Board Best Practices

Boardroom
best practice
Lessons learned from board assessments across Europe
Contents
1. The board 9
1.1 Purpose 10 1.4 Accountability 14
1.2 Responsibilities 10 1.5 Regulation 16
1.3 The long term 13 1.6 Structures 17
2. Board composition 20
2.1 Composition and appointment 21 2.7 Commitment 35
2.2 Board size 22 2.8 Number of directorships 37
2.3 Independence 24 2.9 Skills and attributes 38
2.4 Term 27 2.10 Fit 43
2.5 Diversity 30 2.11 Board culture 44
2.6 Diversity at the top of the business 35
3. Induction and education 45

3.1 Board induction 46 3.4 Continuing education 48
3.2 Mentoring 47 3.5 Outside directorships as a career 50
3.3 Role assignments 47
4. Board leadership 52
4.1 The chairman 53 4.3 The “deputy” chairman 58
4.2 The chairman as CEO 56 4.4 The relationship between the

chairman and the CEO 60
boardroom best practice 2

Succession planning 62
5. Succession planning 62
5.1 Whole board succession 63 5.5 CEO succession 70
5.2 Guiding principles for board succession 65 5.6 Succession of combined chairman/CEO 73
5.3 Factors to consider in board succession 66 5.7 Succession below CEO level 74
5.4 Chairman succession 67 5.8 Executive assessment 76
6. Board committees 77
6.1 Committee membership 78 6.5 Nomination committee 86
6.2 Reporting back 79 6.6 Strategy committee 88
6.3 Audit committee 80 6.7 Other committees 89
6.4 Remuneration committee 83
7. Managing meetings 91
7.1 The board agenda 92 7.7 Social dynamics 99
7.2 Strategy 92 7.8 The non-executive directors’ meeting 100
7.3 Quality of debate 94 7.9 Keep it in the boardroom 101
7.4 Meetings 95 7.10 Resolving conflict 102
7.5 Meeting materials 97 7.11 The knowledge gap 103
7.6 Meeting locations 98 7.12 The company secretary’s contribution 104
8. When things go wrong 106

8.1 Crisis management 107 8.4 Liability 111
8.2 Shareholder activism 108 8.5 Legal consequences 111
8.3 The human dimension 110 8.6 D&O insurance 112

9. Measuring performance 113
9.1 Measuring board effectiveness 114 9.4 Reporting to shareholders 120
9.2 External facilitation 116 9.5 Non-executive remuneration 120
9.3 Individual evaluation 119
10. Beyond the boardroom 123

10.1 Corporate trust 124 10.3 Overseeing company culture 125
10.2 Social impact 124 10.4 Defining the company’s purpose 127
APPENDIX
A. Further reading 130 D. Spencer Stuart consultant contacts 133
B. Directors’ Forum 131 E. Principal governance codes in Europe 134
C. Spencer Stuart offices worldwide 133
About Spencer Stuart’s Board Practice 136
on spencerstuart.com
Boards Around the World

An interactive exploration of how boards around the world compare in
terms of diversity, composition, compensation and more.

Introduction
Introduction
Companies are facing an uncertain and disruptive business environment. Rarely
has the role of the board been more important in steering a company through
challenging times.
Spencer Stuart has been advising the boards of Europe’s leading companies
for several decades. As a result of our advisory work, board assessments and
regular interactions with business leaders we have accumulated a significant
body of knowledge about what makes an effective board.
In this third edition of Boardroom Best Practice our purpose is to share our
knowledge by identifying common areas of best practice among European
listed company boards. We offer here a set of practical recommendations that
boards can apply regardless of the different cultural and legal frameworks in
which they operate. Indeed, if we have learned one thing it is that board effec-
tiveness is enhanced by applying these principles, whether the board is unitary,
two-tier, predominantly executive or operating under the umbrella of a majority
shareholder.
We seek to provide a framework through which best practice can be identified

and tailored to a specific board’s needs. We also present behavioural and regula-
tory differences at a national level as a series of sidebars that accompany the
text. Our aim is to help directors and board chairmen and women1 to understand
1 Hereafter the term chairman is used to include any gender.

Introduction
how changing business requirements and thinking about governance affect

board practice.
The nature of board debate and decision-making, as well as the management

of stakeholders’ interests, is in flux. To keep abreast of developments we will
periodically update this publication, building on our experience and sharing
new lessons learned.
Few endeavours are more fulfilling than serving on a board. Directors operate
at the interface of public and private morality and their accountability goes well
beyond their duties to employees and shareholders. They are encouraged to
elevate the long-term interests of all stakeholders above short-term considera-
tions, even though as a consequence it can be difficult for a board to satisfy the
needs of all who have an interest in the company’s success.
The level of engagement expected of directors is increasing and we believe this

is a good thing. To be a successful director today should be an absorbing intel-
lectual and practical challenge. We hope Boardroom Best Practice will help you
rise to that challenge and add to your enjoyment of the role.

Introduction
What good governance looks like
What constitutes good corporate governance and proper board behaviour is

constantly changing. Governance changes once came about mainly in response
to crises, but continuous improvement is now the watchword, mirroring devel-
opments in the societies that companies serve.
However, it is not the job of codes or regulations to provide a straitjacket that

inhibits a board’s vision and stifles the entrepreneurial spirit of the business.
Boards have considerable discretion and should always be judged on how they
exercise it.
So, whilst there is no universally applicable definition of what makes for an

effective and successful board, we would characterise the hallmarks of a suc-
cessful board as follows:
»» Clear definition and understanding of the role of the board and how it differs
from that of the management team
»» Wise and sensitive leadership that fosters productive and challenging debate
»» Appropriate composition of directors, all of whom are aligned with the long-
term strategic vision
»» Active involvement of all directors
»» Thorough understanding of how the company makes its money
»» Confidence in the competence of the senior management team at all times
»» Efficient decision-making processes

Introduction
»» Trusting and open working environment

»» Clearly defined remits for committees and effective communication between
each committee and the board
»» Regular assessment of individual and collective performance
»» Maturity of vision and shared understanding of the company, its culture and
purpose
»» Commitment to transparency and open communications with all
stakeholders
»» Commitment to honouring the recommendations of relevant governance
codes
»» Willingness to articulate and justify the role of the company in society.
Any board that exhibits all or a majority of these characteristics can be counted
both a success and an enjoyable institution on which to serve.
What follows is an exploration of the conditions, practices and behaviours that

foster the kind of success to which the best boards aspire.

1. The board
Executive Summary
»» Each director should have a clear understanding of the purpose of the
company.
»» The long-term vision for the company, held collectively, should go beyond the
five-year horizon.
»» Boards should be accountable to a broad constituency, beyond traditional
stakeholders and encompassing society at large.
»» Boards should be aware of all relevant rules and regulations and seek advice
on resolving ambiguity.
»» Board structures may vary but all should provide the opportunity for outside
directors to properly discharge their responsibilities.
9
The board
1.1 Purpose
The board of directors developed as a means of capturing wisdom and experi-
ence and applying these to problems faced by the organisation at large. The
board is where power and authority lie and where responsibility and account-
ability are to be found. It is a mechanism for synthesising the views of a range
of experts who exercise collective responsibility in the long-term interests of the
business.
The codes and laws governing board behaviour differ by jurisdiction and the
regulations and legal structures under which they are created vary from country
to country. Nevertheless, all boards essentially have the same purpose.
As a minimum, that purpose is to accomplish the formal objectives set out in

the company’s foundation documents. Board directors do this by utilising the
powers vested in them by those foundation documents and by law and regula-
tion. In exercising these powers they should attempt to balance the legitimate
interests of all stakeholders, both inside and outside the organisation.
1.2 Responsibilities
Specific board responsibilities vary according to jurisdiction and the prevailing
board structure. The responsibilities of a unitary board in a UK company are
subtly different from those of a supervisory board in Germany, for example.
Regardless of governance structure, the key responsibility of all boards is to
balance the interests of the company, shareholders and other stakeholders
by ensuring long-term growth that is sustainable and profitable. This involves

The board
oversight of the executive through ongoing active questioning, constructive

challenge and support. Specifically:
Performance
To support the CEO and management in establishing the optimal strategy for
the business, to monitor the implementation of that strategy and to challenge
and support the executive in the discharge of their duties.
Succession
To take full responsibility for the board’s own succession including that of
the chairman and the CEO, and to ensure that the company has appropriate
systems in place for effective succession at senior-executive level.
Compliance
To ensure that the business meets all its regulatory obligations, whether
structural, behavioural or financial, and to secure the confidence of investors by
upholding the highest standards of corporate governance.
Risk management
To understand the financial, operational and reputational risks faced by the
company and the sector in which it operates, ensuring that all necessary
measures are taken to mitigate and control those risks.

The board
Reputation management
To have an understanding of and explanation for all decisions and actions
taken by the company, ensuring these are properly communicated, whether the
company is in crisis or not.
Social impact
To set the tone at the top of the company, to understand the company’s place in
society and to provide the executive with the external perspective — “bringing
the outside in.” To recognise that regulatory compliance may not be enough to
satisfy ethical expectations.
This is not an exhaustive list. However, we believe that no outside director can
properly fulfil his or her many responsibilities without deep knowledge of what
the company does and an emotional commitment to how it does it. The most
effective director is both the representative of the stakeholders and an
ambassador for the business.

The board
1.3 The long term

By looking after the long-term interests of the company, directors can foster an
environment that creates sustainable value for all stakeholders.
Short-term thinking stifles the ability of company boards to make the bold
investments in the future that will secure the long-term health of the business,
which is the board’s ultimate responsibility.
A long-term vision for the business is a necessary precursor to the develop-

ment of strategy, guiding the board and management as they look beyond the
five-year horizon.
Is the board focused on the long term?

We recommend that boards ask themselves the following questions:
»» Does our board understand the need »» Does our board seek outside advice
for a long-term vision? on critical issues?
»» How clearly can the directors articu- »» Are all the directors required to have a
late the long-term vision and values of long-term stake in the business?
the business? »» Do we assess whether new director
»» How engaged is our board in debat- candidates will uphold the long-term
ing strategy with management, or is it vision of value creation for the
handed down as a fait accompli? business?
»» To what extent do we cultivate long-
term investors and explain our vision
for the business to them?

