Sir Geoffrey Owen

The board agenda and the number of meetings

Since the outside director has only a limited amount of time to devote to the company, that time must be used constructively. A crucial task for the Chairman is to structure the agendas of board meetings in a way which ensures that the board focuses on important issues and has the opportunity to engage with the executives on policy.

In one large company, the Chairman has ruled that each board meeting should allocate an appropriate amount of time to the following topics:

a report on operational and financial performance against plan

an update on markets, competitors, customers and investors

progress on strategic issues

developments on important people issues

a review in depth of one key strategic issue

a short presentation from one senior or high-potential leader.

Other topics, for example the strength of the brand, succession plans and longerterm scenario development, are dealt with on a periodic basis. In this company, the Chairman also ensures that at the end of the meeting at least five minutes are set aside for an assessment of how well the board has handled the agenda and how useful the discussion has been. This is a good discipline since many board meetings tend to overrun their allotted time span, leading to hurried treatment of the last few items on the agenda. The Chairman has to steer a path between sticking rigidly to a specific time slot for each item and allowing a freeflowing discussion. As the size of the agenda tends to expand, partly because of the growing importance of corporate governance issues, many companies are finding that a morning meeting followed by lunch is no longer enough; an all-day meeting is becoming common practice, often followed or preceded by an informal dinner.

The Chairman’s ability to manage board meetings efficiently depends to a considerable extent on the support he receives from the Company Secretary. This is a role which has become more central to good corporate governance. Apart from the responsibility for organising and distributing the board papers (preferably at least a week before the meeting), for taking the minutes and for providing a full record of the discussions, the Company Secretary has to keep the Chairman and the board abreast of new developments in corporate governance, and to ensure that all statutory requirements are fulfilled.

What can sometimes seem to be pedantic interventions on the Company Secretary’s part can irritate directors who want to get on to what they regard as more interesting topics, but scrupulous attention to detail is an essential ingredient in the board’s deliberations. The importance of the Company Secretary’s role is reflected in the decision by British Petroleum to detach the post from the

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The role of the board

Chief Executive and make it part of the Chairman’s office. Under this arrangement, the Company Secretary is not part of the executive management. He reports to the Chairman and ‘provides support to all the non-executive directors, ensuring that board and board committee processes are demonstrably independent of the executive management of the group’.4 More on this can be found in David Jackson’s chapter on the role of the Company Secretary (chapter 4). While this system may not be appropriate for smaller firms, it underlines the need to provide the Chairman and the outside directors with adequate administrative support.

As for the number of board meetings, most companies have eight or nine regular meetings per year, usually supplemented by a two-day strategy discussion away from the head office. Such a schedule can cause problems for companies with extensive international operations and with several directors based outside the UK; having fewer meetings with 100 per cent attendance is clearly preferable to having more meetings with irregular attendance. Moreover, there is a danger with too many meetings that the discussion takes on a routine character, with the directors spending most of their time in passive mode, listening to reviews of the previous month’s results.

Board committees

The time commitment of non-executive directors has been increased by the additional duties that have been given to board committees, principally the audit committee, the remuneration committee and the nomination committee.

The audit committee is responsible for ensuring the adequacy of the company’s financial controls and the robustness of its external and internal audit arrangements. At least one member of the audit committee is required by the Combined Code to have recent and relevant financial experience. The other members need to be knowledgeable enough to understand the accounts and the financial reporting rules that have to be followed. Following the Enron affair and the passing of the Sarbanes-Oxley Act, British boards, whether or not their company’s shares are listed in the US, have become much more aware of their responsibilities in the area of financial control. This has meant, among other things, a closer relationship between the audit committee and the external auditors. The auditors increasingly regard the chairman of the audit committee as their boss (and paymaster), rather than the company’s Chief Financial Officer. Audit committees are also looking more closely at the balance between the auditing firm’s audit and non-audit fees, and seeking to ensure that the latter are not so large as to jeopardise the auditor’s independence.

