Corporate Governance Toolkit

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Dr.AshleyBurciaga,France,Researcher
Published Date:05-07-2017
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 Corporate Governance Toolkit for small and medium enterprises: nd 2 Edition April 2005 CORPORATE GOVERNANCE TOOLKIT Forward This series of information sheets is part of the CPA Australia program to advance financial reporting and governance issues. It is sponsored by CPA Australia and authored by PricewaterhouseCoopers. CPA Australia (www.cpaaustralia.com.au) is a major international accounting body with membership of more than 105,000 finance, accounting and business professionals around the globe. PricewaterhouseCoopers (www.pwc.com/au) provides industry-focused assurance, tax, legal and advisory services for public and private clients worldwide. It assists clients to understand and implement good practice corporate governance principles and effectively integrate these into a framework meeting the client’s needs and circumstances. The Corporate Governance Toolkit focuses on the practical application of governance principles for small and medium enterprises and provides straightforward guidance. Corporate governance is constantly evolving to reflect the current corporate, economic and legal environment. The information sheets which make up the Corporate Governance Toolkit provide generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT Contents Forward 1 Overview 5 Performance assessment 1.1 What is corporate governance? 5.1 Performance assessment 1.2 Governance in an SME 5.2 Board performance assessment 5.3 Audit committee performance assessment 2 In the boardroom 6 Oversight and supervision 2.1 Roles and responsibilities 2.2 Directors’ duties 6.1 Delegations of authority 2.3 Role of the chairman 6.2 Risk management 2.4 Board composition 6.3 The internal control framework 2.5 Board committees 7 Practical guidance 2.6 Charters 2.7 Effective board meetings 7.1 Effective budgeting 2.8 Boardroom conduct 7.2 Compliance 2.9 Board papers 7.3 Early warning signs of failure 2.10 Minutes and action items 2.11 Access to papers and advice 8 Companies in Australia 8.1 Board awareness 3 The board and the organisation 8.2 ASX Corporate Governance Council: 3.1 Corporate values, ethics and codes of Principles and recommendations conduct 8.3 ASX Corporate Governance Council: 3.2 Stakeholder relations Disclosures 3.3 Conducting an AGM 8.4 CLERP 9 disclosures 3.4 Director education 3.5 Succession planning 3.6 Remuneration issues 3.7 The audit committee 4 The relationship with auditors 4.1 Selecting an external auditor 4.2 The external auditor relationship 4.3 Evaluating the external auditor 4.4 Internal audit 4.5 Overseeing the work of the internal audit functionCORPORATE GOVERNANCE TOOLKIT 1: Overview 1.1 What is corporate governance? Corporate governance is a topic that has received growing attention in the public in recent years as policy makers and others become more aware of the contribution good corporate governance makes to financial market stability and economic growth. Corporate governance is all about controlling your business and so is relevant, and indeed vital, for all organisations, whatever size or structure. The concept of corporate governance has proved difficult The basic principles of effective corporate governance to define precisely, because it covers a large number of are threefold: concepts and economic relationships that affect many Transparency Accountability Are the board telling us what Is the board taking people. The OECD has the following working definition is going on? responsibility? of corporate governance: Good, effective "Corporate governance is the system by which business governance corporations are directed and controlled. The corporate governance structure specifies the distribution of rights Corporate Control and responsibilities among different participants in the Is the board doing the right thing? corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and Based on these principles, organisations and markets procedures for making decisions on corporate affairs. By around the world have considered the appropriate doing this, it also provides the structure through which mechanisms for their markets. For example, the UK the company objectives are set, and the means of started their corporate governance regime with the attaining those objectives and monitoring performance." Cadbury Code of Practice published by the London Stock Exchange in 1992, which has been regularly updated, This is summed up in a quote from Corporate Practices 1 most recently as a new Combined Code in 2004. Other and Conduct, 3rd edition : examples include: “The essence of any system of good corporate ƒ the OECD, which publishes guidelines on corporate governance is to allow the board and management the governance freedom to drive their organisation forward but to ƒ South Africa, where the comprehensive King Report exercise that freedom within a framework of effective on Corporate Governance was issued in 2002 accountability”. ƒ Australia, where the Australian Stock Exchange Corporate Governance Council issued a set of principles of good corporate governance in 2003 ƒ Hong Kong, where the Hong Kong Society of Accountants has produced a number of relevant publications, including a updated basic framework of principles in 2004 ƒ the US, where various stock exchanges, such as the NY Stock Exchange, have set out specific requirements in relation to governance mechanisms. 