Board Membership - directors appointment, roles and remuneration

- in which we review:
- the appointment of directors -desirable attributes in a director -core competencies of a director -roles directors play -director s duties, rights and powers -directors' disclosures, service contracts and agreements -directors remuneration

The appointment of directors

Director appointments arise:
on the initial incorporation of a company on re-appointment at the expiry of a director's term of office to fill a vacancy on the creation of an additional directorship

The appointment of directors

The rotation of directors articles typically provide terms of service for directors traditionally a fixed proportion retired and could be elected each year, often a third (a staggered board)

BUT staggered boards inhibit change

preserves experience provides stability produces a longer term strategic horizon

Calls for annual re-election of entire board

directors of poorly performing companies entrenched wholesale change difficult pressures of market for control circumvented

The appointment of directors

The size of boards articles typically provide for upper and lower limits some company law provides limits
Eg. prohibiting boards with a sole director requiring directors to be real persons not other companies

case often made for additional directors seldom argued that a board is too large
lack of cohesion more difficult to reach consensus formation of cliques or cabals reduced opportunity for each director to contribute

The appointment of directors

Retirement, disqualification and removal some company law provides age limit Often 70 unless shareholders agree Some company law provides lower limit frequently 18 Company law has provisions for director disqualification bankruptcy mental illness disqualification by courts

offences against companies law failure to file official returns corrupt business behaviour

The appointment of directors

How are directors appointed? in private companies: decisions taken by dominant shareholders In public listed companies:
nomination committee of board makes recommendation board agrees proposal put to shareholders shareholders vote

Criticism that boards become self-perpetuating

shareholders have little opportunity to make nominations proposals to make shareholder nominations easier

Desirable attributes in a director

Behind the corporate constitutions, board structures and corporate governance codes are people
People bring personal prejudices, political behaviours and power plays to board affairs What personal attributes are needed in a successful and professional director?

Desirable attributes in a director

Desirable attributes in a director

Integrity Independence Intellect Character Personality

Desirable attributes in a director

Integrity Means being able to: Distinguish right from wrong and judge corporate behaviour accordingly Recognise and declare a conflict of interest Act in the company interest, not self interest or personal gain Essentially integrity means acting honestly. A director with integrity is trusted. The concept of the company is based on trust.

Desirable attributes in a director

Independence For Independent Non-executive Directors (INEDs) - having no interest in the company that can affect or be seen to affect the exercise of independent, objective judgement For Connected Non-executive directors (CNEDs) and Executive Directors (EDs)

- being able to recognise the nature and extent of interests in the company - being able to exercise independent judgement, doing what is right for the company despite personal or other interests

Desirable attributes in a director

Intellect - What in Oxford colleges they call having a good mind.

Intellect combines:
an appropriate level of intelligence the ability to think at different levels of abstraction the imagination to see situations from different perspectives, not along a single track

Desirable attributes in a director

Character (Some say strength of character) Desirable character traits include being: independently minded, objective and impartial tough-minded, tenacious and resilient, with the courage to make a stand, yet capable of moving towards consensus balanced in approaching risk, results orientated but neither riskaverse nor rash wise or just having common sense

Desirable attributes in a director

Personality the ability to interact positively with others - flexibility - sensitivity - diplomacy - persuasiveness - and the ability to motivate Other desirable personality traits include being: - a sound listener - a good communicator - and being politically sensitive.

Desirable attributes in a director

A company as a legal entity, has a legal persona, but it does not have a conscience.
The board has to act as the corporate conscience. 1. Obey the laws of all the jurisdictions in which it operates

2. Create a corporate character which establishes the way the company operates over and above merely staying within the law
3. Formal statement of the corporate mission and core values - can be little more than pious aspirations - can produce rigorous policies, approved and monitored by the board

Desirable attributes in a director

Microsoft corporate mission and values Our Mission At Microsoft, we work to help people and businesses throughout the world realize their full potential. This is our mission. Everything we do reflects this mission and the values that make it possible. Our Values As a company, and as individuals, we value:

Integrity and honesty

Passion for customers, for our partners, and for technology Openness and respectfulness Taking on big challenges and seeing them through Constructive self-criticism, self-improvement, and personal excellence Accountability to customers, shareholders, partners, and employees for commitments, results, and quality

Lord Nolans seven principles of public life

1. selflessness - holders of public office should serve the public interest, not seek gains for their friends 2. integrity they should not place themselves under financial obligation to outsiders who might influence their duties 3 objectivity they should award public appointments and contracts on merit

4. accountability they should submit themselves to the appropriate scrutiny 5. openness they should give reasons for their decisions 6. honesty they should declare conflicts of interest 7. leadership they should support these principles by personal example

The core competencies a director needs

Every governing body is different Each director brings a different set of experience, skills and knowledge to the board Overall every board needs to have a mix of capabilities for a balanced and well qualified team So directors need some basic core competencies -experience,
skills, and knowledge - appropriate to the corporate entity. What might they be?

