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International Restructuring Newswire
Welcome to the Q2 2025 edition of the Norton Rose Fulbright International Restructuring Newswire.
Global | Publication | March 2011
On 3 March 2011 the Financial Reporting Council (FRC) published its new Guidance on Board Effectiveness (Guidance), which replaces Good Practice Suggestions from the Higgs Report (known as the Higgs Guidance).
The Guidance is intended to make boards think about how they can carry out their role most effectively, focusing on the leadership and effectiveness of the board. It addresses those issues in Sections A and B of the UK Corporate Governance Code (Code) that companies, board members and investors have asked for guidance on.
The Guidance embodies the shift in emphasis underlying the recent developments in corporate governance in the UK, namely, that ensuring appropriate structures and processes are in place is not sufficient on its own – boards need to focus on the way in which they carry out their role and their own behaviour.
This briefing looks at the contents of the Guidance and at the critical questions the key players need to ask themselves to ensure board effectiveness.
To be an effective board, the participants need to understand what constitutes an effective board. The Guidance describes an effective board as one that “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”. It emphasises that challenge is as important as teamwork and, as such, an effective board will not always be a comfortable place.
The key functions of an effective board identified by the Guidance are to:
As set out in the Code, the chairman has overarching responsibility for leadership of the board. This means creating the conditions for overall board and individual director effectiveness. Critical to this is making sure that there are no ‘no go’ areas – the board must be able to operate oversight in all areas. Similarly, the chairmen of board committees must create the conditions to ensure the effectiveness of their committees.
The role of the chairman is key to establishing the framework for an effective board. A chairman should therefore ask himself or herself whether he or she is fulfilling the various components of the role set out in the Guidance. For example:
As well as performing the role of senior independent director (SID) specified in the Code, the Guidance highlights the critical role played by the SID when the board is undergoing periods of stress, when he or she is expected to work with the chairman, other directors and/or shareholders to resolve significant issues.
The board should have a clear understanding of when the SID might intervene in a particular issue to maintain board and company stability. Examples of this and questions a SID should ask himself or herself to determine whether he or she is performing the role adequately include:
The SID should have a defined role which is set out in writing and which takes into account the above issues.
Executive directors are equally responsible as non-executive directors for creating an effective board, including the performance of the functions of an effective board identified above.
Executive directors should consider the following questions to help determine whether they are contributing to an effective board:
If you are the CEO:
Finally, if you are the CFO, what do you do to ensure high-quality financial information is delivered to the board on the company’s financial position in a timely manner?
The Guidance specifies that it is the role of non-executive directors to uphold high standards of integrity and probity and, critical to the performance of their role, they should ensure they are devoting adequate time to the discharge of their responsibilities.
Non-executive directors should consider the following questions to help determine whether they are contributing to an effective board:
The company secretary plays a leading role in good governance by supporting the chairman and helping the board and its committees to function effectively.
In performing his or her role, the company secretary should ask himself or herself:
Critical to developing and maintaining an effective board, a board must continually monitor and improve its performance. The Guidance considers that this can be achieved through board evaluation for which the chairman has overall responsibility as indicated above. Chairs of board committees should also be responsible for the evaluation of their committees.
Board evaluation should explore the effectiveness of the board by considering the questions raised above in the context of the role of the chairman, SID, executive directors, non-executive directors and company secretary, as well as considering how the board works together as a unit and the effectiveness of contributions made by individual directors.
Boards are coming under increasing scrutiny over their role in improving company performance while, at the same time, managing and controlling risk. Central to this are the governance arrangements in place to improve board effectiveness and ensure the values and culture of an organisation, which are established by the board, permeate all levels of the organisation. Corporate governance is not a box ticking exercise - it is about implementing the spirit of the Code. It is the responsibility of all those involved in a company’s governance to put this into effect.
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