UK Guidance on Board Governance Is Essential Reading

The Financial Reporting Council (FRC) is the independent regulator in the UK and, in addition to mandatory standards, they occasionally publish non-mandatory guidance on governance. On March 3, they released Guidance on Board Effectiveness.

While the new guidance is not complete in itself (for example, it references separate guidance for audit committees covering oversight of audit and risk matters), I believe everybody concerned with effective board processes and operations should give it careful consideration — wherever they reside.

A few nuggets:

  • 1.1. The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed
  • 1.2. An effective board develops and promotes its collective vision of the company’s purpose, its culture, its values and the behaviours it wishes to promote in conducting its business
  • [An effective board] creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction
  • 1.3. An effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature. Diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors, and breaking down a tendency towards ‘group think’
  • [The chairman’s role includes] making certain that the board determines the nature, and extent, of the significant risks the company is willing to embrace in the implementation of its strategy, and that there are no ‘no go’ areas which prevent directors from operating effective oversight in this area
  • 1.22. Non?executive directors should insist on receiving high?quality information sufficiently in advance so that there can be thorough consideration of the issues prior to, and informed debate and challenge at, board meetings. High?quality information is that which is appropriate for making decisions on the issue at hand – it should be accurate, clear, comprehensive, up?to?date and timely; contain a summary of the contents of any paper; and inform the director of what is expected of him or her on that issue
  • 6.1. While the board may make use of committees to assist its consideration of audit, risk and remuneration, it retains responsibility for, and makes the final decisions on, all of these areas

What do you think of the guidance?

Posted on Mar 7, 2011 by Norman Marks

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  1. There are some good directions in the FRC’s GUIDANCE ON BOARD EFFECTIVENESS. However, I still like ABA’s definition better than FRC’s that says: “A business corporation’s core objective is to create and increase wealth for its shareholders. Directors provide leadership toward this objective thorough two primary functions: decision making and oversight.” Decision making is further defined as approving corporate policy and strategic goals, evaluating and selecting top management, approving major expenditures, and acquiring and disposing of material assets. Between decision making and oversight (financial performance, management performance, and compliance with legal obligations and corporate policies), the board has plenty to do.

    The FRC's definition (1.1) is: "The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed."  Isn’t this the role of the CEO? FRC’s definition is too broad and overlaps with that of management.

    In addition, there is still the inherent conflict of interest with executive directors. 1.12 says they should have the same duties as other members of the board and not see themselves only as members of the CEO’s executive team when engaged in board business. I simply ask how can this reasonably happen since serving two masters is not possible.

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