1 Bosch Committee, Corporate Practices and Conduct, Third Edition, 1995, Australia The Australian recommendations of the ASX Corporate Governance Council, for example, translate to the basic principles as follows: How the elements translate into mechanisms • Encourage enhanced performance Creating an Is the board doing • Recognised and manage risk environment to the right thing? • Remunerate fairly and responsibly take risk • Recognise the legitimate interests of stakeholders • Promote ethical and responsible Is the board Clarifying the role decision making taking of board and • Lay solid foundations for management responsibility? management and oversight • Structure the board to add value Meeting • Safeguard integrity in financial reporting Are they telling us information needs • Make timely and balanced disclosure what is going on? of investment • Respect the rights of shareholders communities The King Report from South Africa expands on the three basic principles to separate out characteristics within 2 these principles , as a basis for its framework, and other country specific requirements may concentrate on specific parts rather then the principles overall. However, whatever regime is in place, when considering corporate governance issues, and specifically recommendations in relation to systems or mechanisms, it is useful to concentrate on the overall purpose of good governance: to assist organisations to achieve their strategic objectives. 2 The King Report characteristics are set out in information sheet 1.2 Governance in an SME. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 1: Overview 1.2 Governance in an SME The King Report on Corporate Governance for South Africa identified seven primary characteristics of good governance: ƒ Discipline - commitment by the organisation’s senior management to widely accepted standards of correct and proper behaviour ƒ Transparency - the ease with which an outsider can meaningfully analyse the organisation’s actions and performance ƒ Independence - the extent to which conflicts of interest are avoided, such that the organisation’s best interests prevail at all times ƒ Accountability - addressing shareholders’ rights to receive, and if necessary query, information relating to the stewardship of the organisation’s assets and its performance ƒ Responsibility - acceptance of all consequences of the organisation’s behaviour and actions, including a commitment to improvement where required ƒ Fairness - acknowledgement of, respect for and balance between the rights and interests of the organisation’s various stakeholders ƒ Social responsibility - the organisation’s demonstrable commitment to ethical standards and its appreciation of the social, environmental and economic impact of its activities on the communities in which it operates. the specific needs of an organisation at a given point in How does corporate governance time. apply to small and medium sized When corporate governance is discussed, it is often enterprises (SMEs)? spoken of in terms of a company’s corporate Many of the characteristics described above are governance framework. The key elements within an relevant to both SME’s and large listed public effective governance framework, and the issues companies. As an organisation grows in size and relating to each element, are set out on the following influence, these issues become increasingly important. page and are relevant to organisations large and small, in both the private and the public sectors. The However, it is also important to recognize that good table provides a useful structure for any company to corporate governance is based on principles consider its own approach to corporate governance underpinned by consensus and continually developing and the matters which may assist it to achieve its notions of good practice. There are no absolute rules strategic objectives. which must be adopted by all organisations. “There is 1 no simple universal formula for good governance” Many of the matters listed may not be directly relevant Instead emphasis in many localities, such as Australia, in all situations and some may not, in particular Hong Kong and the UK, has been to encourage circumstances, be within the board’s control, but it organisations to give appropriate attention to the provides a useful context in which any organisation principles and adopt approaches which are tailored to can consider its governance needs and how they might be most appropriately addressed. 1 Bosch Committee, Corporate Practices and Conduct, Third Edition, 1995 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved xxxxx xxxxx xxxx Key elements of, and issues relating to, an effective corporate governance framework Board structure, Boardroom Regulatory Robust risk Corporate social Strategy, planning Effective and Relationship with composition and conduct, disclosures and management and responsibilities and monitoring appropriate management membership relationships and shareholder compliance committee performance communications processes structures Board charter Agreed and Communication with Policy/framework Code of Conduct / Vision and mission Charter and clarity in Clarity of roles and understood roles and shareholders and Code of Ethics: roles and responsibilities Director selection and Board commitment, Strategic / corporate responsibilities stakeholders responsibilities appointment process oversight and review plan Value adding Commitment to Composition and Annual report Structure shareholders NED independence Accountability Business plans Open and honest organisation disclosures and objectivity Skills / selection Ethical Risk processes: Annual budgets Consultative Induction and training Clear operational criteria and terms of standards Remuneration instructions and chairman and Monitoring and Accessible Risk Access to and Expectation of guidance: members Formal letters of evaluation identification relationship with employees Accountable appointment to independent advisors Independence and Delegations of Management Risk assessment directors Privacy Appropriate objectivity authority performance /measurement Management/board performance based Directors’ Code of monitoring and Compliance relationship Frequency of Conflicts of remuneration Risk response Conduct assessment meetings interest Conflicts of interest Performance Objective Robust appropriate Separation of Management evaluation Induction and training Policies and performance internal control and Improper payments/ Chairman and CEO succession planning measures procedures statutory and receipts Board agenda, Relationships with Skills/selection criteria Component