Core competencies for a director

Experience Essential director-level experience supplements the knowledge available to the board - for example, additional experience about financial reporting standards, corporate governance, board procedures, strategy formulation, and policy making - or experience of overseas markets, frontier technologies, international finance or other areas that supplement the experience of the existing board

Core competencies for a director

Skills Essential director-level skills include: strategic reasoning perception and vision a critical faculty capable of quantitative and qualitative analysis and financial interpretation planning and decision-making capabilities communication and inter-personal skills networking and political abilities

Core competencies for a director

Knowledge Directors need appropriate knowledge of the enterprise, its business and board-level activities, as well as relevant information about the companys political, economic, social, and technological context
If directors are to make sense of board information and contribute meaningfully to board discussion, they must have basic knowledge about the company, its business and the financials.

Core competencies for a director

Knowledge of the company involves a clear understanding of: The basis of power over the company (who are shareholders, where does power lie to appoint directors) The basis of law under which the body operates The governance rules and regulations The board structure, membership and personalities The board processes, such as the use of board committees and the basis of board information An awareness of the history of the entity is also vital in interpreting the current situation and understanding board culture and the perspectives of the chairman and other board members.

Core competencies for a director

Knowledge of the business involves an understanding of: The basic business activities and processes Its purpose and aims Its strengths and weaknesses How it measures success The field of its operations (including markets and competitors) The strategies being pursued The structure of the organisation, its culture, management, and people, Management control and risk management systems

Core competencies for a director

Knowledge of the financials involves an understanding of: How the company is financed The essence of its annual accounts and directors reports Developing trends in key financial ratios Criteria used in investment appraisals Calibre of financial controls Who the auditors are It is not necessary to be an accountant to be a good director but financial literacy is important

Roles directors play

Directors make different contributions to the board and play a number of roles
Some of these roles contribute to performance strategy formulation and policy making others contribute to conformance - executive supervision and accountability

Roles directors play

Performance related roles
Bringing wider business and board experience to the identification, discussion, and decision of board-level issues. Identifying issues that the board, not management, should be handling Adding specialist knowledge, skills and know-how to board deliberations Being the source of external information for board discussions - a window on the world for other directors Being a figurehead or an ambassador for the company, being able to represent the company in the outside world Connecting the board to networks of useful people Providing status to the board and the company

Roles directors play

Conformance related roles

Providing independent and objective judgement Providing a catalyst for change, questioning existing assumptions, introducing new ideas Being a monitor of executive activities, offering objective criticism and comment on management performance Playing the role of watchdog, able to provide an independent voice and protect the interests of minorities Being a sounding board for the chairman, the chief executive or other directors Acting as a safety valve able to act in a crisis

The legal duties of a director

Directors responsibilities derive from the nature of the joint stock limited liability company and are enshrined in statute law, case law and regulation Details vary by jurisdiction, but the essential duties are: a duty of trust - to exercise a fiduciary responsibility to the shareholders a duty of care - to exercise reasonable care, diligence and skill

The legal duties of a director

The duty of trust
Act honestly - for the benefit of members Show independence of judgement Avoid conflict of interest Act fairly

The legal duties of a director

Act honestly - for the benefit of members

Exercise powers honestly in line with the companys constitution

Exercise powers in good faith, for the benefit of the members in the short and long term
Recognise the need to foster business, to see the impact of operations on communities and environment, and maintain a reputation for good business conduct

The legal duties of a director

Show independence of judgement

A director has a duty to exercise independence of judgement and not restrict his thinking or action

The legal duties of a director

Avoid conflict of interest

A director must disclose a personal interest in any company transaction and abide by the boards decision on that interest A director must not make a secret profit out of the company A director must not use any property, information or opportunity from the company for his own benefit unless allowed by the companys constitution and disclosed

The legal duties of a director

Act fairly
A directors duty is to act fairly between all the members of the company A director must recognise the interests of minority shareholders

The legal duties of a director The duty of care

Exercise care, skill and diligence
A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person - with the knowledge, skill and experience expected of a director - and the knowledge, skill and experience which that director has

The legal duties of a director

Codification of Directors Duties
UK Company Act 2006

Duty to act within powers Duty to promote the success of the company Duty to exercise independent judgement Duty to exercise reasonable care, skill, and diligence Duty to avoid conflicts of interest Duty not to accept benefits from third parties Duty to declare interest in proposed transaction or arrangement

