p1 Acca Lesson4

Session Objectives
Topic 4
The Board of Directors
Explain and evaluate the roles and responsibilities of boards of directors Describe, distinguish between and evaluate the cases for and against, unitary and two-tier board structures Describe the characteristics, board composition and types of, directors (including defining executive and nonexecutive directors (NED)
accountingclassroom.com 2008
Student Notes for ACCA P1-Professional Accountant
Session Objectives
Describe and assess the purposes, roles and responsibilities of NEDs Describe and analyse the general principles of legal and regulatory frameworks within which directors operate on corporate boards
Session Objectives
Define, explore and compare the roles of the chief executive officer and company chairman Describe and assess the importance and execution of, induction and continuing professional development of directors on boards of directors
Session Objectives
Explain and analyse the frameworks for assessing the performance of boards and individual directors (including NEDs) on boards
What is Board of Directors (BOD)?

Board of Directors is a group of people legally charged with responsibility and authority to govern an entity. Directors, individually and collectively, have a duty for corporate governance
Board of Directors of NonProfit Organisations

BOD of non-profit organisations report to stakeholders, that is, local communities. Generally they are part-time body (volunteers). They:
Meet occasionally May not know each other well May not receive adequate training
Director versus Trustee

Historically nonprofits set up as trusts were controlled by trustees. Each could have specific responsibilities and duties Corporate term for trustees is director. All have same broad responsibilities and duties
Key Roles of Directors ( Based on Combined Code)

Provide entrepreneurial leadership Represent company view and account to the public Decide on a formal schedule of matters of board decisions Determine the companys mission and strategic aims Select and appoint CEO, chairman and other BOD
accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant

Set the companys values and standards Ensure companys management is performing the job correctly Establish appropriate internal controls that enable risk to be assessed and managed Ensure necessary financial and human resources are in place

Ensure that obligations to shareholders / stakeholders are met Meet regularly to discharge duties effectively Assess and report own performance annually to shareholders Submit themselves for re-election at regular intervals ( max 3 years)
Additional Key Roles for Listed Companies

Appoint appropriate NEDs Establish remuneration committee Establish nomination committee Establish audit committee
Duties of a Board Member

Duty of obedience: Duty of care Duty of loyalty
Duty of Obedience
Must be faithful to mission Be knowledgeable about the business Exhibit proper stewardship and governance of legal and fiscal responsibilities
Duty of Care
Most important duty owed by director Perform level of care an ordinarily prudent person would in similar circumstances
Stay abreast of financial health Understand programmatic accomplishments Generally monitor operations
Duty of Loyalty
Standard of faithfulness to nonprofit Personal or constituent interests put aside Decisions made in best interest of nonprofit
Potential Problems Faced by BOD

Boards largely rely on management to report information to them thus allowing management to obscure problems and true state of the company BOD meeting only occasionally may be unfamiliar with each other making it difficult for board members to question management
Potential Problems Faced by BOD

CEOs often have forceful personalities, sometimes exercising too much influence over the rest of the board The current CEOs performance is judged by the same directors who appointed him / her making it difficult for an unbiased evaluation
Role of Board
Strategic Management Control Shareholder and market relations
Strategic Management
BOD is responsible for setting the context for the development of strategy of the company Strategic development also consist of assessing the opportunities and threats facing the business.
This involves screening of strategic proposals and implementing appropriate strategies
Control
Responsible for monitoring and control of the activities of the company Responsible for the financial records of the company and that the financial statements drawn up are based on appropriate accounting policies and ensure financial information is accurate Responsible for the direction of the company and ensuring that managers and employees work towards strategic objectives that have been set.
Shareholder and Market Relations

Responsible for raising the profile of the company and promoting the companys interests in its own and possibly other market places Responsible for managing its relationships with its shareholders Responsible for maintaining relationships and dialogue with the shareholders, in particular the institutional shareholders.
Board Structure
Unitary Boards: Issues

NED expertise: Required not just for supervising but for running the company NED empowerment: As responsible as executives. Actively involved from an early stage Compromise: Less extreme decisions developed prior to need for supervisory approval
Unitary Boards: Issues

Responsibility: A single decision making unit with wide viewpoints suggests better decisions Reduction of fraud, malpractice: Wider involvement in actual management of company Improved investor confidence
Two-tier Boards
Two-tier boards are primarily associated with France and Germany. They exist primarily due to:
Codetermination: The right to be informed and involved in decisions that affect them Closer Relationships: Banks have closer relationship by becoming shareholders
Advantages of Two-tier Boards

Clear separation between those that manage the company and those that own it or must control it for the benefit of shareholders Implicit shareholder involvement in most cases Wider stakeholder involvement implicit through use of workers representation
Advantages of Two-tier Boards

Independence of thought, discussion and decision since board meetings and operations are separate Direct power of management through the right to appoint members of the management board
Two-Tier Boards: Problems

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
Composition of the Board

The Board is a link between owners and controllers of company. It monitors management on behalf of shareholders. It includes:
Chairman CEO Directors
At least 50% of the board should be constituted by NEDs.