strategies regulatory compliance reporting, papers and third parties / access Definitions of Political contributions and term of Chairman e.g. technology, frameworks minutes to external advice role and CAPEX Integrity of advertising Skills/selection criteria responsibilities Communication and Frequency, conduct, Annual performance and terms of directors training management and Employee relations review Clearly defined and outcomes of meetings Appropriate size well managed Monitoring, reporting Health and safety Relationship with and relationships with and certifications Confidentiality of reporting to the board Social and stakeholders and discussions CEO/CFO regulators environmental statements: Competent company obligations Continuous secretary Financial reports Trading policy disclosure obligations present true and and company Whistleblowing fair view announcements Effective and efficient risk management and control External auditor Internal audit CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.1 Roles and responsibilities The role of the board can be summarised as being to bring an independent and objective view to the organisation’s decisions and to oversee the performance and activities of management. What is the board’s role? The full range of a board’s responsibilities is extensive and includes: Performance Compliance/legal conformance Overall operations ƒ Ensuring the organisation’s long ƒ Understanding and protecting ƒ Establishing the organisation’s term viability and enhancing the the organisation’s financial vision, mission, values and financial position position ethical standards ƒ Formulating and overseeing ƒ Requiring and monitoring legal ƒ Delegating an appropriate level implementation of corporate and regulatory compliance of authority to management strategy including compliance with ƒ Demonstrating leadership accounting standards, unfair ƒ Approving the business plan, ƒ Assuming responsibility for the trading legislations, occupational budget and corporate policies relationship with CEO including health and safety and ƒ Agreeing key performance his or her appointment, environmental standards indicators (KPIs) succession, performance ƒ Approving annual financial assessment, remuneration and ƒ Monitoring/assessing performance reports, annual reports and dismissal of the organisation, the board itself, other public documents/sensitive management and major projects ƒ Overseeing aspects of the reports employment of the management ƒ Overseeing the risk management ƒ Ensuring an effective system of team including remuneration, framework and monitoring internal controls exists and is performance and succession business risks operating as expected planning ƒ Monitoring developments in the ƒ Recommending auditors and industry and the operating new directors to shareholders environment ƒ Ensuring effective ƒ Oversight of the organisation, communication with including its control and shareholders and other accountability systems stakeholders ƒ Approving and monitoring the ƒ Crisis management progress of major capital expenditure, capital management ƒ Appointment of the CFO and and acquisitions and divestitures company secretary ƒ have an appropriate level of skills and resources What is management’s role? ƒ perform against the established KPIs to deliver the The responsibilities of management are to: objectives of the organisation. ƒ recommend the strategic direction and translate the But at all times, the board must be in control. strategic plan into the operations of the business ƒ manage the company’s human, physical and Does a non-executive director have financial resources to achieve the organisation’s specific responsibilities? objectives - run the business Organisations commonly appoint individuals to the board ƒ assume day to day responsibility for the from outside of the organisation. This allows a fresh organisation’s conformance with relevant laws and perspective to be taken on the responsibilities of the regulations and its compliance framework board. These individuals are the non-executive directors. ƒ develop, implement and manage the organisation’s Non-executive directors do not have any additional risk management and internal control frameworks responsibilities over an executive director in their role as ƒ develop, implement and update policies and director, but the expectations and skills each director procedures brings to the board will differ. Common duties are ƒ be alert to relevant trends in the industry and the addressed in a separate information sheet ‘2.2 Directors’ organisation’s operating environment duties’. ƒ provide information to the board These duties are augmented by your operational ƒ act as a conduit between the board and the responsibilities to: organisation ƒ understand the organisation, its business, its operating environment and its financial position ƒ apply your expertise and skill in the organisation’s best interests ƒ assist management to keep performance objectives at the top of its agenda ƒ understand your role is not to act as auditor, nor to act as a member of the management team ƒ respect the collective, cabinet nature of the board’s decisions ƒ prepare for and attend board meetings ƒ seek information on a timely basis to ensure you are How important is the relationship in a position to contribute to the discussion when a matter comes before the board, or alert the chairman between management and the in advance to the need for further information in board? relation to a particular matter The relationship between management and the board is ƒ make informed decisions critical and must be supported by a clear segregation of ƒ ask appropriate questions. responsibilities. Management must: How does all this work in an SME? ƒ be accountable Small and medium organisations are often characterised by the high level of integration and overlap of board ƒ operate within delegated authorities membership, ownership and management. Many have a sole director. Where there is a board, it is often made up of members of the management team (executive directors), key stakeholders and/or their relatives. These facts do not change the roles and responsibilities, or the legal duties of the directors. In fact, it makes it more important that you understand the capacity in which you act at any given point in time. In these circumstances, the easiest approach may be to give specific attention to your role as a director and to encourage your board to meet formally on a periodic basis to address its responsibilities. It may also be prudent to consider whether your board and indeed your organisation might benefit from the inclusion of one or more non-executive/external directors. A well selected external director will: ƒ bring knowledge and objectivity to support the management team ƒ provide a valuable sounding board ƒ provide the catalyst to introduce an appropriate level of structure, process and formality to the board. 