The Importance of Board Independence - a Multidisciplinary Approach
Einde inhoudsopgave
The Importance of Board Independence (IVOR nr. 90) 2012/7.2.1:7.2.1 The board structures available to the company
The Importance of Board Independence (IVOR nr. 90) 2012/7.2.1
7.2.1 The board structures available to the company
Documentgegevens:
N.J.M. van Zijl, datum 05-10-2012
- Datum
05-10-2012
- Auteur
N.J.M. van Zijl
- JCDI
JCDI:ADS599504:1
- Vakgebied(en)
Ondernemingsrecht / Algemeen
Ondernemingsrecht / Corporate governance
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This subsection addresses the issue about the board structures available to the company. This issue is important for the discussion about independence, because it deals with the separation of people who are involved in management and people who are involved in supervision.
A public company must have at least two directors, of which at least one director is a natural person, according to sections 154(2) and 155(1) of the Companies’ Act 2006 (hereafter: CA 2006) (Davies et al. 2008: 14.1; Andenas and Wooldridge 2009: 267). However, the Companies’ Act 2006 does not make a distinction between executive directors and NEDs nor does it require the directors to act as a board. Therefore the Companies’ Act does not need to address questions regarding board structure, division of tasks and the positions of CEO and chairman. The norm in the United Kingdom is a unitary board structure (Davies et al. 2008: 14.25). However, the Walker Committee regards a dual board structure as an option for companies in the United Kingdom, because it is not excluded by law (Walker Committee 2009: 2.5).
Despite the lack of provisions for a unitary board structure in the Companies’ Act, the UKCGC explicitly mentions the unitary board structure accompanied by a division of tasks between executive directors and NEDs. Main principle A.4 is: ‘As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy’. Although the task of executive directors is not explicitly mentioned in the UKCGC, the supporting principle A.4 elaborates on the (monitoring) tasks of NEDs:
‘Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.’
Important for the structure of the board are the chairman, the deputy chairman (where there is one), the CEO, the senior independent director and the chairman and members of the board committees, who should all be identified in the annual report (code provision A.1.2). The role of the CEO is not specified further in the UKCGC, whereas section A.3 is dedicated fully to the chairman. His duties are specified in the main principle of this section: ‘The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.’ The supporting principle specifies the duties of the chairman further:
‘The chairman is responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. The chairman should also promote a culture of openness and debate by facilitating the effective contribution of nonexecutive directors in particular and ensuring constructive relations between executive and nonexecutive directors. The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders.’
Therefore, a listed UK company in the UK is governed by a unitary board structure, which is divided into executive directors and NEDs. The CEO is the principal of the executive directors and the chairman is responsible for the entire board. A graphical representation of the British unitary board structure is given in Figure 7-1.
Figure 7-1: The unitary board structure in the United Kingdom. Executive directors and NEDs cooperate on one board of directors. NEDs can be divided into independent and non-independent. The CEO is one of the executive directors and the Chairman of the board is typically one of the NEDs. The dashed line between CEO and Chairman symbolises the possibility of CEO-duality.