the articles of association of the company or through shareholder resolution such as failure to be re-elected by rotation

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Appointment and retirement of directors

Removal of directors
Personal bankruptcy Resignation from office by notice to the company Absence for more than six consecutive months, without permission of the directors, from meetings of directors held during that period and the directors resolve that the office be vacated.
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Appointment and retirement of directors

Disqualification of directors
Allowing the company to trade while insolvent Not keeping proper accounting records Failing to prepare and file accounts Being guilty of three or more defaults in complying with companies legislation regarding the filing of documents with Companies House during the preceding five years Failing to send tax returns and pay tax Taking actions that are deemed to be unfit in the management of a company.
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Conflict and disclosure of interests

The fiduciary duty of directors is to act in the best interests of shareholders. A conflict of interest is a breach of this duty. The breach is in relation to the existence of the conflict and not in relation to the outcome of a situation.

Cross directorship
This creates the independence problem and impairment of objectivity

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Sales

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Directors performance evaluation

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

Guidance on performance evaluation

Companies should tailor the evaluation to suit their own needs and circumstances. Companies should disclose in 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.
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Guidance on performance evaluation

It is suggested that the use of an external third party to conduct the evaluation will bring objectivity to the process. The evaluation should consist of a number of pertinent questions and answers, designed to assess performance and identify how certain elements of performance could/should be improved.
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Guidance on performance evaluation

The evaluation process will be used constructively as a mechanism to:
improve board effectiveness maximise strengths tackle weaknesses.

The results of board evaluation should be shared with the board as a whole. The results of individual assessments should remain confidential between the chairman and the executive/NED concerned.
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Who is NED
A non-executive director (NED, also NXD) or outside director is a member of the board of directors of a company who does not form part of the executive management team. He or she is not an employee of the company or affiliated with it in any other way.

The key functions of a NED

Strategy role: this recognises that NEDs have the right and responsibility to contribute to strategic success. Scrutinizing role: NEDs are required to hold executive colleagues to account for decisions taken and results obtained. Risk role: NEDs ensure the company has an adequate systems of internal controls and systems of risk management in place. People role: NEDs oversee a range of responsibilities with regard to the appointment and remuneration of executives and will be involved in contractual and disciplinary issues
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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 Develop and refresh their knowledge and skills to ensure that their contribution to the board remains informed and relevant Ensure that information is provided sufficiently in advance of meetings to enable thorough consideration.
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The effective NED

The Combined Code describes an effective NED as one who:

Supports executives in their leadership of the business while monitoring their conduct Questions intelligently, debates constructively, challenges rigorously and decides dispassionately Gains the trust and respect of other board members Promotes the highest standards of corporate governance and seeks compliance wherever possible.
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The Combined Code for NED

The Code states as a principle that the board should include a balance of NEDs and executives. This is to reduce an unfavorable balance of power towards executives. To strengthen this point the Code makes clear what it means by an 'independent' non-executive.
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Independence can be judged as:

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 director's fee. Not having any family ties with the firm Not holding cross directorships with other directors Not being a significant shareholder Not having served on the board for over nine years.
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Advantages of NED
Monitoring: they offer a clear monitoring role. Expertise: to expand this resource available for management to use. Perception: institutional and watchdog perception is enhanced because of their presence.

Advantages of NED
Communication: the implied improvement in communication between shareholders interests and the company. Discipline: NEDs may have a positive influence on the success or otherwise of takeovers.

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Disadvantages of NED
Unity: lack of trust and needless input can affect board operations. Quality: willing to serve.

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Two tier
Companies in the UK and US have tended towards unitary structures. Japanese companies and some European countries have preferred twotier or even multi-tier boards.
Management board: responsible for managing the enterprise with the CEO to co-ordinate activity. Supervisory board: appoints, supervises and advises members of the management board. A separate chairman co-ordinates the work and members are elected by shareholders at the annual general meeting (AGM).

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Advantages of a two-tier board

Clear separation between those that manage the company and those that own it or must control it for the benefit of shareholders.

Advantages of a two-tier board

Wider stakeholder involvement implicit through the use of worker representation. Independence of thought, discussion and decision since board meetings and operation are separate.
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Implicit shareholder involvement in most cases.

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Problems of two tier

Dilution of power through stakeholder involvement. Isolation of supervisory board through non-participation in management meetings. Agency problems between the two boards. Added bureaucracy and slower decision making.
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Unitary board
The involvement of NEDs in the running of the company rather than just supervising. NED are as responsible as the executives. Less extreme decisions developed.

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Unitary board
combine decision-making will improve the process Reduction of fraud, malpractice due to wider involvement in the management of the company. Improved investor confidence: through all of the above.
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CEO
It is vital for good corporate governance to separate the roles of CEO and chairman.