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.2 Directors’ duties As a director, you have a number of specific legal duties which have developed from a number of sources over time. For companies incorporated in Australia, for example, these primarily stem from statutory obligations imposed by the Corporations Act 2001 and complementary relevant State legislation and Ordinances of relevant Territories. Other duties have arisen from precedents developed in case law. You should be aware of the specific legislative or industry requirements applicable to the country of your organisation. above usually extends your responsibilities to include What are my key duties? certain limited duties to creditors, employees, the In Australia, and many other countries, the fundamental community, government or other stakeholders. common law and statutory obligations of any director are the duties to: The business judgment rule? ƒ act in good faith, in the best interests of the company The business judgement rule provides that, if as a ƒ act with care and diligence director, you make a decision in relation to the business ƒ avoid conflicts between your role as a director and operations of the company and meet a number of any of your personal interests. specific requirements, then you will be taken to have These are extended by a range of specific discharged your duty to act with care and diligence. responsibilities including requirements in relation to the The specific requirements that must be met are that: preparation of financial statements and avoiding ƒ you made the decision in good faith for a proper insolvent trading. purpose In discharging these duties you need to: ƒ you do not have a material personal interest in the subject matter of decision ƒ support management to make the best decisions ƒ you have taken steps to inform yourself on the while avoiding the tendency to second guess them subject matter of the decision to the extent you ƒ encourage constructive debate in the boardroom reasonably believe to be appropriate ƒ ensure all relevant issues are given due ƒ you reasonably believe the decision is in the best consideration before a decision is made. interests of the company. As a director, you also need to be aware of the wide range of other legal requirements with which the Where can I find more information company must comply and that, as a result, have a direct on this important issue? bearing on your role and in some instances, attach There are corporate governance organisations in many specific personal responsibilities to you. Specific countries that provide additional information on directors’ examples include legislation in relation to privacy, duties. For Australian companies, the Australian Institute occupational health and safety, environment protection, of Company Directors publication Duties and trade practices, taxation and equal opportunity Responsibilities of Directors and Officers (17th Edition, legislation. 2002) provides a comprehensive overview. To whom do these duties extend? As a director, your key duty is to the shareholders as a group. However the legislative framework described nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.3 Role of the chairman The chairman is the most prominent position on the board, and one which has specific responsibilities. It is generally accepted that on average, a non executive chairman may spend up to two to three times as many days each year on their duties for a organisation as his or her fellow directors. The time and effort that it may take a chairman to effectively discharge his or her responsibilities is largely impacted by the organisation, the particular issues it is confronting at any point in time, the personalities and skills of the individual directors and the dynamics of the board as a whole. What is the role of the chairman? Meeting agendas and the flow of information It is the chairman’s responsibility to lead the board and In establishing the meeting agendas, the chairman facilitate constructive contributions by all directors to should meet with the company secretary and CEO to ensure the board functions effectively as a whole in determine which matters require the board’s attention discharging its responsibilities. and/or decision. One of the core competencies of any chairman is In seeking to have items added to the agenda, ensuring that board meetings are efficient and effective. management may need to provide written reports or papers. This is facilitated by: The agenda may need to allow for relevant presentations ƒ an appropriate meeting agenda which allocates to the board and where appropriate, management sufficient time to each agenda item attendance to discuss a particular agenda item. ƒ competent management of the information flows to the board to support agenda items The form and content of board papers is discussed ƒ managing boardroom discussions and ensuring separately in the information sheet ’2.10 Board papers’. conclusions/decisions are reached, are clearly understood by all directors and are appropriately Managing boardroom discussions recorded. The chairman needs to ensure: Because of the nature of the role, many corporate ƒ there is structured and open debate of issues