The board
If long-term considerations are going to prevail over short-term interests, then

the board has to be bold and courageous in exercising its collective responsibil-
ity, setting the tone for the business to think about its mission in a different
way.
Directors do not have to accept that their hands are tied, that they are there
to do the bidding of shareholders who may be only fleetingly involved with the
company. They can make a difference by committing themselves more deeply
and exclusively to the business and by ensuring that all board activities and
interactions with management and investors are underpinned by a clear under-
standing and articulation of the organisation’s long-term vision and values.
1.4 Accountability
Historically, most boards of directors did not feel the need to answer to anyone
beyond the owners of the business, and indeed owners and directors were
sometimes the same people. Over the years, however, boards have become
accountable to an ever-growing list of stakeholders.
While shareholders were usually the original constituency to whom obligations

were owed, these constituencies have expanded to include, at a minimum,
employees and customers. More recently, the social impact of a company’s
operations, both negative and positive, has meant that all boards must take
account of any group or individuals who might be affected by corporate action,
regardless of whether or not such persons are in a direct relationship with the
company. So, suppliers, regulators, non-governmental organisations (NGOs),
lobbyists, academia, potential recruits, etc., all extend the list of stakeholders.

The board
Beyond this, boards are expected to be aware of the company’s overall social
impact and to justify and defend their activities in terms of the public interest,
not just that of the owners.
Accountability and responsible business

In most markets boards are deemed to Thus beyond existing codes and law,
be accountable to the shareholders at the there is general acceptance of the
General Meeting. However, in all markets concept that companies have obliga-
local company law addresses account- tions beyond just shareholders and the
ability and has different emphases. requirement to produce profit.
Usually the definition is broadened to
Originally, obligations were largely owed
include a selection of other stakeholders,
to owners, promoters and those who had
i.e. people to whom the company can
invested in the success of the business
be seen as owing a duty or people who
for reward. Growing recognition of social
depend upon it in some other way.
market pressures then led many jurisdic-
For example, in Italy, there is more tions to expand the list of interested
emphasis on accountability to the con- parties to include “stakeholders” and
trolling shareholders, and in countries those on whom the company relies for
where there are employee representatives its wider success, e.g. employers, cus-
on the board, these are also accountable tomers, local communities, etc. Today’s
to their employee electorate. In Norway, concern seeks to establish whether
the board is accountable to the company, companies and directors owe obligations
which includes not only shareholders and to society at large in return for their
owners, but also creditors, employees licence to operate and, if so, what these
and others. In the Netherlands, the might be.
board is accountable to all stakeholders.
In the UK, the board is accountable to
the shareholders and the company itself,
although it is obliged to have a broader
constituency in mind.

The board
1.5 Regulation
Boards do not operate in a vacuum, insulated from the pressures of account-
ability. Both law and regulation delineate what they can and cannot do and how
they should go about their work.
Once upon a time, there was only the law. Both civil codes and common law
set out the duties of directors in limited form. Founding shareholders and
owners were supreme and as for the interests of subsequent investors it was
a case of “caveat emptor”. Other stakeholders had not yet been identified, nor
their interests protected.
In recent years, the law has been deemed insufficiently comprehensive to regu-
late all aspects of corporate behaviour. More importantly, it lacks the flexibility
to be changed quickly to deal with emerging responsibilities or abuses and with
the evolving pace of public expectations.
Consequently, authorities have turned increasingly to regulation and codes

of conduct to guide board behaviour. Sometimes they have promoted self-
regulation but results have been mixed.
Most national governance codes are based on the principle of comply or

explain. Whilst reasonable, the principle’s effectiveness depends on the qual-
ity of the explanation in the event that a company does not comply with a
recommendation. Given that most codes are largely silent on what comprises
a proper explanation, the adequacy of comply or explain is an issue for the
outside director to consider carefully.

The board
A particular challenge for directors is the proliferation of codes of conduct

and best practice recommendations at investor, regulator, national and
supranational level. Corporate governance is now both an industry and a field
of academic study. Directors will need professional guidance to understand the
sometimes conflicting signals coming from these many sources.
1.6 Structures
In this publication we identify those aspects of being a director that are com-
mon to all types of boards, but especially those of listed companies. However,
different governance systems operate throughout the world and have created a
range of different board structures.
It is important to remember that the dynamics of the board and the role of
the outside director will vary to reflect what type of board structure is in place.
The role may also be slightly different in state-owned or in family-controlled
businesses.
In Europe, two forms of board structure predominate: 1) unitary or single-tier,

in which supervision and management are combined in a single body; and 2)
supervisory or two-tier, in which supervision and management are respectively
assigned to separate bodies. The responsibilities of a supervisory board are
necessarily fewer, lacking the management dimension.
Unitary board
A unitary board consists of a chairman, outside directors and at least one rep-
resentative of management. Within this basic model there are many variants:

The board
»» In some countries, one individual performs both the chairman and CEO
roles
»» Unitary boards often have a senior independent director or equivalent
»» Independent directors are usually in the majority
»» Some outside directors may not be independent
»» Management may be represented by the CEO as well as other executives
»» Day-to-day management of the company is handled by a senior executive
team often referred to as the executive committee, appointed by and respon-
sible to the CEO.
Supervisory board
A supervisory board consists of a non-executive chairman and outside direc-
tors. Some jurisdictions have co-determination laws governing board composi-
tion, meaning that up to 50 per cent of board members must be employee
representatives elected by employees. In the two-tier system, the management
function is in the hands of a separate legal entity, often referred to as the execu-
tive board, which is chaired by the CEO and overseen by the supervisory board.
In some countries, for example France, Italy and the Netherlands, company
law permits companies to choose between two or even three alternative board
structures.
Family-controlled businesses, state-owned enterprises and cooperatives often

have board structures that reflect their unique circumstances. This means that
they can conform to listed company governance requirements where relevant
but choose to ignore them when not.

The board
The role and responsibilities of the outside director in an organisation where

there is a majority shareholder are not materially different from those of a
director in a listed company with a broad shareholder base. However, they may
be harder to execute and properly discharge, and require direction and determi-
nation to maintain true independence.
All structures should provide the opportunity for outside directors to properly
discharge their responsibilities, with protections in place for them in the event
of dispute. This should be a comfort to board members, who of course can
always exercise the power of resignation.
Larger and more complex companies sometimes form an advisory board,

whose purpose is to provide additional specialist expertise without the legal
constraints or obligations imposed on board directors.

2. Board composition
Executive Summary
»» The board’s collective expertise should reflect the strategic priorities of the
business.
»» The ideal board size is eight to 12 members, except in the case of supervisory
boards, which may need to be larger.
»» Independent outside directors should always comprise a majority on the board.
»» Regular re-election and maximum recommended terms are desirable to guaran-
tee refreshment, monitor performance and promote transparency.
»» All boards should plan to comply with local regulations on board diversity and
thereby strive to avoid groupthink.
»» To be effective, boards should meet at least six times a year and outside directors
should be prepared to devote 20–30 days to the business and sometimes more.
»» Outside directors should not be appointed to cover an executive weakness —
that should be addressed at executive level.
»» Directors should exhibit an emotional commitment to the company and its
purpose.
»» As the steward of corporate behaviour, the board should ensure that its own
culture is beyond reproach.
20
Board composition
2.1 Composition and appointment

Board composition is at the heart of board effectiveness. Progressive boards
should frequently consider whether they have the optimum composition.
Effective boards are made up of directors who reflect the strategic priorities
and challenges of the business, the relevant areas of risk, and the diversity of
stakeholders.
Recruiting effective non-executive board members is crucial to ensuring corpo-

rate success. The appointment of a non-executive director is not only subject
to shareholder approval but to public scrutiny. Boards, and their nomination
committees, must be prepared to explain their choices, demonstrate objectivity
and lack of bias, and show that appointments are made purely on the basis of
merit.
All board appointments must be the result of an objective and rational process,
which varies from country to country. Whilst the formal appointment is made
by the board and/or the shareholders, the evaluation of candidates usually falls
to the nomination committee and sometimes to a committee independent of
the company and its executive management.
It is increasingly the case that investors expect non-executive appointments

to be mediated through professional advisors. The reasons are various.
First, investors expect a transparent and justifiable appointment. Second,
objectivity in the choice and how that choice is made is important. Third, bias,
real or imagined, is avoided if the process is in the hands of an independent

Board composition
consultant. And fourth, a broader perspective is brought and specialist require-

ments more easily met.
In some sectors, the regulator has made rules both as to who can be appointed
and how they are vetted. This is principally found in the financial services sec-
tor, where the financial regulator is responsible for setting the criteria as to the
relevant experience of board candidates and for checking their career history
and bona fides.
2.2 Board size

The size of a board is critical to its effectiveness. A board needs to be large
enough to allow for a wide range of views and competencies and for each of the
committees to be populated, but not so large as to prevent active engagement
and participation by all directors.
In most instances, we believe that the ideal board size is eight to 12 members
in a unitary board. When boards move further into double figures they become
less effective: it is harder to sustain effective debate when numerous people are
at the table.
Supervisory boards, however, may have to be larger than this, especially where
co-determination is a legal requirement. By contrast, supervisory boards with
no employee representatives often have fewer than eight directors.

Board composition
The trend for unitary boards is towards less formal boards with fewer directors
around the table. The boardroom is a place for debate and decision — not only
for reporting and noting. Each director is expected to make his or her individual
contribution.
Just as boards are more accountable for corporate actions, so directors require
a closer engagement with the business if they are to carry out their responsibili-
ties properly. The days of the purely reactive board are numbered.
Average board size across Europe*

Board size Board size Board size
Belgium 10.4 Italy 11.6 Spain 10.8
Denmark 10 Netherlands 9.2 Sweden 9.9
Finland 8.2 Norway 8.5 Switzerland 10.5
France 13.9 Russia 10.1 UK 10.2
Germany 14.1
* Data appearing in charts throughout this publication are taken from country-specific 2016 editions of the Spencer Stuart Board Index. A list
of these can be found in Appendix A. Each Board Index is available on the Spencer Stuart website.

