The FRC published its Guidance on Board Effectiveness on 3 March 2011. This guidance should assist companies in applying the principles of the UK Corporate Governance Code and replaces the Higgs Guidance which covered similar ground. The guidance has been produced following a two-stage consultation by the Institute of Chartered Secretaries and Administrators ("ICSA") and will be required reading to capture the tone expected in a modern boardroom.
An effective board
The guidance establishes the primary role of the board as promoting and developing the company's purpose. This is perhaps self-evident but it is important because, in considering corporate governance structures, risk control, ethics and statutory duties the guidance very clearly does so in the context of the board providing entrepreneurial leadership. Business is not about minimising risk; it is about running a successful enterprise whilst assessing and managing risk.
The role of the chairman
As the guidance states: "Good boards are created by good chairmen." Chairmen are going to want to look carefully at how their boards function in the light of the role which the guidance sets out for them. It is also notable that the leadership role of the chairman is also allocated to the chairman of each committee in relation to that committee, so those non-executives will also be keen to understand and develop their roles.
The role of the SID
The senior independent director has a bipartite role, depending on whether the company is operating in a steady state or a crisis. In the draft version of the guidance it was felt that the role of the SID in the steady state was too large and potentially interfered with that of the chairman. That issue has been rectified in the final version. The SID is a sounding board for the chairman (and evaluates the chairman and may look after succession of the chairman) but has a wider role in times of stress.
The guidance sets out very well the balance between being a director of a unitary board, being both an executive with one particular area of responsibility and being part of an excutive team inviting challenge from non-executives. The CEO is allocated particular responsibilities. In particular, the CEO should communicate the company's culture, values and behaviours throughout the company.
Continuing the trend of the last few years, the guidance stresses the need for non-executives to be properly introduced to the company and its business and inducted into their role and for that to be continued by continuing education and good information flows. The need to devote sufficient time to non-executive roles is also focused on, and in particular the fact that time commitments can be variable depending on events such as a takeover, acquisitions or operational difficulties.
The guidance has a strong focus on the role of the company secretary and stresses, in particular, the importance of the company secretary in relation to information flows to the board and board committees.
Extensive guidance is included on decision making and on issues which may occur and limit the board's ability to function well. Boards are recommended to review past decisions and to look at the process followed and not just the outcome. This might occur as part of board evaluations.
The board composition debate has been a little overshadowed by the call to increase the number of women on boards. The guidance stresses the need to consider the need for a variety of personal attributes and the importance of a diversity of psychological type, background and gender.
Whilst not being prescriptive, the guidance sets out some areas which might be considered when carrying out board evaluations and these are likely to be used as a starting point by most companies.
The guidance stresses the responsibility of the full board, regardless of the existence of committees, for risk evaluation, and emphasises the need to allow proper time for discussion and communications intra-committees and between committees and the full board.
Relations with shareholders
In line with developments in the field of stewardship more generally, the need for good and continuous communication with shareholders is stressed.
The guidance is not binding but is very helpful and should make a contribution to the effective operation of boards. Read the full guidance here.