governance regimes require or recommend that the ƒ he or she facilitates the contributions of all members chairman be an independent director. ƒ all issues are given due and appropriate consideration. The chairman has to ensure there is balance. He or she must maintain control without dominating the debate. The chairman typically allows the discussion of issues to proceed until the point of which a broad consensus has been achieved, or he or she is able to summarise an agreed-upon conclusion. Where dissention exists and no conclusions appear to be forthcoming, the Chairman must decide whether: ƒ the directors require additional information ƒ there may be particular benefits in postponing a What if the chairman is the CEO? decision on a specific matter The duties and skills required of a CEO are different from ƒ additional or external advice should be obtained. those required by the chairman of the board. For this reason, many corporate governance regimes require or In situations where there are serious disagreements, the recommend that the roles of chairman and CEO should chairman must manage this situation to its resolution. not be exercised by the same person. Some also Does a chairman have any other suggest that the CEO should not go on to become the chairman of the same company. This is also based on responsibilities? the view that there should be a clearly accepted division The chairman is the principal spokesman for the board of responsibility between the CEO and the chairman to and will be required to show leadership in difficult ensure an appropriate balance of power and authority situations. exists. There will be instances when he or she is called upon to The chairman manages the board and the board speak publicly on behalf of the organisation. Whilst this provides an oversight to the organisation acting on behalf may occur in certain instances, generally, this role falls to of the shareholders and other key stakeholders. The the CEO. CEO manages the organisation with powers delegated to In addition, the chairman is the key link between it by the board. management and the board. The relationship between If the chairman and CEO are one and the same person, the CEO and chairman is vital and, if it is to be effective, there is a risk that the benefits of independent oversight it must be based on co-operation, trust and mutual and an appropriate balance of power could be respect. compromised. The CEO should be encouraged to use the chairman as In smaller organisations, separation of the CEO and the a sounding board to discuss sensitive issues or matters chairman may not always be possible or feasible. In of concern. If the working relationship is a good one, the these instances, organisations may set in place other CEO will also seek the benefit of the chairman’s structures to meet the aims of ensuring that both of the experience and where the chairman is an independent, roles are implemented and that the benefits of non executive director, his or her more independent and independent oversight are met. These may include objective view. clearly setting out the specific duties of the individual in In discussing issues with the CEO, the chairman may their role as chairman (which is of particular importance if determine that certain issues require elevation for there are external directors on the board), nominating discussion at a board level. one of the external/non-executive directors as a senior NED who will undertake some of these duties, or If the company is a public company, the chairman will introducing written protocols for dealing with conflicts of also be required to manage the annual general meeting interest. and have a key role in the company’s relationship with any institutional investors. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.4 Board composition Effective boards work together in the interests of the shareholders. An effective board is not dominated by one member or factional group and it does not require members to be experts in all fields. An effective board does not just happen. It requires care, effort, thought and analysis to identify and select the right team of people to help the organisation with its current challenges and opportunities, to take the organisation forward into the future and to work in partnership with senior management, providing real oversight and value adding guidance ƒ strategic thinking What makes an effective board? ƒ knowledge of the organisation and industry. Different boards have different compositions of skills. The skill requirements depend on the organisation’s size, How do we determine the skills and nature, ambitions and the challenges it faces. professional experience we need An effective board is one that has the right mix of skills on our board? and experience and can work together as a team while There is no single correct answer other than to say that it encouraging diverse and healthy debate in the interests is increasingly important that the directors and of the company and its shareholders. particularly those serving on the audit committee, have an appropriate knowledge and understanding of financial To discharge its duties, the board must also be statements and other financial reports. structured in such a way that it has proper understanding and competency in the current and emerging issues Beyond this, it is beholden on the incumbent directors to facing the organisation; and can effectively review and consider the skills of the current board and to identify any challenge management’s decisions. additional skills or experience that are required. What qualities should I demonstrate Typically a board may have a mix of directors with skills in: if I am going to be an effective ƒ law director? ƒ finance, including accounting expertise There a number of personal qualities that each director should bring to a board regardless of their background, ƒ marketing or the particular skills and experiences that have ƒ operations relevant to the organisation’s activities identified them as able to make a valuable contribution to including, where