Board composition
Breakdown of director types in selected markets

non-executives executives
% who sit on one % serving as Average number
Country listed board only % plural* non-executives % of board of directorships
Belgium 11.5% 58.6% 72.2% 14.6% 1.8
(Bel 20 + Bel Mid)
Denmark 12.6% 28.7% 58.6% 0.6% 1.9

(OMX Copenhagen)
Finland 16.7% 28.1% 55.2% 0.5% 2.2

(OMX Helsinki)
France 11.5% 32.3% 56.3% 8.0% 2.1

(CAC 40)
Norway 7.5% 10.8% 81.7% 0.5% 1.5

(OBX)
Russia 3.6% 38.0% 58.3% 15.8% 1.6

(RTS)
Sweden 8.9% 32.5% 58.7% 6.5% 2.3

(OMX Stockholm)
UK 17.9% 48.8% 33.3% 25.6% 1.9

(FTSE 150)
* Professional board directors who do not hold an executive post.
2.3 Independence
Most governance codes recommend that a minimum of 50 per cent of board
members should be independent from management and shareholders, with no
conflict of interest. In our judgement this is truly a minimum requirement.
Ideally, all outside directors would be independent, but at the very least inde-
pendent outside directors should comprise a majority of the board.

Board composition
Independence is defined in various ways, but the following elements are com-
mon to most jurisdictions in Europe. Independent directors must:
»» be free of commercial or personal conflicts of interest

»» not be a former member of the company, at least not before any given cool-
ing-off period
»» have no financial relationships with the company or its counterparties
»» have no interlocking directorships
»» not serve beyond the prescribed number of years.
Obviously, a person’s independent status can change. So it is good practice

to review the independence of non-executive directors every year. This is often
mandated in governance codes and forms a reporting item in the annual
report.
Independence is not only a demonstrable fact but also an attitude of mind.
Independent thinking is essential if the outside director is to act as both

challenger and supporter. The best outside directors identify clearly with the
business, yet also bring an objectivity to the board’s deliberations that is not
possible for the committed executive.
Where there is a controlling stakeholder, or one with a significant holding, the

situation can be complex. Such stakeholders can be a founding individual, a
government agency, or perhaps an activist or other interloper. Sometimes, in
the case of listed companies, the free float can be as little as 25 per cent of
the issued equity with the balance held in family or connected hands. Such a

Board composition
situation requires still greater rigour on the part of the outside director to think
and act independently.
A simple rule might help in such situations: the truly independent director has
the interests of the company and all its stakeholders at heart. What course of
action will yield the greatest chance of success for all stakeholders in the longer
term?
There is currently much discussion around how boards should be constructed.

In the past, the pool from which outside directors was chosen was too restric-
tive and a “club” atmosphere developed in some boardrooms, with extensive
interlocking directorships. This risk is now well understood and today’s
challenge is to create effective boards that better reflect the world in which
companies operate.
Two initiatives have introduced more dynamism into board composition. First,
the adoption of fixed terms has reduced the average tenure of non-executive
directors and encouraged board renewal. Second, innovative measures to
increase diversity have widened the recruitment pool. We now consider these in
further detail.

Board composition
Independent directors as a proportion of the board

% % %
Belgium 44.8% Italy 50.1% Spain 43%
Denmark 66.3% Netherlands 60% Sweden 63.7%
Finland 83.1% Norway 79.6% Switzerland 88%
France 69% Russia 32% UK 61.1%
Germany 60%
2.4 Term
Frequency of re-election and length of term for an outside director has, histori-
cally, varied according to board structure, preference and local custom.
In recent years, there has been a clear trend towards maximum recommended
terms for outside directors and annual — or at the very least, staggered — re-
election by shareholders.
These two developments — of maximum terms and regular re-election — are

evidence of an increasing democratisation of the corporate governance
process, in response to the twin demands of greater transparency and
accountability.
The motivation for fixed and maximum terms is to ensure regular infusions
of fresh thinking into the boardroom and to avoid complacency. Indeed, it is
the fear that independence is jeopardised after a time that has prompted the
widespread adoption of term limits.

Board composition
This raises the possibility of a more dynamic approach to board composition.

The need for certain kinds of expertise among outside directors could mean that
longevity is no longer the only measure of a director’s success.
A dynamic board should be able to accommodate long-term directors as well

as directors who serve only a relatively short term. Certain situations may
demand a specific kind of outside contribution where a director is needed for
a limited period. An alternative would be for the board to retain an advisor,
rather than appoint a director. Such an advisor could attend board meetings
by invitation. There should be no harm in a director serving a short term when
the reasons for this are understood clearly from the outset. However, too many
short-term appointments might become a distraction to the business and
could lead to a board in a permanent state of flux.
The appointment and re-election of directors by shareholders is also evolving.

Some markets now mandate annual re-election at the AGM for all directors.
Originally, it was feared this would lead to instability, that AGMs would become
the platform for proxy fights over director appointments and that individuals
would allow themselves to be compromised. However, there is no evidence that
this has been the case and there is no obvious correlation between the require-
ment for regular re-election and overall tenure.
For shareholders to fail to re-elect a properly nominated and competent direc-

tor is very rare indeed — and when it does happen it normally indicates a crisis
within the organisation that would have led to instability in any event.

Board composition
Average tenure: chairmen and non-executives (years)

Tenure Tenure Tenure
Belgium 6.0 Italy 5.5 Spain 6.4
Denmark 5.1 Netherlands 3.8 Sweden 5.8
Finland 4.9 Norway 3.9 Switzerland 6.6
France 6.3 Russia 3.4 UK 4.9
Germany 5.7
Term lengths and maximum tenure

conventional Term lengths Maximum tenure
Belgium Not more than four years None specified
Denmark Annual re-election recommended but law No limit but directors lose independence
allows terms of up to four years after 12 years
France Law allows six years but in practice usually No limit but directors lose independence
three to four years after 12 years
Germany Usually five years Code recommends defining tenure but in
practice usually no limit
Italy Three years No limit but directors lose independence
after nine years
Netherlands Four years Officially three terms but in practice two
terms becoming the norm
Norway Two years No limit
Spain Four years by law No limit but directors lose independence
after 12 years
Sweden Annual re-election recommended but law None specified
allows terms of up to four years
Switzerland Annual re-election No limit
UK Code recommends appointment for a fixed Six to nine years is the norm but directors
term, de facto three years, subject to annual lose independence after nine years; further
re-election years possible subject to annual re-election
and scrutiny

Board composition
2.5 Diversity
Just as in society, diversity in the boardroom is a sign of health. Diversity can
be expressed in many different ways, but in building an effective board what
matters most is diverse thinking. Greater diversity leads to better debates and
better decision-making, ultimately leading to better results.
Gender diversity is receiving much public attention and is the subject of both
political and regulatory intervention, at national and supranational level. In
some countries, ethnic diversity in the boardroom is now emerging as a fresh
challenge. The better-led businesses will attempt to act in advance of legisla-
tion and indeed many already are doing so.
Regardless of the mechanics used to achieve the result, there is an unstoppable

momentum now in favour of greater diversity of thought and experience on
boards.
In terms of gender diversity, considerable progress has been made, particularly

among outside directors. Progress is much slower among executive directors.
To address this will require more than imaginative lists of candidates drawn
from wider pools; it will need a re-engineering of corporate HR practices, busi-
ness priorities and ways of working. Executives with high potential need to be
prepared to take on outside board positions. This is a challenge both for the
company and for the search professional.

Board composition
Non-national directors as a proportion of the board

% % %
Belgium 31.8% Italy 9.4% Spain 15.3%
Finland 41.0% Norway 29% Switzerland 60.0%
France 35% Russia 43.8% UK 33.1%
Germany 23%
Just as it is reasonable that a board of directors should reflect the gender of

society at large, so they should reflect the ethnic mix. A cursory inspection
of the boards of Europe’s leading businesses reveals a gulf between board
composition and the ethnic makeup of European society or the company’s
shareholders.
Behind these assertions lies a much bigger challenge — ensuring true diversity
in its widest sense.
True diversity is not simply a matter of physical characteristics. It is about

allowing flexibility of thought to prevail over groupthink, bringing to any discus-
sion a variety of experiences, perspectives, interests and expertise.
As in any good team there should be a mixture of styles and strengths on

boards. Only by balancing perspectives can true debate and decision be
achieved. Thus for every director drawn to the status quo, there must be a
challenger; for every deeply experienced member there must be at least one
who asks the obvious question; the numerate must be balanced by the literate
and so on.

Board composition
The issue of quotas is at the forefront of the current debate. Certainly, the
imposition of quotas for representation on grounds of gender or ethnicity, for
example, can help achieve numerical objectives more quickly. But this is not the
whole story.
Gender quotas and current representation of women

on European boards
Proportion of women on boards Gender quota
Belgium 27% Quota for state-owned companies only
Target
Denmark 25.7%
Target for state-owned companies only
Finland 29.9% No quota or target
France 38.8% No data
Germany 26.4%
Italy 26.4%
Netherlands 20%
Norway 44.1%
Russia 7%
Spain 16%
Sweden 36%
Switzerland 20.5%
UK 24.4%

Board composition
gender quotas by country

Quota
Country (target) Requirement deadline
Austria (35%) Only companies in which state-ownership is over 50% have to com- 2018
ply. However, the 2012 code of corporate governance recommends
that companies report on the measures taken to promote women
to the management board, supervisory board and top management
positions
Belgium 33% One-third of board members have to be “of a different sex from the 2017
other members”
Czech No targets or quotas

Republic
Denmark The 1,100 largest Danish companies are required by law to define In force
their own target of “the under-represented gender”. They have to
report on progress in their annual reports
Finland 50% Only state-owned companies have to comply with the law that In force
states that men and women must be equally represented on a board
of elected representatives unless there are special reasons to the
contrary
France 40% All listed companies and non-listed companies with at least 500 2017
workers and with revenues over €50 million. If companies do not
comply their board elections may be nullified
Germany 30% The quota is binding for non-executive positions. In the case of In force
non-compliance, seats allocated to the “underrepresented gender”
are counted as as empty. There is also a target for executive directors,
although this is not a binding quota. Companies are expected to set
their own goals and report on these goals
Greece 33% The quota applies only to the state-appointed portion of full or In force
partially state-owned company boards
Iceland 40% The quota applies to both private and public companies with more In force
than 50 employees
Ireland 40% Only state-owned companies have to comply In force
Italy 33% The quota is for quoted and state-owned companies that have at In force
least three members on their board. If companies do not comply they
will receive a warning followed by fines

