Key themes and trends in UK governance

1. Key themes and trends in UK governance Julia Casson, Director, Board Insight Limited

2. My agenda today • What is governance and how can it support our work? • New issues in 2010 UK corporate governance code • Key points from FRC board effectiveness guidance • Would it be useful to reflect any of these developments in the Co-operatives UK Code?

3. How can governance support our work? • What do we mean by governance? • UK Code – the way organisations are ‘directed and controlled’ • The board’s work on strategy, controls, values and standards • Key issues – accountability, transparency, ethics, avoiding conflict of interest, avoiding concentration of power in too few hands...... • Approach must be proportionate to size and scope of organisation • Better ways of working save time and avoid loss • Board Insight – • Practical ways to ensure proper stewardship of the organisation to promote good performance’

4. The new UK corporate governance code • Key themes • Emphasis on the leadership role of the Chair • The board must take responsibility for risk • Board composition and diversity • Role of directors • External board evaluation at least every 3 years for largest companies See FRC website at www.frc.org.uk/corporate/ukcgcode.cfm

5. Leadership and effectiveness • New sections in code on leadership and effectiveness • Code asks chair to comment in annual report on how leadership and effectiveness aspects of the code have been addressed • Chair responsible for the leadership and effectiveness of the board • And for ensuring adequate time is available (at board meetings) for discussion of all agenda items, in particular strategic issues • Chair should promote a culture of openness and debate • By facilitating the effective contribution of NEDs in particular and ensuring constructive relations between executive and NEDs • Chair should regularly review and agree with each director their training and development needs

6. Risk • More emphasis in UK code on the board’s role in risk • Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives • Board should maintain sound risk management and internal control systems

7. Risk • In practice: • Periodic board discussion and agreement of risk approach • Test proposals against agreed approach • Better oversight of controls (not just the audit committee!) • Risk assessment in all board and committee papers and MI • Link risk to strategy and remuneration • Embed risk management throughout the organisation • Create risk aware culture

8. Board composition • The search for board candidates should be conducted and appointments made on merit against objective criteria • And ‘with due regard to the benefits of diversity to the board, including gender’ • The aim is a balanced board, regularly refreshed • Directors of FTSE 350 companies should be re-elected annually

9. Board diversity • Diversity – the code to be amended from October 2012 • Companies to have a diversity policy and report annually on it “A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives. An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non‐executive director.” Changed wording in bold

10. Board diversity • New wording in UK code from October 2012 • “Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness”. New wording in bold

11. Directors • NEDs should ‘constructively challenge’ and help develop proposals on strategy • Directors should allocate sufficient time to discharge their responsibilities effectively • All directors should have appropriate knowledge of the company and access to its operations and staff

12. Board evaluation • Code has provided for annual board evaluation since 2003 • This is also in the Co-operatives UK Code • The change – largest companies to have external evaluation at least every 3 years • Why? • Greater credibility • Objectivity • Independence • Proportionality is key • How to choose your approach

13. FRC guidance on board effectiveness • Non-mandatory guidance to assist in applying the leadership and effectiveness aspects of the code • See http://www.frc.org.uk/publications/pub2526.html • Sets out main elements of roles of certain board members • Includes a section on the company secretary • Long section on decision-making - process and cultural issues • Eg include in board papers a description of the process used to arrive at the proposal • How to optimise decision making and avoid factors which inhibit it

14. FRC guidance – the company secretary • Cosec to play ‘a leading role in the good governance of the company by supporting the chairman and helping the board and its committees to function efficiently’ • ‘The company secretary should report to the chairman on all board governance matters’ • ‘The chairman and the company secretary should periodically review whether the board and the company’s other governance processes, for example board and committee evaluation, are fit for purpose, and consider any improvements or initiatives that could strengthen the governance of the company’

15. FRC guidance – the company secretary • ‘The company secretary should ensure the presentation of high‐quality information to the board and its committees’ • ‘The company secretary can also add value by fulfilling, or procuring the fulfilment of, other requirements of the Code on behalf of the chairman, in particular director induction and development’ • ‘The company secretary’s effectiveness can be enhanced by his or her ability to build relationships of mutual trust with the chairman, the senior independent director and the non‐executive directors, while maintaining the confidence of executive director colleagues’

16. Questions and discussion