important, international experience the success of the organisation. ƒ key industries in which the organisation operates ƒ corporate governance Individual directors should have: ƒ human resources ƒ the highest standards of personal integrity ƒ risk management ƒ excellent judgement and an ability to make informed ƒ mergers and acquisitions, if relevant decisions within time constraints ƒ specific matters, relevant to the company. ƒ professional credibility The key is to take an informed and measured look at the ƒ the capacity to think strategically and to demonstrate skills the organisation needs on the board and to make vision an honest assessment of how the current board matches ƒ sound communication skills up to those skills. This does not mean that individual ƒ sound inter-personal skills directors who are making a valuable contribution must ƒ team orientation. stand aside, but does require proactive steps to be taken to address any identified skill deficiencies without ƒ bring particular skills and qualifications to the allowing the size of the board to expand too far. organisation including an outside view, a balanced perspective and a “fresh set of eyes” To achieve this, the board or a nominations committee ƒ offer it the benefit of their external experience and should regularly review the range of skills, experience expertise and expertise on the board to enable identification of ƒ be well placed to consider major issues and potential knowledge gaps. initiatives from an objective perspective. It is also valuable for the organisation to have a formal Principles of good corporate governance emphasise the and transparent procedure for the selection and importance of a majority of non-executive directors in the appointment of new directors and a succession plan that boardroom, particularly of listed companies, where the ensures the maintenance of an appropriate balance of separation of the interests of the shareholders and skills, experience and expertise on the board. These management may be quite substantial. procedures can be shared with stakeholders to assist communication, for example they could be published on In Australia particular importance is placed on the the organisation’s website. separation of the role of the CEO (typically an executive director) and the chairman (typically a non-executive director). This is a view that has been adopted in a How big should a board be? number of other countries, including the UK, and is It is quality, not quantity that counts and there is no single gaining increasing acceptance internationally. This is correct answer. A small board of directors of the highest discussed in greater detail in the information sheet calibre, with complementary skills and experience and a ‘2.3 Role of the chairman’. degree of independence, can make for a more effective board than just sheer numbers of individuals. What is an independent non- Indeed a large board can very quickly become unwieldy executive director? and limit the opportunity for individual directors to make To be an independent non-executive director, a director an effective contribution. should be independent of management and free from any business or other relationship which could materially The board size should ideally reflect the needs of your interfere or reasonably be perceived to materially organisation and encourage efficient decision-making. interfere with the exercise of their independent Suffice to say, one size does not fit all. judgement. The board should regularly assess the independence of its directors. Many countries now What is the difference between an require or recommend that a majority of the board of executive and a non-executive listed companies should be independent non-executive director? directors. A board can be made up of both executive and non- The concept of independence has been considered by executive directors. many regulators and there are many slightly differing Executive directors are employees, and are usually “definitions” provided. It is important that you understand senior managers of the organisation. the legal or regulatory requirements in your country relating to your organisation, and that your board has Non-executive directors are not employees. They are articulated what it considers an acceptable definition removed from the day to day management and within these requirements. operational pressures of running the organisation. They are expected to: 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.5 Board committees Committees allow directors to give closer attention to important issues facing the organisation than is possible for the full board in a scheduled board meeting. Committees are an effective way to distribute the work between the directors and allow more detailed consideration of specific matters. The number of committees, the size and mix, will vary from organisation to organisation depending on its size, complexity and the challenges it faces. Not all organisations will need to have specific committees. The smaller the organisation and the smaller the board, the less likely it is that board committees will strengthen the governance framework and provide real benefit to the board, the directors or the organisation as a whole. However, in each situation the need for and possible benefits of delegating some of the work of the board to a board committee should be considered on its merits. An alternative to creating a board committee, and one What makes board committees which is favoured by many small and medium sized effective? organisations with very small boards, is to adopt a model Regardless of the role of your committees, there are where the whole board fulfils the traditional role of several steps your board can take to contribute to its specific committees but that it meets separately, outside effectiveness, including: the normal board meeting, to attend to these responsibilities. ƒ developing formal, documented terms of reference for each committee This ensures the directors have sufficient opportunity to ƒ appointing an appropriate chairman – usually