Board composition
gender quotas by country

Quota
Country (target) Requirement deadline
Netherlands (30%) Large companies should aim to have at least 30% of their board 2019
seats held by women. If they do not reach this percentage they have
to explain the reasons in their annual report. There are no sanctions
Norway 40% Listed and non-listed public limited companies, state, municipal and 2007
co-operative companies (ongoing)
Poland (30%) The target applies to publicly listed companies in which the state has In force
shares, or to other key companies
Portugal No targets or quotas
Spain 40% There is a law recommending 40% female representation, but there In force
are no sanctions
Sweden No targets or quotas
Switzerland (30%) Women should occupy 30% of board seats and 20% of top manage- In force
ment positions.
UK (33%) The target applies to the boards of FTSE 350 companies and to the 2020
executive committees and their direct reports for the FTSE 100 only.
Companies are asked to develop a strategy to achieve this goal and
to report on progress.
European (40%) The target set by the European Commission refers to the under- 2020
Union represented sex among non-executive directors of companies listed
on stock exchanges in member states

Board composition
2.6 Diversity at the top of the business

Unfortunately, there is still less diversity among chairmen than there is on
the boards they lead. This is an important governance challenge for boards to
address.
Most chairmen are still recruited from the ranks of former chief executives or
chief financial officers. Among larger companies there is an instinctive reaction
to appoint only an individual with prior experience as a chairman. But chairmen
have to start somewhere.
Given that there is still a bias towards appointing former CEOs as chairmen,
the predominantly non-diverse profile of CEOs finds its reflection in the profile
of chairmen.
It is clear that far more needs to be done inside organisations to enhance the
opportunities for women and ethnic minorities to progress to senior executive
roles. Only then can they hope to become plausible candidates for CEO, for
non-executive directorships and, ultimately, for the role of chairman elsewhere.
2.7 Commitment
Board members must be able to dedicate enough time to the boards on which
they sit, yet the demands on them are becoming more intense and fast-moving.
For an outside director, our experience suggests that 20 to 30 days a year is a

reasonable estimate of the time commitment for a public company director-
ship. Indeed, preparation and reading time, depending on the diligence and

Board composition
efficiency of the director, may add to this. Most chairmen of European compa-
nies invest at least twice as much time as other board members.
There may be up to 10 board meetings each year; add to this committee obliga-
tions, two or three days away at a strategy meeting and an overseas visit and 20
to 30 days is easily eaten up. And this is before adding additional opportunities
to familiarise oneself with the business, attending to any specific tasks and
various continuing education obligations.
Inevitably this has consequences for who can plausibly be a candidate for a
directorship and who is able to properly discharge the responsibilities.
A sitting executive may find it a challenge to carve out 20 or 30 days from the
calendar — even allowing for doing much of the preparatory work at weekends.
Fortunately, most employers see real advantage in permitting their executives to

serve on another board. The merits are obvious — it broadens the executive’s
experience and understanding, and provides exposure to other ways of doing
things. Moreover, the cross-fertilisation this encourages is likely to promote best
practice.
However, it is unlikely that a sitting executive could easily cope with more than
one, or exceptionally two, outside appointments. Most companies seek at least
one or two sitting executives on their boards because their contribution is a
reflection of current business practice. CEOs are particularly in demand and
can afford to be highly selective.

Board composition
The balance of directors could be taken from the recently retired, for their
recent experience, or from the actively “plural”, for their energy and breadth of
vision — always leaving room for the “elder statesman” who brings, hopefully,
additional perspective and wisdom.
2.8 Number of directorships

As to the maximum number of directorships that a “plural” outside director
can contemplate, in previous years one might have said as many as five.
However, with today’s level of expectation and commitment, more than three
or four listed company directorships is potentially too many. The burden is
exacerbated if one or more of the companies fall into crisis. Many directors also
have private company, pro bono or not-for-profit positions and the demands of
these too can mount up. Nomination committees rarely take account of these
commitments, although they should.
Calendar compression is a serious issue. In many markets, corporate year-

ends are concentrated around a particular date, for example 31 December.
This puts diary pressure on plural directors who have to attend AGMs and
accounts approval meetings for example, leaving less time for more reflective
contributions.
Board composition can be driven as much by practical considerations as by

business needs. For example, it may well be determined by the location and
frequency of meetings. International businesses often require regional expertise
on the board. However, the practical difficulties of attending a board meeting in
Europe for a director based in, say, Hong Kong should not be overlooked. Some

Board composition
organisations have appointed regional advisory boards that avoid the logistical
difficulty of having directors flying across continents to board meetings.
2.9 Skills and attributes

Much is demanded of outside directors. For a start, they need to understand
the business model and the factors critical to its success.
Traditionally, chairmen preferred to choose people with prior board experience

or those already sitting as executive directors. But as boards seek more diver-
sity, the net is being cast more widely. People from advisory backgrounds, the
public sector and academia are joining boards, bringing with them very differ-
ent sets of abilities. In addition, boards are looking closely at other companies’
executives immediately below board level, for example those on the executive
team.
The ranks of first-time non-executive directors are swelling as boards seek to

correct gender and ethnic imbalance and bring in expertise with specific current
skills such as digital, social media or consumer behaviour. Boards are also
hiring people with experience of a specific geography. Many of these will rightly
be younger appointments.

Board composition
A summary of the attributes of the ideal outside director might read as follows:
»» Commercially aware, financially literate with a good appreciation of risk

»» Internationally minded and multilingual
»» Interested in the business, committed and well prepared and used to dealing
with complexity
»» Objective and independently minded, prepared both to challenge and sup-
port management yet still a team player
»» A relationship-builder and an ambassador
»» Intellectually flexible with a sharp mind, able to think laterally and beyond
their area of expertise
»» Having a particular experience of relevance to the board
»» Clear understanding of prevailing governance practice and fiduciary duties
»» Fair-minded, having absolute integrity and wisdom and above all courage
and common sense
»» Articulate and persuasive whilst being a good listener and a good
communicator
»» And — perhaps most importantly — low in ego yet high in self-confidence.
These are general skills and attributes. Increasingly, boards seek non-executive
directors to meet more specific criteria: skill sets, regional experience or other
areas of knowledge.
Indeed, this specific “extra” is often the defining feature of what a board looks
for in a new non-executive. A board may have identified a need in the context

Board composition
of geographical operation, or knowledge of a specific sector such as financial

services, or in an area of risk such as cyber and data security or regulation.
In all of these examples, we believe that the non-executive should not be

expected to substitute for a missing executive skill — that must be solved at
the executive level. Rather, the expert non-executive director can act as both an
informed commentator and interpreter for the rest of the board.
So, an outside director with a relevant skill set can be helpful in translating
a particular issue into language understood by a predominantly non-expert
board.
However, there are dangers in having a technical “translator” on the board,

especially if the dialogue between the director and the relevant company execu-
tive excludes other directors. The presence of an expert does not mean that the
other outside directors should not seek to master a particular issue: they are
not being given permission to switch off from a discussion.
The challenge is that when you bring an individual with deep skills on to the
board, they must always be capable of contributing beyond their area of special-
ism. Particular expertise is optional — but the other attributes of a successful
director are mandatory.

Board composition
Maximum number of mandates

In some jurisdictions the law and corporate governance codes set different
limits for the number of mandates that directors may have. The maximum
number varies greatly across the region.
Directors of financial services companies are subject to the limits indicated
in the EU’s Capital Requirements Directive IV (CRD IV), which states that
unless representing a member state, members of the management body of
a “significant” financial institution must comply with one of the following: an
individual may either have one executive directorship plus two non-executive
directorships or four non-executive directorships. Companies within the same
group count as separate entities, but not-for-profit or charitable organisations
are not included in the restriction.
Belgium
Five listed companies but no further specification.
Denmark
No rule, but the code recommends not taking on more than “a few” non-
executive directorships or one chairmanship and one non-executive directorship
in companies outside the group.
France
By law, a person may sit on no more than five boards of companies headquar-
tered in France. The corporate governance code limits executives to two outside
boards and portfolio directors to five boards, irrespective of whether they are
French or foreign.
Germany
The law allows a maximum of 10 mandates, with chairmanship counting double.
The code sets a maximum of three mandates for reasons of workload.
Italy
No limit is set for executives. For portfolio directors, each company must set a
limit.

Board composition
Netherlands
A points system operates whereby directors who are Dutch nationals are allowed
mandates totalling five points. They may be non-executive director of up to five
Dutch companies or organisations, with a chairmanship counting double. Active
executives are limited to two non-executive directorships. This applies to compa-
nies fulfilling two of the following criteria: at least €35 million revenues; at least
250 employees; €17.5 million assets.
Mandates at non-Dutch companies are not counted in this scheme and neither
are cooperatives and some NFP organisations.
Norway
No rules, but in practice, two is generally seen as the maximum for executives
and four for a portfolio director.
Spain
No limit is prescribed. Each company sets its own requirements and more than
half do have a limit — four is becoming the norm, in line with financial services.
Sweden
None specified.
Switzerland
For listed companies, the code recommends a maximum of five per director,
with no distinction between executives and portfolio directors. There are no
limits for non-listed companies.
UK
The code recommends that a serving executive should have no more than one
FTSE 100 mandate and no chairmanships. In practice, it has become the norm
to apply this recommendation to all outside directorships.
Chairmen are expected to chair no more than one FTSE 100 company. There
is no prescribed or recommended limit for portfolio directors, but in practice a
maximum of four seems appropriate.

Board composition
2.10 Fit
It is essential that outside directors bring to the board an awareness of the
context in which the company operates.
Outside directors are normally appointed for their specific sector, geographic,
financial, commercial, marketing or other expertise relevant to the company’s
business or perceived needs.
But knowledge and experience are not enough unless they are complemented
by a soft skill set. Emotional intelligence is as important in being a successful
director as IQ. There is no point in holding an opinion if you can’t put it across
constructively and at the right moment.
Collegiality must also join the list of what makes a good fit — but not at the
expense of objectivity or courage.
For a potential director to be a good fit the board must see belief in and emo-
tional commitment to the purpose of the business. Most importantly, there
should be clear excitement about the challenge.
Keep in mind that a unanimous decision is reached via constructive debate

and sometimes by a degree of measured disagreement. So board deliberations
must be characterised by trust, openness and mutual respect. This is not to say
that sociability is a prime requirement, but boards of directors are both busi-
ness and social constructs. The most effective outside director is one who is
listened to and gaining a hearing is a social skill. Regardless of the skill set, the
question for the company is ultimately: will the candidate fit?

