7.2.4.2 Board composition

The label ‘independent’ or ‘non-independent’ has implications for other parts of the UKCGC. Code provision B.1.2 provides that at least half the board, excluding the chairman, should comprise independent NEDs. This requirement does not hold for small companies. These small companies should have at least two independent NEDs. A company is considered to be small if it is below the FTSE 350 throughout the year immediately prior to the reporting year.1 The proportion of executive directors versus NEDs is mentioned in the supporting principle B.1 of the UKCGC, which states that it should be ‘appropriate’. The term ‘appropriate’ is not explained in a code provision, but the supporting principle adds that the balance should be such that no group or individual can dominate the board’s decision-making.

One of the independent NEDs should be appointed by the board as senior independent director to provide a sounding board for the chairman and to serve as intermediary for the other directors, according to code provision A.4.1. Furthermore, this senior independent director serves as a contact person for shareholders if communication through the normal channels of chairman, CEO or other executive directors has failed or such contact is not appropriate. The chairman, who according to main principle A.3 is ‘responsible for leadership of the board and ensuring its effectiveness on all aspects of its role’, should be independent based on the criteria mentioned above (code provision A.3.1). The independence criteria should be met at the time of appointment. This provision also touches upon CEO duality. If the board decides to appoint the CEO as chair of the board, the board should consult major shareholders in advance. In addition, the board must state the reasons to the shareholders and include the motivation in the annual report. Only two of the 150 largest FTSE companies – Carnival and Immarsat – have a situation of CEO duality in 2010 (Spencer Stuart 2011: 28-35).

Good information provision is a condition for independent judgment of the NEDs. Section B.5 about the information and support states that the chairman is responsible for ensuring that the directors receive accurate, timely and clear information. Under the direction of the chairman, the company secretary should ensure that good information flows within the board and its board committees and between senior management and NEDs.

Table 7-3: Board composition numbers of the 150 largest UK-listed FTSE companies in 2010, calculated using data from Spencer Stuart (2011). Relative percentages in the distribution are in parentheses.

The board composition numbers of the largest 150 UK-listed FTSE companies are given in Table 7-3. The average board has 10.4 directors, of which 6.3 are NEDs. Of these NEDs 5.9 are independent and comprise 95 per cent of the NEDs on the board and 63 per cent of the whole board. The table shows that eight companies have a board of which less than fifty per cent comprises independent NEDs. Therefore, these companies do not comply with code provision B.1.2, which requires that at least half of the board must be independent. In 114 of the 150 companies all NEDs are deemed independent.