Board Meetings
Agenda should strike a balance between long- and short-term issues Every director should have an opportunity to place items on the agenda All topics should have supportive information, risks and alternatives identified. Meetings should be regular and attendance expected Chairman should direct proceedings allowing ample time for discussions
accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant accountingclassroom.com 2008
Roles of NEDs
Independence of NEDs
Should not be an employee in last 5 years Should not have had material business relationship with company in last 3 years Should not have received other remuneration from the company besides directors fee Does not have any family ties with the firm
Independence of NEDs
Should not hold cross-directorships in other companies Should not be a significant shareholder Does not serve on board for more than 9 years
Why Should NEDs be Independent

Provide an objective view of board decisions Provide expertise and communicate effectively Provide shareholders with an independent voice on the board Provide confidence in corporate governance Reduce accusations of self-interest in behaviour of executives
Advantages of NEDs
Monitoring Expertise Perception Communication Discipline
Disadvantages of NEDs
Unity Quality Liability
Separate Roles of Chairman and CEO

Chairman runs the board and CEO runs the company. Board not dominated by a single powerful individual Clear division of responsibilities
Separate Roles of Chairman and CEO

Only small companies can have the same person as the CEO and Chairman Board appoints the chairman who may be full-time or part-time. The chairman is usually a NED Appointment of chairman counterbalances the CEO
Chairmans Responsibilities
Ensure that board sets and implements the companys direction and strategy effectively Act as companys lead representative, explaining aims and policies to outside world
CEOs Responsibilities
Take responsibility for the performance of the company as determined by boards strategy Report to the chairman and / or BOD
Need for Splitting the Role

No one should have unfettered power of decision Chairman should be independent in the same way as NEDs
Reasons for Splitting the Role

Representation Accountability Temptation Unity Ability Human Nature
Directors Induction
Primarily aimed at NEDs, however should be the same for new EDs For an internally promoted director it would depend on the persons background Break the ice with the board
Induction Process
Each company should have own process Guidelines:
Comprehensive Customised Contain select written information + presentations and site visits Give a balanced and real overview Not information overload List of all induction material
Induction Process
Give an understanding of the nature of the company, its business and the markets Link with the companys people An understanding of the companys main relationships
Objectives of Induction
Communicate vision and culture Communicate practical procedural duties Reduce the time for the individual to become productive Welcome on the board Ensure retention of individuals
Induction Package
Directors Duties Company Strategies Board Operations
Directors Duties
Brief outline of the role of a director and a summary of his/her responsibilities and ongoing obligations under the Corporations Act. The company's policies on:
Matters reserved for the board Matters reserved for CEO/Senior management Other relevant policies and procedures of which the director should be aware
Company Strategies
Current strategic/business plan and budgets for the year with revised forecast, and three/five year plan. Latest annual report and half year report as appropriate. List of major domestic and overseas subsidiaries, associated companies and joint ventures.
Internal mandatory induction procedure. Disclosure of directors notifiable interests agreement (for signing)
Company Strategies
Details of any major litigation, either current or potential, being undertaken by the company or against the company. The corporate profile Company Brochures, mission statement Treasury issues such as financing and dividend policy
Board Operations and Issues

Up to date copy of the company's Constitution. Minutes of the last 4 to 6 board meetings. Schedule of dates of future board meetings and board subcommittees if appropriate.

Description of board procedures covering details such as:
when papers are sent out the normal location of meetings how long they last an indication of the routine business transacted

Details of board subcommittees and committee charters Where the director will be joining a committee, copies of the minutes of meetings of that committee during the previous 12 months.
Brief biographical and contact details of all directors of the company, the company secretary and other key executives.
accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant accountingclassroom.com 2008 Student Notes for ACCA P1-Professional Accountant
Directors CPD
Purposeful, systematic activity by individuals and their organisations to maintain and develop the knowledge, skills and attributes which are needed for effective professional practice.
CPD Requirements
Companies need to provide resources for skilling and reskilling directors including NEDs Chairman addresses these needs for the Board as a whole Chairman also leads in identifying development needs of individual directors Company secretary facilitates the process NEDs need to take time out for CPDs
Why CPDs
Ensure directors have sufficient skills to be effective Bring to notice the challenges and changes in business environment Improve board effectiveness Support directors in personal development
Duties of Directors
General Duties Duty of Skill and Care Fiduciary Duties Statutory Duties
General Duties
A director of a company must: (a) act in accordance with the companys constitution; and (b) only exercise powers for the purposes of which they are conferred. A director must exercise independent judgement. This duty is not infringed by his acting: (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by directors; or (b) in a way authorised by the companys constitution.
Duty of Skill and Care

