Friday, June 21, 2024

Corporate Governance and Reporting – Part 2

Introduction

In the last instalment of this series, I concluded that the Board of Directors is the custodian of corporate governance. King III states that “The Board should act as the focal point of corporate governance”. The role of the Board is critical in that it sets the “tone at the top” with respect to everything that gets done at senior management level all the way to the shopfloor. The starting point for the Board in this respect is the Board Charter, which commits the Board to its role in corporate governance and is signed off by the Board Chairperson on behalf of the Board as a collective. 

The Board Charter-the starting point.

The Board Charter sets the “tone” for the rest of the corporate governance framework. Australia’s Corporate Governance Principles and Recommendations (ACG) clearly states that a listed entity should have and disclose a Board Charter setting out:

(a)the respective roles and responsibilities of its Board and management; and (b) those matters expressly reserved to the Board and those delegated to management. 

The UK Corporate Governance Code 2018 (UKCG) emphasizes that the Board should establish the company’s purpose, values and strategy and satisfy itself that these and its culture are aligned. 

King IV probably captures better the all-encompassing responsibility of the Board as follows: “members of the Governing Board should assume collective responsibility for steering and setting the direction of the organization; approving policy and planning; overseeing and monitoring of implementation and execution by management and ensuring accountability for organization performance”. It is  clear from the above that the Board’s responsibility starts from defining the organization’s purpose all the way to making sure that the purpose is achieved together with the related processes that come in between such as implementation and monitoring activities. 

Therefore, the Board Charter is the beginning of corporate governance. Without a Board Charter, or a poorly documented charter for that matter which does not commit the Board to its roles and responsibilities noted above, every aspect of the business will eventually “catch the cold” as it will be like  a ship without a captain. More than one centers of power are likely to emerge and with disastrous consequences on the purpose of the organization.

Appointment of the Board

Having concluded that the Board has ultimate responsibility over an entity, I now consider the appointment process of the Board. A well-documented Board Charter that is being driven by a “defective” Board is like the Titanic-its destined to sink despite being the largest ship afloat in its time. 

The key principle coming through most progressive codes of corporate governance is that the appointment of new Board members begins with a sub-committee of the Board called the Nomination Committee. It is important to emphasize that it does not start with the Shareholder.The Shareholder receives nominations for new Board members from the Nomination Committee through the main Board (which approves the nominations before forwarding to the shareholder for approval) and will either approve or disapprove. While this may seem straight forward, it is probably the genesis of most corporate governance problems especially in developing countries where corporate governance is still in its infancy. 

The concept of a Nomination Committee does not exclude the shareholder from the Board appointment process-it just makes it more robust and transparent.

The role of the Nomination Committee should be captured in a Nomination Committee Charter and is principally to assist with the process of identifying suitable members of the Board including performing background checks, reference checks and independently verifying qualifications of the proposed Board members (King III and King IV). 

The UKCG beautifully captures the role of the Nomination Committee as to:

(a) lead the process for appointments, 

(b)plan for orderly succession of both Board and Senior Management and 

(c) oversee the development of a diverse pipeline for succession.

In addition, the nomination committee should consider the balance of skills, knowledge and experience on the Board and ensure that it meets the requirements of the entity.

The Nomination Committee itself should be made up of a majority of independent non-executive directors and the Chief Executive Officer should not be a member of the committee. Also, the Chairman should not chair the committee when dealing with their succession (King IV, UKCG).

Conclusion

Having set the ground for the Board appointment and its roles and responsibilities as set out in the Board Charter, the next instalment will consider the composition of the Board and the role of the Chairperson.

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