Board composition
2.11 Board culture

As the steward of corporate behaviour, the board’s first obligation is to ensure
that its own culture is beyond reproach.
A board’s personality depends on a number of factors, for example the

nationality, history, cultural roots and ownership structure of the company. The
board’s size, the profile of the directors and the degree of formality in its deal-
ings also play a part in building corporate culture and reputation.
The chairman has a significant role in shaping the style and culture of the
board in terms of how relationships are conducted, the quality of teamwork,
transparency, communication and freedom of expression among directors, and
interaction with the executive team. Every board should therefore consider these
matters carefully, for they serve to promote the best interests of the company.
While board behaviours have less influence on culture than those of the CEO
and management team, boards do set a tone that in turn has an impact on the
company’s culture. Boards should be aware of what that tone is and how they
contribute to it by their own actions. They can ask themselves:
»» How do our boardroom behaviours advance the right tone at the top?
»» Are we sufficiently inquisitive, collaborative, disciplined and decisive?
Remember, we are talking about the spirit and dynamic of the board. This is
not necessarily the same thing as the culture of the company. The board is a
principal custodian of company culture, but it has a spirit of its own and to
some degree this will inform the company’s own culture.

3. Induction and education
Executive Summary
»» All boards should operate a tailored induction programme for all directors,
whether first-timers or not.
»» Continuing education for directors is essential to ensure they are aware of busi-
ness, legal and operational changes and the impact on their responsibilities.
»» Directors should be given every opportunity to see the operations at first hand to
support their understanding of the business.
»» Tailored programmes such as Spencer Stuart’s Directors’ Forum should be a
part of every outside director’s commitment.
45
Induction and education
3.1 Board induction

Chairmen and boards have a responsibility to ensure that new directors are
given proper support in learning their role so that they can get up to speed as
quickly as possible.
An induction programme should be mandatory for all directors, regardless of

experience.
The induction is usually overseen by the company secretary. New directors

should ask for the process to be tailored to them, particularly if they feel they
want to explore certain areas of the business in greater depth.
A full programme should involve:
»» Presentations from management on the business model, profitability and

performance
»» A review of the previous 12 months’ board papers/minutes to understand
current issues
»» Meetings with key executives/functions such as finance, marketing, IT,
HR, etc.
»» Site visits to understand how the business works and to meet people on
the ground
»» Meetings with advisors, for example, bankers, brokers, accountants or others
»» Explanation of regulatory and governance issues
»» Attendance at an investor day.

New directors (proportion of the board appointed in a 12-month period)

% % %
Belgium 12.5% Italy 17% Spain 14.9%
Finland 14.4% Norway 17.2% Switzerland 10.5%
France 14% Russia 17.7% UK 14.9%
Germany 16.9%
3.2 Mentoring
The practice of mentoring existing and aspiring directors is increasing. The
mentoring is often done by an existing director or sometimes by an external
professional. There is an opportunity for mentoring new directors. For instance,
an existing director could take charge of the induction of the new colleague and
be responsible for making them comfortable in the role and maximising their
potential — at least for the first six months.
3.3 Role assignments

Any director’s arrival on a board will be made easier if they are able to make an
immediate contribution.
For instance, the chairman should not wait to make a new director a member of
at least one board committee; it is appropriate that all outside directors should
serve on at least one committee.

Sometimes unitary boards assign particular spheres of interest to an outside

director, relevant to their experience. This can take the form of assigning to
them a part of the business operations or function as an area of first responsi-
bility. Such assignments can be valuable and, again, should not be delayed.
3.4 Continuing education

Boards should seek continuously to develop the knowledge and competency
of their directors. Business complexity is increasing, as well as governance,
accounting, legal and regulatory changes that require regular training updates.
In the same way that directors expect management to be at the cutting edge
of their industry, management expects directors to keep themselves informed
about their role, the sector and the company.
This obligation is the subject of constant review and will normally be reported
on annually to shareholders and others.
Well-resourced companies can contemplate undertaking the task of continuing

education themselves, but it is a broad field of study.
There is no shortage of organisations offering to update and educate directors.

For first-time non-executives we recommend participation in one of the many
new director training programmes available. Such events offer the opportunity
to become more familiar with boardroom debates and governance issues.
Accounting and law firms also hold regular seminars updating directors on the
latest developments in remuneration, audit, risk and governance generally.

Advice to aspiring outside directors

Taken from Becoming a non-executive director, published by Spencer Stuart
What follows may be helpful for experienced directors passing on advice to executives
who have not yet served on an outside board.
Your first directorship is also the hardest Identify sectors which you know or
to get and will take the longest; but are contiguous with the day job. Look
others will follow more quickly once you for companies which need or match
are a non-executive director and have your particular expertise, but which are
experience. sufficiently different not to pose a com-
mercial conflict; companies you can learn
A serving executive is generally only
from, as well as contribute to.
allowed one, or occasionally two, non-
executive roles, so it is vital to choose Bear in mind the following:
the right company. What you are seeking
»» Sitting on a board for several years
may be neither appropriate nor what you
feels like a long time if you’re not
need at this point. Your options may be
enjoying it.
limited by your own board or by local
corporate governance rules. You have to »» Mistakes will be on your CV forever.
be realistic and pragmatic. Organisation »» Do not underestimate the time com-
size and status aren’t everything; you mitment. It is not just a question of
should consider the option(s) most suit- preparing thoroughly for meetings
able to your background and experience. (reading the board papers is essen-
tial), but making time for site visits
Similarly, if you are about to retire from
and meetings with management.
executive life the first non-executive
directorship you choose is critical — it »» Aim high, but be realistic.
will signal the scale and type of company »» Think through any potential conflicts
you are interested in and position you for of interest.
future opportunities.
continued >

»» Don’t be hasty; the right opportunity »» Be prepared for rejection. Try to find
is unlikely to become available out why you were rejected and learn
immediately. Don’t be surprised if you from it.
go to many interviews before you find »» Contiguity is inevitable and to be
a board that is willing to hire you and welcomed. This is not a time for
that is a good fit. This is normal, so reinvention. You will be hired for who
be patient. you are and what you have done, so
stay close to what you know.
Spencer Stuart Directors’ Forum is the leading international programme

designed to equip new and aspiring directors for life inside the boardroom
(see Appendix B). This programme is augmented by membership of an alumni
group — a ready-made network of fellow directors.
3.5 Outside directorships as a career

All the above are responses to the growing professionalism required of outside
directors. No longer hired for their experience or business relevance alone,
outside directors are expected to have a working knowledge of relevant govern-
ance requirements and of the regulatory environment in which they and their
colleagues operate.
This in turn is a response to the appearance of the “plural” outside director —

a person who might have secured their first appointment on the basis of their
executive experience, but who is subsequently appointed for their non-executive
and independent qualities.

The “plural careerist” has undoubtedly professionalised the role of the outside
director. As with other professions this should bring in its wake specialist train-
ing and the elevation of the company’s interest and those of stakeholders over
the interests of the director.

4. Board leadership
Executive Summary
»» The chairman should set the tone for the board by encouraging open and
candid discussion involving all board members.
»» The roles of chairman and CEO are usually better separated to avoid an
undue concentration of power.
»» The chairman-CEO relationship is key and the responsibilities should be com-
plementary not overlapping.
»» The CEO should not become chairman except in exceptional circumstances.
»» Most unitary boards benefit from a clearly defined role for the senior inde-
pendent director and deputy chairman.
52
Board leadership
4.1 The chairman

The leadership of the board is the sole responsibility of the chairman. Today’s
effective chairman brings time, business experience, personality and maturity to
the role.
The chairman sets the tone and regulates the conduct of the board. Conse-
quently, the manner and quality of its deliberations to a large extent reflect the
chairman’s way of doing things. It follows that the chairman plays a leading
role in the composition of the board.
The role and influence of the chairman has grown significantly in recent years
and, as a consequence, today’s chairmen have more diverse profiles and back-
grounds than in the past.
The required style of board leadership has also changed. It used to be that
chairmen either provided robust leadership from the front or existed merely as
ceremonial figures. Now, chairmen are required to coordinate a board of strong
outside directors and, when things go wrong, be ready to slip into executive
mode. Greater versatility and a broader range are imperative.
So the chairman has a significant influence on the culture and tone of the
board. By setting the agenda and ensuring that the board is addressing the
right topics at the appropriate level, the chairman promotes active participation
of all directors.
The chairman’s influence and judgement is vitally important because it dictates

the nature and quality of debate. It is the chairman’s responsibility to create an

Board leadership
atmosphere in which topics are open for discussion and board members can
disagree with each other if necessary. They should be able to express their views
openly and candidly without fear of being considered disloyal. Effective debate
and full disclosure at meetings make it less likely that divisive discussions will
take place outside the boardroom.
When members spend time with each other outside board meetings it helps
build trust and understanding within the board.
Some investment by the chairman in the social side is therefore beneficial to

board relationships.
The chairman should encourage strong relationships and respectful interaction

between executives and non-executives. The key principle here is trust: manage-
ment will share their concerns with the board if they perceive a cooperative and
supportive atmosphere.
The chairman should determine how and when non-executives communicate with
executives outside board meetings. Relationships between the board and manage-
ment can be strengthened in a number of ways, for example by inviting executives
to present to the board, having directors make site visits and by mentoring.
All of the above comments apply equally to one- and two-tier boards. But in
the two-tier system, the CEO and chairman have the additional responsibility
of ensuring that the supervisory and management boards communicate and
interact productively. In some jurisdictions, directors’ communication with
shareholders is strictly regulated. For example, in Germany, only the CEO can

Board leadership
discuss operational matters with shareholders. The chairman is only entitled to

speak to shareholders on issues relating to the board.
There are many effective ways to lead a board of directors — perhaps as many
as there are personalities in the chair.
It may be the diplomat who facilitates or the intellectual who listens; the con-
servative who cautions or the radical who inspires.
Whatever style the chairman might adopt, the principle aim is always to draw
the best from the board, to support and encourage the executives and to ensure
that the board as a whole is significantly greater than the sum of its parts.
The evolving role of the chairman

As their responsibilities have grown, the company’s public representatives.
most chairmen in a unitary board system Depending on the personality and profile
would see themselves as the chairman of the CEO, this role can be significant.
of the company, rather than of the board
In some two-tier systems, the role of the
only.
chairman is more constrained as a result
But whatever the system, whilst the of custom, practice and even regulation;
management of the board and the however, in the absence of a formal
smooth running of its deliberations are constraint, chairmen are increasingly
obviously part of the chairman’s role, being drawn into the public debate.
they no longer define it.
Thus, the chairman may become another
Increasingly, in both the unitary and resource for the company in all its public
two-tier board systems, enhanced public dealings. As a result of the chairman’s
scrutiny of corporate life has promoted raised profile there is a need for more
some chairmen to the role of one of rounded and experienced candidates.