an focus on the specific matters required without independent, non executive director compromising the more strategic focus of the board meetings. ƒ appointing appropriate directors to the committee – typically the emphasis is on committee membership that is primarily/exclusively non-executive directors What committees might my and includes those directors with the expertise most company need? relevant to dealing with the issues at hand Audit Committee ƒ requiring regular feedback from committees to the board The most common committee is the audit committee. It ƒ ensuring the committee has appropriate access to is particularly relevant not only for large companies but independent professional advice also SMEs, not for profit organisations and public sector ƒ requiring absolute transparency on committee entities. The functions of the audit committee are activities considered separately in the information sheet ‘3.7 The audit committee’. Broadly the audit committee will ƒ ensuring the committee has appropriate oversee the external and internal financial reporting administrative support. issues, including internal controls over reporting and The key issue is that any committees set up serve the relationships with auditors. board’s needs and are effective. Committees should not be established simply because a board feels good Public sector organisations and some SMEs often have a governance requires it to have a number of committees. finance committee in addition to their audit committee. The responsibilities of a remuneration committee may Nominations Committee include: Nominations committees are also common. While this is ƒ development and review of executive remuneration particularly important for larger organisations, the role of and incentive policies a nomination committee – to provide an efficient ƒ the organisation’s recruitment, retention and mechanism for the detailed examination of the selection termination policies and procedures for executives and appointment processes of directors and officers – is and senior management also relevant to other organisations. The mix of skills and experience on a board is vital. ƒ performance based incentive schemes ƒ director remuneration policies If a nominations committee is set up, for larger organisations it usually will consist of at least three ƒ superannuation arrangements members, the majority being independent directors to ƒ consideration of disclosures required in the provide an objective view. The chairman of the organisation’s reports on remuneration matters committee will also be an independent director. Other Committees The specific responsibilities of the nominations committee may include making recommendations to the While risks are often included in the audit committee board on matters such as: remit, an organisation may establish a separate risk management committee which specifically address the ƒ the assessment of necessary competencies on the identification, mitigation and monitoring of the risks faced board and its maintenance by the organisation, whether financial or operational. ƒ selection criteria and process for appointing new Not for profit organisations, or others, may chose to set members to the board up a social responsibility committee that focuses on ƒ board and CEO succession plans broader and non-financial issues which are important to ƒ evaluation of board and CEO performance the particular organisation. ƒ the appointment and removal of directors and the CEO. How do I manage board Remuneration Committee committees? The number and substance of committees utilised by the The remuneration of the board and senior executives is a board will be dependent on the organisation’s activities, sensitive area and the board will often set up a separate and any specific legal or regulatory requirements. To committee to spend time on the relevant aspects of manage committees, the board should establish formal remuneration. charters which set out the roles and responsibilities, If a remuneration committee is established there will composition, structure and powers of that committee. usually be at least three members, the majority of whom This will ensure that the members of the board, are independent directors to ensure an objective view is committees and management are clear on the role of brought to the deliberations. Use of independent each and that matters are not duplicated or left out. directors will also avoid conflict of interest situations and Agendas and reports of committees should be made in can increase stakeholder confidence that the reference to the charter to ensure they remain focused. organisation’s best interests are being served. The Many organisations will also make the charters available chairman of the committee may also be an independent to other stakeholders, for example by publishing them on director. the organisation’s website. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.6 Charters In the literature on corporate governance, much has been written about the need for committees of a board to have a formal charter or a statement of their terms of reference which sets out the committee’s roles and responsibilities and relevant administrative matters. A formal charter is important, as it provides a framework for the committee’s operations. It is also considered good governance for the board to have its own charter in place. ƒ the board’s relationship with management including What is a charter? delegations of authority and communications Typically a committee charter is designed to ensure there between directors and staff is a clear understanding of the committee’s role, not just ƒ board committees, including the board’s power to by the committee members, but by management and the establish committees, those in place at a given point board. in time, the process for appointing directors to committees and any relevant administrative There is also increasing acceptance of the value of a requirements board charter, particularly in small to medium sized companies, not for profits and in public sector ƒ the role of the