4 BP Annual Review 2003, p. 39.

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Sir Geoffrey Owen

Membership of the remuneration committee has also become more demanding. Members have to wrestle with the increasing complexity of executive remuneration packages and with the knowledge that their decisions will be scrutinised critically by institutional investors and the press. Most companies now offer their senior executives a range of incentive schemes tied to the achievement of specific performance targets. Remuneration committee members rely on consultants to advise on the incentive effects of these schemes and on how they compare with those offered by other companies. Whether the complexity of these schemes is justified by their impact on executive performance is open to question, but the fact remains that setting remuneration packages has become a difficult and time-consuming process, calling for sensitivity on the part of committee members, both to the wishes of investors and to the effect of their decisions on morale within the company.

Inevitably the largest burden falls on the chairmen of these two committees, and this is reflected in the size of their fees, but it is important to ensure that other members play more than a minor role. They need to be fully engaged in the reviewing and decision-making process and, again, this means devoting more time to the meetings of the committee and to preparations for them.

The nomination committee, concerned with identifying and selecting new non-executive directors, meets less frequently than the audit and remuneration committees. Its task is to ensure that the board has an appropriate mix of skills and experience and that succession plans for retiring directors are organised well in advance. A tricky issue is the degree of influence that should be wielded by the Chief Executive in the appointment of new directors. The Combined Code states that new directors should be independent, having no previous business connection with other members of the board, and most companies go to great lengths to avoid any hint of cronyism in their appointments. Yet there is still a tendency to go for candidates who will fit in with the established culture of the board, and to steer clear of people who may be thought to be too aggressive or in some sense too awkward in their approach.

The Chief Executive has every right to object to nominees who, in his view, are unlikely to work constructively as part of a team, but this should not preclude the appointment of strong-minded individuals who are capable of challenging the Chief Executive’s proposals. Hence it is important that the nomination process is not dominated by the Chairman and the Chief Executive; other board members must be fully involved. That a new Chairman should be compatible with the current Chief Executive goes without saying; whether the Chief Executive should have the right of veto, as is the case in some companies, is another matter.

The nomination committee is sometimes also given responsibility for corporate governance, in the sense of monitoring on the board’s behalf any new corporate governance rules or guidelines, keeping abreast of the corporate governance debate and ensuring that the board is alerted to significant developments.

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The role of the board

Size and composition of the board

Taking into account the responsibilities which now fall on non-executive directors, how many of them should there be? What is the optimum size of the board, and what is the appropriate mix of executive and non-executive members?

Most Chairmen agree that, as a minimum, the Chief Executive and the Chief Financial Officer should be on the board. Whereas in the US that is generally regarded as a maximum, many British companies take the view that other senior managers such as the Chief Operating Officer, if there is such a post, or functional directors like the heads of R & D or human resources, or the heads of major divisions should also be considered for board membership.

Some Chairmen believe that managers who are answerable to the Chief Executive should be not be members of the board since they are placed in an impossible position. As managers, they cannot express views which might imply lack of confidence in the Chief Executive; yet as directors they are required to take an objective view of what is in the best interests of shareholders. Others believe that the presence on the board of two or three executives in addition to the Chief Executive and the Chief Financial Officer strengthens the sense of a balanced team at the top of the company, working together to drive the business forward. Such an arrangement, according to this view, gives the nonexecutive directors greater exposure to potential successors to the current Chief Executive, and the executive directors are obliged to think more broadly about the company as a whole. This is particularly relevant in international companies where several divisions are based outside the UK; the divisional heads may be central to the success of the business, but if they are not on the board they may have little contact with the head office and little understanding of the pressures to which the directors are exposed.

As one Chairman has put it:

to have a meaningful executive representation you have to have the heads of the key divisions there, not to talk narrowly about their own operations, but to be involved in broader issues of strategy, and in such matters as dividends, share buy-backs, feedback from shareholders. Divisional executives learn a great deal about governance, which is a good preparation for becoming Chief Executive, and their contribution goes way beyond their divisional responsibilities.5

The balance between executive and non-executive director membership has implications for the size of the board. The tendency over the past fifteen years has been for boards to get smaller, and for the executive component to go down. According to a study by Deloitte, the average FTSE 350 board had ten members in 2005/6, comprising six non-executive directors (including the

5Quoted in Geoffrey Owen and Tom Kirchmaier, The Changing Role of the Chairman, London: Chairmen’s Forum, 2006, p. 25.

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