Board leadership
When selecting a chairman, his or her style of leadership should be clearly

understood. Going against conventional wisdom can be an effective strategy
and is sometimes necessary, but the better default position for a chairman is to
have a more low-key style that brings out the best in other directors.
4.2 The chairman as CEO

Thirty years ago, the orthodoxy in unitary boards was for companies to be led
by an executive chairman whose power was effectively unrestrained other than
by the collective of the board. In response to a series of high-profile abuses of
corporate power, a number of countries determined that a better governance
model would be to separate the leadership of the company into two roles —
those of the chief executive and non-executive chairman.
Today, there is a growing belief around the world that the roles of chairmen
and CEO are better separated. An undue concentration of power in one pair of
hands heightens risk.
Board members should always feel free to challenge the CEO about the
decision-making process in a robust and constructive manner. When the CEO
is also the chairman, directors may feel inhibited. Since the balance of informa-
tion is heavily weighted in favour of the combined CEO/chairman, the directors
may feel at a practical disadvantage. For these reasons, we believe that in the
unitary context splitting the roles is generally in the company’s best interests.
Some circumstances may justify the roles being combined, in which case the
board has an obligation to explain why doing so is in the interests of both the

Board leadership
To combine or separate the roles of chairman and CEO?

BELGIUM NORWAY
The governance code recommends Two-tier system: the roles are always
that the roles should be separated, separated.
which is almost always the case.
SPAIN
DENMARK 57% of chairmen are also CEO. But
Two-tier system: the roles are always even where there is a formal separa-
separated. tion, often the chairman is de facto
CEO and the CEO is de facto COO.
FRANCE
Out of the remaining 43% at least half
There is a choice of three formulas:
are purely cosmetic. Many founders
1. Chairman/CEO remain as chairman and therefore de
2. Chairman and CEO are separated facto CEO.
3. Two-tier system with supervisory SWITZERLAND
board and management board There has been a big change in the
last 10 to 12 years towards splitting the
66% of companies choose option 1.
roles. 95% have separated.
GERMANY
UK
Two-tier system: the roles are always
The roles are almost always split. The
separated.
code stipulates that there should be a
ITALY clear delineation, but there are one or
Separating the roles is common. two examples where there is an execu-
However, there are many executive tive chairman, with or without a CEO
chairmen. Structure depends largely as well.
on the company ownership (family;
government, etc.).
NETHERLANDS
Two-tier system: the roles are normally
separated. There are very few excep-
tions in family-controlled companies.

Board leadership
shareholders and the company. It should also be made clear to shareholders how
long this situation might prevail and the circumstances in which it might end.
Naturally, the question of whether the roles of chairman and CEO should be
combined in one person only arises in the context of the unitary board.
4.3 The “deputy” chairman

The position of deputy chairman is a feature of board governance regardless of
whether the roles of chairman and CEO are separated or combined. In some
jurisdictions the equivalent position is known as the senior independent direc-
tor or the lead director. The role is designed to provide the following:
»» to offer a sounding board for the chairman

»» to serve as an intermediary for other directors when necessary
»» to provide a point of contact for shareholders as an alternative to the chairman
»» to lead the chairman’s performance evaluation on behalf of the board
»» to conduct the chairman succession process
»» to chair meetings of the non-executive directors once a year, or more fre-
quently when the chairman is also the CEO
»» to manage the board in the chairman’s absence.
Under normal circumstances, the role of the deputy chairman or senior

independent director is limited to occasional contact with shareholders, and to
leading the annual evaluation of the chairman’s performance. The role comes
into its own in times of crisis or when a change of chairman is being considered.

Board leadership
In companies where the chairman is also the CEO, the deputy chairman or
senior independent director has the vital role of acting as a counterweight to
the chairman’s concentrated power. This requires an individual with both pres-
ence and authority.
The role of the deputy chairman or equivalent across Europe

Belgium Norway
The code only refers to the role of the Not compulsory, but usual in larger
chairman companies
Denmark Spain
The role of deputy chairman is not Where the chairman is also the CEO
compulsory and the senior independent there will be a lead director
director is not a current concept
Switzerland
France Not legally defined and not compulsory,
The role of senior independent director but an increasing number of companies
is defined in the corporate governance appoint a senior independent director,
code, but specific role specification is left usually the same person who holds the
to individual companies vice chairmanship
Germany UK
There is at least one deputy chairman The corporate governance code recom-
mends that one of the independent
Italy
directors be appointed senior independ-
The role of vice chairman is legally
ent director and there is near-total
required
compliance.
Netherlands
Not required, but many companies have
a vice chairman performing this role

Board leadership
4.4 The relationship between the chairman and the CEO

The relationship between the chairman and the CEO is the most important one
on the board. Together, they represent the public face of the company and, to a
great extent, take joint responsibility for its success or failure.
Often, the most effective combination is based on complementary strengths,

where one compensates for and reinforces the other. Chairmen and CEOs of
a similar character can nevertheless make formidable pairings, providing they
reach a clear understanding of each other’s roles. That said, their relationship
is always coloured by one simple fact — it is the chairman’s ultimate duty to
change the CEO if things do not work out.
A good chairman is an ever-present resource to the CEO and will have the
courage to guide, challenge and support him or her. But it is important that
the chairman does not become a shadow CEO. Nothing will guarantee a break-
down in relations like a chairman seeking to perform the CEO’s duties.
If there is a fractured relationship between the chairman and the CEO, or if they
are not aligned on the company’s objectives, long-term commercial success
will be impossible to achieve.
There is a preference amongst some boards to promote former CEOs to the role
of chairman in the same company. This raises a number of interpersonal issues
and requires specific explanation to the shareholders.

Board leadership
Given that the relationship between the chairman and the CEO is the most
significant in the business, regardless of board structure, then having a chair-
man who sits in judgement on their own successor creates a difficult dynamic.
If the CEO is to become chairman, boards should at least consider a grace pe-
riod — but, grace period or not, it remains a poor idea, rarely justified.

5. Succession planning
Executive Summary
»» The company’s strategy should inform the range of skills most needed for the
board.
»» There should be a continual process of reviewing and identifying board needs
and an early start should be made on each specific recruitment.
»» Boards should conduct an inventory of the skills, contributions and cognition
of current board members to identify any gaps.
»» The chairman’s succession should be planned carefully, coordinated with
anticipated board changes and handled by the senior director, deputy chair-
man or similar.
»» The best boards should contain at least one or two directors who are plausi-
ble chairmanship candidates.
»» Independent advice should always be taken to ensure objectivity and provide
a justification for each decision.
»» For CEO succession, an early start is essential and knowledge of internal and
external candidates should be a constant preoccupation for the board.
»» A pipeline of internal candidates should be identified through regular succes-
sion reviews, in conjunction with an external consultant.
»» Priority should be given to a rigorous assessment of character and capabili-
ties, achievement to date and potential in the role, as well as cultural fit with
the organisation.
»» A multifaceted evaluation like this must be conducted by an outside consult-
ant with access to the appropriate expertise, data and intellectual property.
62
Succession planning
5.1 Whole board succession

Boards are increasingly taking responsibility for their own succession needs.
Many are intent on observing best practice for reviewing director performance
and recruiting the next generation.
Succession starts with strategy. A company’s direction should inform the range
of skills most needed around the boardroom table. An ideal mix of expertise
will ensure that a board can fulfil its responsibility to advise, supervise and
challenge management.
Board succession is most often the responsibility of the nomination (or nomina-
tion and governance) committee but the appointments themselves are made by
the whole board, generally on the committee’s recommendation. The committee
responsible should keep the full board informed about its deliberations rather
than introduce a shortlist of preferred candidates once selected. The best pro-
cesses ultimately involve all board members. That should certainly be the aim.
It is worth noting that in some jurisdictions the appointment of a director is not

valid until approved by shareholders. In the UK the board appoints a new direc-
tor with immediate effect, and this is ratified at the next shareholder meeting.
Directors should not assume that an ideal candidate will be easily found or,
once found, readily available. There is competition for talent among potential
non-executive directors just as there is for top executives. Boards should there-
fore consider casting a wide net and planning their recruitment well in advance.

Succession planning
The need for early planning of board succession is greater today in the light of
public scrutiny, pressure from rating agencies, governance watchdogs, regulators
and the demand for additional skill sets to support changes in company strate-
gies. All boards, from major corporations to not-for-profit organisations, are
increasingly in the spotlight and need to demonstrate their willingness to evolve.
Consequently, succession planning should not be an episodic event or exercise;

it should be seen as a continuing process.
This applies equally to the critical positions of chairman and CEO. Here, the pro-
cess of succession in the longer term should begin upon appointment. Indeed,
thinking about this issue should be all-encompassing, embrace all board posi-
tions and should be a standing agenda item for the nomination committee.
Gradual reinvigoration should be the aim, with retirements and appointments

ordered to satisfy the need for both continuity and fresh thinking. Each board
seat should be occupied by a skilled director who knows his or her role, has
received a thorough induction and continues to be offered appropriate develop-
ment opportunities.
All this is best achieved if the board is consistently advised by an external con-
sultant, creating a partnership with the business that has the single ambition of
smooth succession, whenever it is required.
Well-informed board succession planning ensures a strong, relevant board.

A transparent process helps to create a respectful boardroom culture. High-
performing boards use a variety of tools to facilitate succession planning, and
we shall now look at some of them.