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The board should not be dominated by a single powerful individual and therefore the role of chairman (person running the board) and the CEO (person running the company) should rest with different people. The division of responsibilities between the chairman and CEO should be clearly established, set out in writing and agreed by the board. The board appoints the chairman and the position may be full-time or part-time. The chairman is usually a NED.
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Only in a small company, where size makes separate appointments unrealistic, are the duties of the CEO and chairman carried out by one individual. The appointment of a chairman of the board of directors is the main counterbalance to the CEO.
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CEO's responsibilities
Take responsibility for the performance of the company, as determined by the boards strategy. Report to the chairman and/or board of directors.

Chairmans responsibilities
Ensure that the board sets and implements the companys direction and strategy effectively. Act as the companys lead representative, explaining aims and policies to the outside world.

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RBS

Splitting the role

The Combined Code is unambiguous with regard to the separation of the chairman and CEO roles: 'A clear division of responsibilities must exist at the head of the company. No individual should have unregulated power of decision.'

SCB

D G Khan

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Reasons for splitting the role

For
Representation: the chairman is clearly and 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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Reasons for splitting the role

Against
Unity: the separation of the role creates two leaders rather than the unity provided by a single leader. Ability: both roles require an complex knowledge of the company. It is far easier to have a single leader with this ability rather than search for two such individuals. Human nature: there will almost inevitably be conflict between two high-powered executive offices.
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Induction
Although aimed at NEDs, the principles of an induction program will be the same for new executive directors coming to the company from another organisation. For an internally-promoted director, it will depend on the persons background. NEDs will only be productive if they come to know about the company.

Objectives of induction
To communicate vision and culture. To communicate practical procedural duties. To reduce the time taken for an individual to become productive in their duties. To incorporate an individual as a welcome member of the board. To ensure retention of individuals for future periods.
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The induction process

Be comprehensive Be tailored to the needs of the company and individual directors Contain selected written information plus presentations. Give new appointees a balanced and reallife overview of the company Not overload the new director with too much information
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Continuous Professional Development

To run an effective board, companies need to provide resources for developing and refreshing the knowledge and skills of their directors & NEDs. The chairman should address the developmental needs of the board as a whole with a view to enhancing its effectiveness as a team. NEDs should be prepared to devote time to keeping their skills up to date.
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Objectives of CPD
Ensure directors have sufficient skills and ability to be effective in their role. 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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Insider dealing/trading
What is insider dealing
Inside information is information which is not available to the market or general public and is supposed to remain confidential. These types of transactions in the companys own shares are considered to be fraudulent. The directors, simply by accepting employment, has made a contract with the shareholders to put the shareholders interests before their own, in matters related to the company. When the insider buys or sells based upon company-owned information, he is violating his contract with, and fiduciary duty to, the shareholders.
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Importance of committees
Reduces board workload and enables them to improve focus on other issues. Creates structures that can improve decisions in key areas. Communicates to shareholders that directors take these issues seriously. Communicates to stakeholders the importance of remuneration and risk.
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Nomination committee
Should lead the process for board appointments and make recommendations. Majority of members should be independent and non executive directors The chairman or an independent NED should chair the committee The chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship.
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Nomination committee
For the appointment of a chairman, the nomination committee should:
Prepare a job specification, including an assessment of the time commitment expected, recognizing the need for availability in the event of crises. No individual should be appointed to a second chairmanship of a FTSE 100 company.

Nomination committee
For NED's:
The terms and conditions of appointment of NED's should be made available for inspection. The letter of appointment should set out the expected time commitment. NED's should undertake that they will have sufficient time to meet what is expected of them. The board should not agree to a full time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company.
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Nomination committee Duties

Be responsible for identifying and nominating for the approval of the board, candidates to fill board vacancies as and when they arise; Before making an appointment, evaluate the balance of skills, knowledge and experience on the board and prepare a description of the role and capabilities required for a particular appointment; Review annually the time required from a non-executive director. Performance evaluation should be used to assess whether the non-executive director is spending enough time to fulfil their duties;
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Nomination committee Duties

Give full consideration to succession planning in the course of its work, taking into account needs of the board in the future; Regularly review the structure, size and composition of the board and make recommendations to the board with regard to any changes; Make a statement in the annual report about its activities;
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Nomination committee Duties

The process used for appointments and explain if external advice or open advertising has not been used. Make available its terms of reference explaining clearly its role and the authority delegated to it by the board; Ensure that on appointment to the board, nonexecutive directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time & commitment.
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The risk committee

Many companies either set up a separate risk committee or establish the audit committee as an audit and risk committee.

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Typical roles of a risk management committee

Agree and approve the risk management strategy and policies. Receiving and reviewing risk reports from affected departments Monitoring overall exposure and specific risks. Assessing the effectiveness of risk management systems.
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Typical roles of a risk management committee

Providing general and explicit guidance to the main board on emerging risks and to report on existing risks To work with the audit committee on designing and monitoring internal controls for the management and mitigation of risks.