chairman and the procedures should organisations where defining the operation of the board, the chairman be absent from a meeting of the board its roles and responsibilities and the separation of the ƒ the conduct of board meetings including the timing, role of the board from that of management, can be frequency, style and approach to meetings, and particularly valuable. details of quorum and voting requirements ƒ other operational matters including: A board charter ensures: o the content, preparation and distribution of ƒ the roles and responsibilities of the board are clear minutes and understood by all relevant stakeholders o the role of the company secretary ƒ the operation of the board and the relationship o circulation of papers between the board and management are clearly o attendance expectations defined ƒ when directors can seek independent advice, or have ƒ all directors have a clear understanding of the access to outside advisors manner in which the board will conduct itself and the organisation’s expectations of them as directors. ƒ membership issues including: o the independence of directors A board charter can be a powerful tool to contribute to o retirement of directors the effective and efficient operation of the board. o performance appraisal processes Even the smallest board can benefit from a written o the size of the board charter tailored to its specific needs. o qualifications and experience. What should a board charter cover? A board charter would typically address: ƒ the responsibilities of the board Do committees need charters? How often should governance Like the board, a well run committee operates most charters be reviewed? effectively when a written charter is in place. Each charter should be periodically reviewed, usually annually, to ensure the board/committee is meeting its A typical committee charter will cover: objectives and considering any new challenges the ƒ the overall purpose and objectives of the committee organisation may be facing. ƒ the size, frequency and timing of meetings It is important that the charter is a living document that ƒ the committee’s roles and responsibilities including moulds itself to the needs of the organisation. its particular areas of focus (for example, an audit committee’s charter will typically make particular Who should have access to board reference to financial reporting, dealings with the internal and external auditors and oversight of the and committee charters? internal control framework) The organisation’s board and committee charters should ƒ any delegation of decision making authority to the be available to directors, management, internal and committee from the board external auditors. It is becoming increasingly usual for ƒ the relationship with management and other organisations to also make them available to other stakeholders stakeholders, particularly shareholders. Hence it is ƒ reporting responsibilities and the ongoing relationship common to see board and committee charters, or with the board. summaries thereof, published on the organisation’s website. A committee charter will also cover relevant operational matters. How else might a charter be used? A well defined charter: ƒ provides particularly valuable information for new directors and will facilitate the induction process ƒ provides a valuable guide for the development of an annual agenda for the board or committee to ensure that, during the course of a year, they have given appropriate and due attention to all aspects of their role and responsibilities. This prevents a situation where there is undue focus on particular issues at the expense of other matters of importance to the company ƒ for a committee, provides a framework for reporting the committee’s activities to the board. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.7 Effective board meetings Board meetings should be conducted in an open and inclusive atmosphere that allows for healthy debate by all members of the board. The chairman has a key role to play in achieving this objective but individual directors and the company secretary have their own responsibilities. What are the key elements that contribute to an effective board meeting? An effective board meeting is generally characterised by: ƒ a capable chairman ƒ informed, well prepared directors ƒ seamless logistics in terms of the agenda, preparation and delivery of papers and the venue ƒ timely attendance of appropriate members of the management team for specific agenda items ƒ clear and timely decision making. Is how often we meet an issue? The frequency of board meetings will largely depend on the internal and external circumstances and any specific issues the organisation needs to deal with at a given time. As a general guide, the full board should meet no less frequently than quarterly. The boards of most large companies meet on a monthly basis, or more often, as needs dictate. Board committees typically meet less frequently than the board itself but again, this is directly related to the specific circumstances of the organisation and the Are there any other things I should charters of the individual committees. be aware of if I am to contribute to the success of a board meeting? How long should the meetings be? It is important for board members to have sufficient The length of your board meetings should be sufficient to notice of forthcoming meetings. When this occurs, it is give appropriate attention to the issues at hand. Some incumbent upon you to ensure you are able to attend, organisations are holding fewer, but longer meetings. you are available for the scheduled duration of the Board meetings can vary significantly in duration from meeting and that you allow yourself sufficient time to organisation to organisation – anything from several prepare for the meeting. You should challenge ideas hours to two days may be regarded as appropriate. The where appropriate, without being aggressive and you key is that the meeting should be long enough to cover should be receptive to the views of others. the matters for attention in appropriate detail.