Board composition

[Jiya024]

Dear Professor,

“At least half the board, excluding the chair should be independent NEDs.”

so professor, the remains half(excluding chair) is comprised of executive directors?

And if so who are these executive directors? CEO, CFO, COO etc. these officers form the rest of the board? i don’t think they should, because I feel they are a part of management. And management and Board are seperate groups of people.

However am tad bit unsure professor; perhaps you could shed some light?

[Kim Smith]

The important word here is INDEPENDENT. So the other half could be executive but there could be NEDs who don’t meet independence criteria.

“The board [of directors]” is the management body:
“The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making.”

So, absolutely, the “C-level” executives will be on the board of directors.

[Noah098]

“Where the behaviour throughout the business is not consistent with the purpose, value or strategy the board should ensure management have taken corrective action.”

Sir this line clearly Indicates that management and board are two separate bodies, instead of board being the management body.

And as @Jiya024 points out C-level executives would form part of management(as they would look after day to day operations), so how can they be a part of board?

[Jiya024]

yes professor same doubt

[Jiya024]

moreover professor, i had another doubt related to this. Can nomination committee members nominate themselves to the board?

[Kim Smith]

The Companies Act gives directors powers to fulfil their duties/obligations – this includes setting up the committees in the first place. The nomination committee leads the process of appointments but the board puts the names of the nominees on the ballots that the members vote on.

All directors should be subject to annual re-election. So if shareholders don’t like them they can simply not reappointment them! (Or sell their shares!)

Please remember this is an AUDIT exam – corporate governance is part of the “backdrop” to the audit of listed entities – in the UK though, of the c. 2 million limited companies only c. 2,000 are listed i.e. 0.1% (!!!)

[Kim Smith]

“Non-executive directors should have sufficient time to meet their board responsibilities. They
should provide constructive challenge, strategic guidance, offer specialist advice and hold
management (i.e. executives responsible for the day-to-day) to account.”

In some jurisdictions, “the board” has two-tiers – an executive/management board and a supervisory board. But in the UK and US, for example, the board is “one-tier”.

This is not examinable in AA – you will learn more about corporate governance in Strategic Business Leader.

[Author]

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