The legal duties of a director

A related party transaction is one between a company and a party closely related to it, such as a director or a major shareholder for example, the purchase by the company of a property from one of its directors

Related party transactions provide good examples of the requirement to disclose personal interests
The listing rules of most stock exchanges and securities regulators require related party transactions to be disclosed and, often, approved by the other shareholders

The legal duties of a director

Insider trading, that is trading in a listed companys shares on the basis of privileged, share-price sensitive insider information is a breach of a directors fiduciary duty It is also illegal in almost all countries Japan, Hong Kong and Germany were among the last countries to make insider trading a criminal offence

The United States has the most severe penalties for insider dealing

The legal duties of a director

Directors have to be careful not to trade in their companys shares when they are in possession of inside or privileged information such as the company results just prior to publication and before the stock market has that information The company secretary will often inform directors when the window of opportunity for trading in the companys shares is open and, more importantly, when it is closed

The legal duties of a director

s.9(1) Securities (Insider Dealing) Ordinance Insider Dealing Tribunal (Hong Kong) Insider trading takes place: When a person concerned with a corporation who is in possession of information which he knows is relevant information in relation to that corporation deals in any listed securities of that corporation or their derivatives (or listed securities of related corporation) or counsels or procures another person to deal in such listed securities knowing or having reasonable cause to believe that such persons would deal in them.

The legal duties of a director

The US Sarbanes-Oxley Act 2002 (SOX)
To strengthen corporate governance and restore investor confidence following Enron, WorldCom and others SOX imposed new accountability standards, with criminal penalties, on directors. CEOs and CFOs must certify under oath that their financial statements neither contain an untrue statement nor omit any material fact. Audit committees must be comprised totally of independent outside directors

The legal duties of a director

The US Sarbanes-Oxley Act 2002 (SOX)
SOX also established new independence standards for external auditors Areas of lucrative non-audit work by audit firms prohibited A Public Company Accounting Oversight Board (PCAOB) created to oversee public accounting (auditing) firms and to issue accounting standards Rules regulated by the SEC and apply to all companies quoted in the United States, including overseas companies listed there Sarbanes Oxley Act differentiated the United States from many other countries by enshrining corporate governance practice in law rather than voluntary codes

The legal duties of a director

The US Sarbanes-Oxley Act 2002 (SOX) SOX has proved expensive to operate, particularly section 404 Some overseas companies have complained about the potential extra-territorial legislation Others have withdrawn from listing in the United States

The legal duties of a director

S404 SOX Management must: Accept responsibility for the effectiveness of the companys internal control over financial reporting Evaluate the effectiveness of the companys internal control Support its evaluation with sufficient evidence Present a written assessment If the auditor concludes that management has not fulfilled these responsibilities, the auditor should report to management and the audit committee and disclaim an opinion

The legal duties of a director

UK Companies Act 2006 Clarified directors' duties for the first time in statute law Made clear that directors have to act in the interests of shareholders But added that in acting in the shareholders' interests, they must pay regard to the longer term interests of employees, suppliers, consumers, and the environment

The legal duties of a director

UK Companies Act 2006
Encouraged narrative reporting by companies calling for them to be forward-looking, identifying risks as well as opportunities Quoted companies have to provide information on environmental matters, employees and social and community issues This business review must include information on any policies relating to these matters and their effectiveness, plus contractual and other relationships essential to the business

The legal duties of a director

UK Companies Act 2006 Promotes shareholder involvement in governance by enhancing the powers of proxies Makes it easier for outside investors to be informed and exercise governance rights in the company Allows shareholders to limit the auditors' liability to the company to what is fair and reasonable Requires institutional investors to disclose how they used their votes Introduces a new offence for recklessly or knowingly including misleading, false or deceptive matters in an audit report

Directors remuneration
The remuneration committee
Sub committee of main board Recommends remuneration packages of directors (and sometimes other senior management) Greenbury report (UK 1995) most CG codes require remuneration committee

Need to balance incentive to attract and retain top management in a competitive market for talent, rewarding success, whilst avoiding excesses and apparently rewarding failure

Directors remuneration
Reporting and voting on director remuneration SEC rules since 2007 require full disclosure of pay packages of top management US Corporate and Financial Institution Compensation Fairness Act (20090
response to perceived excessive rewards in financial institutions did not impose pay limits passed responsibility to shareholders

UK legislation (2003) required quoted companies to

publish a directors remuneration report put itto shareholder vote at the AGM But advisory only 2012 suggestion by government that vote becomes binding