Succession planning
5.2 Guiding principles for board succession

Effective board succession depends on the following:
»» A continuing process of reviewing and identifying needs

»» An early start on each specific recruitment
»» Definition of the skills, experience and diversity necessary to support the
strategy and populate committees
»» Inventory of the skills, contributions and diversity of current board members
to identify any gaps
»» Annual board review process including feedback for individual directors
»» The board’s policy on tenure and exiting members: performance review, term
limits or mandatory retirement
»» Committees structured to include the requisite skills and experience.
Used consistently, these tools should produce a clear picture of the gap
between the board today and what it needs to be in the future. The nomination
committee should formulate a plan for how to bridge that gap.
The makeup of the board and the planning of changes should be sequenced
to avoid clusters of departures. Given the increasingly common practice of
mandating maximum terms, wholesale change can occur at a bad time for the
business. Staggered appointments are therefore important; without them the
board may undergo an unplanned culture shift.
Boards that are most effective at succession planning ask the chairman or
senior independent director to have candid conversations with directors at the

Succession planning
outset about how long they plan to serve. This shared understanding between
the board and each director is often the missing piece in the jigsaw of board
succession planning.
It is difficult to ask long-serving directors to make room for directors with new
or different skills. But careful long-term succession planning, overseen by the
chairman and the relevant committee, helps to make these transitions smooth
and dignified.
5.3 Factors to consider in board succession

In recent years, several factors have increased the complexity of board succes-
sion planning:
»» The need for remuneration committees to be experienced in developing

complex remuneration plans and to conduct their work with sensitivity to
outside opinion
»» An increasing demand for specific competencies and risk management expe-
rience among audit committee members
»» The need for directors to chair these committees
»» The need for directors who understand digital and social media tools
»» The need for diversity (cognitive, gender, age, ethnicity, etc.)
»» A global vision
»» Foreign market expertise
»» The need to satisfy regulators

Succession planning
»» Rising attention to term limits

»» The increased risk of legal liability
»» Greater scrutiny from investors and the media.
These requirements, some practical and some professional, mean that a

comprehensive search process has to start early, as we have already noted.
It should also be both wider and deeper, to ensure that the best candidates
are identified and reviewed. Calling upon external professional advice is now
standard practice to satisfy stakeholders that this is the case.
5.4 Chairman succession

This subject requires careful thought and, again, long-term planning. The
chairman should not manage his or her own succession process. Rather, chair-
man succession should be handled by the senior independent director, deputy
chairman or equivalent. Difficulties can arise where the chairman is also the
CEO and where board members may not feel confident, either individually or
collectively, in raising such a sensitive topic.
Since the candidate pool for chairmen is perceived as small and demand is
high, it is imperative that the board has a plan for chairman succession and
starts the process early.
Our observation is that boards almost always leave it too late — defying the
basic principle of succession planning that it should be planned. It therefore
helps for everyone to have a common understanding of the likely term for the
chairman.

Succession planning
Each board should make a point of discussing chairman succession openly and
without any implied criticism. There should be a clear line of sight at least 12 to
18 months ahead.
The best succession process begins on appointment, as we have emphasised

above. The best chairmen are aware of this too. Succession of the chairman
should ideally be coordinated to avoid clashing with the end of the CEO’s
tenure. It is important to avoid both being replaced at the same time, especially
as one of the chairman’s principal duties is to manage the CEO’s position.
It is not uncommon for a candidate for the chairmanship to emerge from

among the existing outside directors. The process should be flexible enough
to accommodate this and for appropriate arrangements to be put in place to
avoid conflict and ensure a level playing field.
Sometimes a chairman candidate is recruited to the board with a view to

becoming the chairman within 12 months — a strategy that can ensure an
orderly and timely process.
It is sensible to recruit at least one non-executive, well ahead of time, who has
the capacity to become the chairman in the future.
Such a plan should complement the succession plan for the CEO — the two
plans should be sequential not simultaneous.

Succession planning
The chairman succession process

The process for chairman succession domicile and detail the expected time
is typically led by the deputy chairman commitment and key responsibilities
or senior independent director (SID). for the role. Ideally, all board members
There can be good reasons why the SID should be consulted for their views on
does not lead the process, for example what the specification might include.
if he or she wishes to be considered as
Once the CSC has approved the
a candidate. In this case, the process is
specification, the search firm begins the
led by another senior board member.
research to identify qualified candidates.
The director leading the succession pro- All directors should be invited to submit
cess may form a chairman succession any candidate suggestions they may
committee (CSC) to run the process. In have and these should be included for
some cases, the composition of the CSC the CSC to consider, alongside those
is identical to that of the nomination candidates identified by the search firm.
committee and in others it is different
Shortlisted candidates should be inter-
but typically it includes members from
viewed by the chairman of the CSC and
the nomination committee.
at least two, but ideally all, members
The committee members should of the CSC. When the committee has
not include directors who wish to be decided upon its preferred candidate (or
considered as a candidate for the role of final two candidates), he or she should
chairman. The current chairman should meet the CEO. At the end of the pro-
not be a member of the CSC. cess, the finalist candidate should meet
the current chairman and those board
The CSC should appoint a search firm
members who are not CSC members;
to advise on the chairman succession
this is often done in a more social
process. As a first step, the CSC and the
setting, for example at a board dinner.
search firm should agree a timetable
with clear milestones and deliverables. It is good practice for the chairman of the
CSC to report regularly to the full board
The CSC, with the support of the search
on the progress of the succession pro-
firm, should then draw up a specification
cess. The CSC may also choose to share
for the role of chairman. The specifica-
candidate names with the full board.
tion should outline the ideal business
experience and track record given the The deputy chairman or SID should
company’s likely agenda over the next discuss with the chairman the timing
few years; it should also set the priori- of the handover to the chairman’s
ties for criteria such as nationality and successor.
Succession planning
5.5 CEO succession

CEO succession is in many ways the most important issue for the board. As
with board and chairman succession planning, it is a continuous process, best
served by taking external advice.
The best time to start the process is early in the CEO’s tenure. Leaving it later
can lead to misunderstandings — it is up to the chairman to initiate that
discussion.
The company approach has to be clear and agreed before embarking on a

succession planning process. Effective, long-term succession planning should
encompass these six elements:
»» The right, air-tight process

»» Well-defined requirements for the future leader
»» Thoughtful assessment of internal candidates and tailored development plans
»» Accurate comparisons to external talent benchmarks
»» Powerful decision support at crucial times
»» Successful transition plans and support.
The board has to be certain that there is a pipeline of high-quality executives

rising through the ranks and capable of joining the senior executive team. The
board, and especially either its chairman or that of the nomination committee,
should be capable of forming an assessment of the next generation of top
executives.

Succession planning
CEO succession — avoiding pitfalls

CEO succession represents a critical review the plan and candidates’ progress
turning point for companies when at least once annually.
tremendous value can be created or
Build and maintain trust in the
destroyed. Furthermore, succession
process
planning is complicated, requiring the
Once they have been through it, direc-
board to manage through the complexity
tors often remark on the power of the
and risk of the decision and the differ-
succession process to align the board
ent ways in which events may unfold
around the strategic direction of the
over time. Succession planning also
business, the capabilities needed in
can be a highly personal and charged
the next CEO and in the ultimate CEO
topic, particularly for the CEO. Part
successor. This only happens when the
of the board’s role is to defuse these
board oversees an effective, transparent
issues and minimise the emotion of the
process, ensures that the stakeholders
process.
understand the process and maintains
A properly handled long-term process an open line of communication with
will increase the likelihood that the internal candidates.
company will produce a strong internal
Remain vigilant even after a decision is
candidate, while ensuring that disap-
made
pointed internal candidates are treated
The board should stay involved in the
with courtesy and tact.
CEO transition to ensure the incoming
We have identified three critical steps to CEO establishes a clear plan for the
avoid pitfalls. early days of the transition and that it is
executed in a disciplined manner. The
Start early and review the plan
board also should make sure that the
regularly
outgoing CEO provides the necessary
In the best processes, objective, third-
support to the new CEO without seem-
party assessments of internal talent
ing to interfere.
occur early enough to provide candi-
dates time to develop and the board
time to build a fuller, more nuanced view
of internal players. The board should

Succession planning
Any selection process will inevitably involve a series of early choices. For exam-
ple, the board may prefer a proven CEO with a strong profile among investors.
Specific industry expertise might be more highly valued than a good track
record in more than one industry. Boards should always be prepared to revisit
these preferences as the merits of individual candidates become clear.
Responsibilities should be clearly established by defining the different roles of

the chairman, the full board and its committees. It is vital for board members
to maintain confidentiality when CEO succession is discussed, particularly
when internal candidates are being considered.
The early identification of an “anointed successor” should be avoided. The risk

is that this takes away the board’s ability to respond to subsequent events,
leaving it with too few options.
If the CEO departs unexpectedly, the board has to be prepared to ensure

management continuity. The board and the CEO should together establish
a strategy in advance and define the procedures that will take effect if an
emergency occurs. The chairman of the board or of the committee responsible
should know the potential candidates who are willing to take on management
responsibility in an emergency or which board member may be able to step in.

Succession planning
Assembling a list of candidates and selecting the right one is and always should
be a bespoke exercise. Context is everything. It is not the case that outsiders
are per se preferable to insiders or vice versa – it will always depend upon the
candidates’ abilities and the company’s needs at the time. It is the board’s
job to look beyond an individual candidate’s track record to see that their true
potential addresses the corporate opportunity.
5.6 Succession of combined chairman/CEO

In countries where separating the roles is standard, the appointment of a com-
bined chairman/CEO is usually a response to specific circumstances and seen
as transitional. Examples might include a company founder or a long-tenured
and particularly successful CEO. In these cases, a chairman/CEO successor will
generally be found from within and not necessarily involve a third-party search.
In jurisdictions where the combined chairman/CEO leadership structure is the

norm, the process should be similar to the search for a chairman described
above, i.e. led by a senior board member, not involving the current chairman/
CEO, and carried out under the guidance of an external advisor.
In such a combination, the principal need is for a compelling candidate for the
CEO role who is able to perform the role of chairman, and not vice versa.

Succession planning
5.7 Succession below CEO level

The board must view senior executive succession as a medium- to long-term
process, avoiding ad hoc appointments that bring with them the risk of failure.
The board should take the opportunity to oversee the succession of senior-level
executives in the internal pipeline. The following measures need to be in place
and kept under permanent review:
»» Exposure to the senior team and the level immediately below is essential.
This can be both formal and informal — through the medium of boardroom
presentations and attendance, or through business and social events, prefer-
ably both
»» Regular opportunities for getting to know key managers with potential,
including their participation in the annual strategy meeting
»» Regular reports from the executive team on high-potential employees and the
provision of development support
»» Agreement between the board and the management team on the criteria for
appraising the next generation of management
»» Either a committee or the full board to monitor the systems for developing
and promoting future senior managers.

Succession planning
Current best practice is as follows:
»» A professionally assisted review of the candidate pool for senior positions.