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Functions for the risk committee by Sadgrove

Develop risk awareness among staff. Define and ensure compliance with risk policies. Control risks within their own departments. Review audit findings and implement controls. Make risk-related recommendations to the board. Seek support of the risk manager in meeting the challenges presented by business risk. 77 By Laeeq Khan

Main responsibilities and duties of the risk committee are

Advise the full board on risk management. Emphasise and demonstrate the benefits of a risk-based approach to internal control. Oversee the entire risk management function. Approve various risks like, market risk, credit risk, liquidity risk, operational risk.
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Remuneration committee
Role of the remuneration committee is to have an appropriate reward policy that attracts, retains and motivates directors to achieve the long-term interests of shareholders It should consist of NEDs and at least based on 3 members & in case of smaller 2 directors will do.
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Remuneration committee
The remuneration committee should judge where to position their company relative to other companies, they should use such comparisons with caution.

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Remuneration committee
The performance-related elements of remuneration should form a significant proportion of the total remuneration package of executive directors. Levels of remuneration for NED's should reflect the time commitment and responsibilities of the role. Remuneration for NED's should not include share options.
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Remuneration committee
If, exceptionally, options are granted, shareholder approval should be sought in advance and any shares acquired by exercise of the options should be held until at least one year after the NED leaves the board. Where a company releases an executive director to serve as a NED elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and if so, what the remuneration is.
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Working of the remuneration Committee

The remuneration committee should consult the chairman and/or chief executive about their proposals relating to the remuneration of other executive directors. The remuneration committee should also be responsible for appointing any consultants in respect of executive director remuneration.
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Working of the remuneration Committee

Where executive directors or senior management are involved in advising or supporting the remuneration committee, care should be taken to recognize and avoid conflicts of interest. The chairman of the board should ensure that the company maintains contact as required with its principal shareholders about remuneration in the same way as for other matters.
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Audit Committee
Audit committee should act independently from the executive to ensure the protection of the interest of shareholders. Management committee should properly inform the audit committee. All executive directors and staff must cooperate with audit committee.

Audit committee- main responsibility

Monitor the integrity of the financial statements. Review the companys internal financial control Monitor/ review the effectiveness of internal audit functions. Make recommendation to the board relating to the appointment of external auditors
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Audit committee- main responsibility

Monitor/ review the independence of external audit Developing system by which staff may raise concern about possible improper operations (whistle blowing)

Audit committee- meeting frequency

Chairman of audit committee to decide the frequency and timings of meetings. 3 meetings are recommended at least a year. No external person should be part of audit committee unless required in agenda.

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External audit process

Audit committee must ensure that appropriate plans are in place for the audit at the start of each audit cycle. It should review
Scope of audit Planned level of materiality Seniority Expertise and experience Amount of time required by auditors.
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Audit committee- external remuneration

Audit committee should approve the term of engagement and the remuneration to be paid to the external audit. Audit committee should review and agree the engagement letter issued by external auditor

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Audit committee and the external auditors

Have annual procedures for ensuring the independence and objectivity of the external auditors Carry out a post-completion audit review.

Provision of non audit services

In US under SOX provision, non audit services by the external audit to all listed companies are completely banned. In UK these services ca be offered subject to the approval of audit committee

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Provision of non audit services

Audit committee while approving will review
Skill and experience of audit firm will make it suitable for the non audit service Safeguards are in place Fee assessment
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Audit committee- shareholder communication

Separate section in annual report should describe the work of committee, section includes
Summary of the role of audit committee Name and qualification of members Number of audit committee meetings Report on the way audit committee has discharged its responsibilities.
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Factors affecting the role of the audit committee

Factors affecting the role of the audit committee

The audit committee should review both its terms of reference and its effectiveness annually, and recommend any necessary changes to the board. To do its work properly, the audit committee must be kept properly informed by the executive management. Management is under an obligation to keep the audit committee properly informed and should take the initiative in providing information, instead of waiting to be asked.

The board should decide how much responsibility it wishes to delegate to the audit committee. The tasks of the committee will differ according to the size, complexity and risk profile of the company. Any disagreement between audit committee members that cannot be resolved within the committee should be referred to the main board for a resolution.
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The audit committee and compliance

The audit committee should review the significant financial reporting issues and judgements in connection with the preparation of the companys financial statements. Management is responsible for preparing the financial statements and the auditors are responsible for preparing the audit plan and carrying out the audit.

The audit committee and internal audit Ensure that the internal audit function has direct access to the board chairman and is accountable to the audit committee Review and assess the annual internal audit work plan Receive periodic reports about the work of the internal audit function

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The audit committee and internal audit

Review and monitor the response of management to internal audit findings Ensure that recommendations made by internal audit are actioned Help preserve the independence of the internal audit function from pressure or interference.

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