A
director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (b) the general knowledge, skill and experience that the director has.
Power of Directors
Limited by:
Articles of association Shareholder resolution Provision of law Board decisions
Liabilities of Directors
Liability of directors is unlimited The directors will be liable to sanction for a civil penalty or a criminal offence.
Penalties
If a director is in breach:
Any contract made by the director will be void They may be personally liable for damages in compensation for negligence May be forced to restore company property at their own expense
Appointment of Directors
All directors are appointed through nomination committee and should be subject to election by shareholders at the first AGM Re-election at intervals of no more than 3 years
Terms and Removal

NEDs should be appointed for specific terms subject to re-election and company act provisions Any time over 6 years rigorous review and over 9 years annual re-election required
Directors Service Contract

Legal document includes: Key dates Duties Remuneration details Termination provisions Constraints Other ordinary employment terms Notice or contract periods should be set at one year or less
Removal of Directors
May be vacated by:
Statute Death Personal bankruptcy Under a provision in either the articles of association or through shareholder resolution Resignation from office Absence from more than 6 months
Disqualification of Directors: Causes

Allowing the company to trade while insolvent Not keeping proper accounting records Failing to prepare and file accounts Being guilty of 3 or more defaults in complying with companies legislation Failing to file tax returns and pay tax Taking actions that are deemed to be unfit in the management of a company
Disqualification of Directors: Period

Period of disqualification for a period between two and 15 years While disqualified, a director cannot:
Be a director of any company Act like a director, even if there is no formal appointment Influence the running of a company through the directors Be involved in the formation of a new company
Key Areas of Conflict between Directors and Company

Directors contracting with their own company Substantial property transactions Contracts with listed companies Loans to directors
Disclosure
of all information concerning transactions involving directors in the notes in annual accounts
Insider Dealing / Trading

Illegal purchase or sale of shares by someone, usually a director, who possesses inside information about a companys performance and prospects which, if publicly available, might affect the share price Inside information is not available to the market or general public Such transactions are fraudulent Reason: When a director accepts employment, he makes a contract with the company to put the companys interest before his own
Performance Evaluation of Directors

Board should undertake a formal and rigorous evaluation of its own performance, committees and individual directors Important provision of the code:
The board of directors should state in the annual report how they undertake the process of evaluating the board's committees and individuals' performance
Evaluating the Performance of Board

Who will do the evaluation Who is being evaluated What is to be covered How is it to be done What is done with the information collected
Guidance on Performance Evaluation

Should be done at least once a year Individual evaluation of directors should consider their individual contributions and time commitment to the role. The chairman should consider the strengths and weaknesses of the board using the results of the evaluations. And non-executive directors should be responsible for the evaluating the chairman of the board.
Other Measures
Are results/performance comparable with competitors? Are board decisions regularly reviewed to measure the impact of decisions taken? Do all directors contribute effectively? Is there effective leadership from the chair?
Evaluation of Non-executive Directors: Basis

Preparation and attendance at board meetings Time spent understanding the companys business outside of the boardroom Quality and value of boardroom contributions Contributions to risk assessment and strategic development
Evaluation of Non-executive Directors: Basis

Readiness to challenge and probe any assumptions Are areas of concern followed up Behaviour and performance gain board respect Current awareness and keeping up to date and the expressing of views and listening to others.
Reporting Performance
The board cannot only measure performance - it must report on it. This is usually done in the annual report and statement of accounts. Public and private companies submit their reports as returns to Companies House. There is no one format or style, with content and length varying enormously.

p1 Acca Lesson4

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

p1 Acca Lesson4

Uploaded by

Copyright:

Available Formats

Session Objectives

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

What is Board of Directors (BOD)?

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Board of Directors of NonProfit Organisations

Director versus Trustee

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Key Roles of Directors ( Based on Combined Code)

Key Roles of Directors ( Based on Combined Code)

Student Notes for ACCA P1-Professional Accountant

Key Roles of Directors ( Based on Combined Code)

Additional Key Roles for Listed Companies

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Duties of a Board Member

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Potential Problems Faced by BOD

Potential Problems Faced by BOD

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Shareholder and Market Relations

Unitary Boards: Issues

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Unitary Boards: Issues

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Advantages of Two-tier Boards

Advantages of Two-tier Boards

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Two-Tier Boards: Problems

Composition of the Board

At least 50% of the board should be constituted by NEDs.

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Why Should NEDs be Independent

Student Notes for ACCA P1-Professional Accountant

Separate Roles of Chairman and CEO

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Separate Roles of Chairman and CEO

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Need for Splitting the Role

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Reasons for Splitting the Role

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant

Student Notes for ACCA P1-Professional Accountant