This in turn involves an analysis of the candidates’ strengths, weaknesses
and potential, enabling boards to come to decisions on long-term succession
planning — in the interests of both the company and the executive
themselves
»» Professional, confidential benchmarking of possible internal candidates
against external executives, especially in relation to CEO succession, should
form part of this scrutiny
»» Top-tier effectiveness requires a careful review of the structure and member-
ship of the executive team or management board. The ability to work
collectively and through others is vital and can only be properly evaluated by a
third party using robust assessment tools.
Regardless of whether the board is unitary or supervisory, the principal

issue is that the senior executive pipeline should be under constant and
dynamic review.

Succession planning
5.8 Executive assessment

In all executive appointments, in particular the CEO, it is best practice to con-
duct a rigorous assessment of the individual character and capability of finalist
candidates.
This assessment should cover, as a minimum, a comprehensive review of

achievements to date, rigorous evaluation of the candidates’ potential in the
specific role, their character, capabilities, leadership style and cultural fit with
the organisation.
An integrated, multi-method approach must be carried out by an experienced

assessment expert, properly resourced and backed by appropriate intellectual
property and benchmarking data.
The objective should be to predict the future leader’s likely success in the con-
text of the particular organisation and its market and reduce the risks inherent in
promoting an insider or importing a talented outsider.

6. Board committees
Executive Summary
»» Delegation of activities to committees does not excuse the board from collec-
tive responsibility for the committees’ actions; all directors should have the
right to attend all committee meetings.
»» The majority of audit committee members should be independent and all
should have an understanding of financial matters.
»» It is important to establish where the responsibility lies for the oversight of
each type of risk in the business, but risk management must always remain
an executive responsibility — it is the job of the appropriate board committee
to monitor that it’s being done effectively.
»» The nomination committee’s remit should be expanded to include govern-
ance matters generally.
»» The remuneration committee should ensure remuneration policy is aligned to
strategic goals, ensure that decisions are based on performance evaluation,
avoid rewards for failure and communicate clearly the adopted principals of
working methods.
»» Engaging directors through participation in a strategy day is preferable to
delegating all responsibility for strategy to a board committee.
»» All committee advisors such as auditors and remuneration consultants
should be the subject of regular competitive tender.
»» The board should keep the committee structure under review, ensuring that
specific industry requirements are met.
77
Board committees
6.1 Committee membership

As the role and remit of the board has expanded, so has the practice of delegat-
ing specific activities to committees. Of course, responsibility for any actions
taken, even if recommended or evaluated by the committee, remains with the
board as a whole.
This has the advantage of freeing up the board’s time for more forward-looking
and strategic discussion. It provides an opportunity for groups of directors
to focus on specific areas, be they audit, remuneration, risk etc. It also allows
them to devote sufficient time to a proper consideration of the issues before
bringing their recommendations to the full board.
The board should be careful about increasing the number of committees, given
the limited availability and time of board members. There is a growing trend in
some countries for all independent directors to be members of all committees,
especially where outside directors number fewer than, say, six. Whilst this is an
appealing idea, it can defeat the object of sharing the burden and benefiting
from the synergy and focus that a subset of directors provides.
This returns us to the discussion of the optimum size of the board, which
should be framed so that at least the three principal committees — audit,
remuneration and nomination — can be properly staffed by independent
directors.
Moreover, the concept of “everybody doing everything” wastes the opportunity

for the best qualified to concentrate on their areas of interest and expertise.

Board committees
That said, it should be a principle that any board director should be entitled to
attend any committee meeting (without being compensated) so long as this
does not reduce the efficiency of the committee’s work.
6.2 Reporting back

It is essential that committee deliberations are reported back to the board
regularly and in full. This is the responsibility of the committee chairman. A
full report should include a summary of the debate on contentious issues, the
options discussed and the reasons behind any recommendations. Thus, the
report-back is not simply a report, it provides an opening for further review if
necessary — the board must always have the opportunity to discuss in full any
issues raised by the committee.
Sometimes the committee chairman’s report is oral, followed some days

or weeks later by the written minutes of the committee meeting. The report
should be full enough for an understanding of the principal issues by all the
board.
The chairman should always allow time for questions from non-committee
members and encourage a measure of discussion and enquiry.
As a general principle, the agenda and minutes of every committee should be

sent to all members of the board for information. However, there will be excep-
tions, especially when it comes to certain sensitive issues relating to remunera-
tion and succession.

Board committees
6.3 Audit committee

Until recently, the audit committee was often seen as the senior board com-
mittee where most public scrutiny was concentrated. Worldwide regulatory
initiatives have concentrated on the role of audit committees and the approval
and presentation of accounts, with the result that the remit and authority of the
audit committee is more uniform and clearer than in the past. The committee’s
priority is to ensure that the nature of the relationships between the auditor
and the company around the preparation of the accounts is rigorous, objective
and not in any way compromised.
The principal tasks of the audit committee are as follows:
»» to monitor the preparation and accuracy of the accounts and satisfy itself
that the functions are adequately staffed to produce the necessary manage-
ment and statutory accounts
»» to monitor the financial controls and discipline of the company in all its
aspects and, if necessary, to interrogate the operations and those responsible
»» to maintain and evaluate the risk register, including any extant litigation. If a
risk committee exists, then knowledge of the register is shared between com-
mittees and ultimately the board
»» to set the programme for the internal audit and review its findings
»» to manage and review the periodic reports from the external auditors
»» to review the performance and work of both the internal and external auditors
»» to recommend any changes to the external auditors and oversee the retend-
ering process.

Board committees
Many jurisdictions require members of an audit committee to have an under-

standing of financial affairs (“financial literacy”). In Germany, members of the
audit committee must also have relevant sector experience. We believe that the
chairman of the committee should be a person with a formal financial qualifica-
tion and directly relevant experience, for example an auditor or a former or
current financial director. There is usually a requirement that either a majority
or all members of the audit committee be independent.
Most audit committees concern themselves with the financial risks present in
the business or which threaten it. All risks are the responsibility of the executive
to identify and mitigate and insofar as these arise from the general operations
of the company. Oversight of this process is the task of the whole board.
A measure of realism is appropriate here. There are financial, operating and

environmental risks that everyone can identify and agree upon. There are
possible existential risks, the “known unknowns”. But there are also risks
that are unanticipated, the “unknown unknowns”. Every organisation may be
confronted by the wholly unexpected. This is not a failure in itself. It will only
become a failure if the corporate response is muddled or unsure.
Risk management in such cases is after the fact. Those responsible should
ensure that procedures for dealing with the unexpected are in place, with clear
roles and responsibilities identified. The issue of crisis management is exam-
ined in section 8.1.
The frequency of audit committee meetings is in general dictated by the

publication of company results, both at interim and final stage. However there

Board committees
is a growing trend for audit committees to meet more frequently than this and
quarterly meetings are increasingly common. All committee members must be
prepared to meet when needs require.
Audit and risk committees — to combine or separate?

It is important to establish where the industrial companies, the equivalent of
responsibility lies for oversight of each a risk committee can be found in the
type of risk, but risk management will health/safety/environment/security
always be an executive responsibility — committee.
it is the job of the appropriate board
Where there are separate audit and
committee to monitor that it is being
risk committees, the boundaries of
done effectively.
responsibility between the two must be
A risk committee is often required in absolutely clear. In such cases, it may
companies where the principal risk is well be appropriate for the same person
financial, such as in the financial sector to chair both committees and for there
(particularly banking). In the case of to be some joint members.

Board committees
6.4 Remuneration committee

The remuneration committee has, at least for the present, replaced the audit
committee as the principal target for public scrutiny. It is increasingly under the
spotlight, attracting close attention from investors, politicians, media and other
stakeholders.
The remit of the remuneration committee is simple: to set remuneration

levels for executive directors and to approve the remuneration policies of the
company. However, as we have seen, no committee can operate in a vacuum,
especially not a remuneration committee.
Accordingly, a well-functioning remuneration committee will:
»» Understand its remit clearly

»» Align all aspects of remuneration policy to the achievement of the company’s
strategic goals and demonstrate how every decision about remuneration is
consistent with this policy
»» Base its decisions on individual performance evaluation and set appropriate
and defensible targets
»» Avoid rewards for failure at all costs
»» Communicate clearly and effectively about its working methods and aims,
the reward criteria, pay-out periods, etc.
»» Construct simpler packages: many arrangements are over-complex if not
impenetrable. Transparency alone is not a solution

Board committees
»» Present the CEO/senior management remuneration policy to shareholders at

the annual meeting. In some jurisdictions the policy must be put to share-
holders for a vote
»» Be clear as to the principles guiding any exercise of committee discretion.
How the remuneration committee communicates its decisions can have a

significant impact on the company. Close attention should be paid to the
reputational damage that can result from unpopular decisions about CEO and
executive remuneration.
We cannot stress too strongly the need for the committee to communicate
clearly its decisions, and the reasons for them, to all stakeholders. This
will serve to avoid many of the problems that currently beset remuneration
initiatives.
It is a welcome fact that regulators’ current initiatives in this area are concerned
with ensuring that remuneration schemes are as simple and comprehensible as
possible. Transparency is not the same as clarity.
It was once sufficient for committees to focus on the most senior executive
remuneration and to declare this as “aligned with shareholder interest”. The
bar is now set higher and the enlightened committee will promote a policy
that ensures that remuneration levels support the business strategy and other
policy objectives while reflecting the corporate culture.
Issues such as pay relativities within an organisation (whether pay is uniform

for the same role and does not vary by gender or ethnicity) and whether rates
of pay, at all levels, are defensible both to the shareholder and the wider public

Board committees
audience are now finding expression in the better remuneration policies being
published.
Notable in this debate is the focus on the CEO/average employee remuneration

multiple — currently at a record high. While this is an oversimplified descrip-
tion of what can be a complex calculation, there can be no doubt that executive
remuneration has been rising steeply for a generation or two. As attention
turns increasingly to remuneration levels it seems we are reaching a tipping
point: the challenge will be no longer “keeping up”, but managing down. These
are very real issues for today’s remuneration committee.
All this must be framed against the remuneration committee’s principal objec-
tive — to foster the growth and success of the company in the longer term.
All they do must seek to promote long-term success rather than short-term
reward.
The properly advised remuneration committee would normally be attended by

the human resources director and/or the head of remuneration. It is common
for remuneration committees to appoint remuneration advisors to keep them
abreast of best practice and investor sentiment. Two observations follow: first,
these advisors should be the committee’s own, not the company’s; second,
they should be subject to a competitive tender process with at least the same
frequency as are the auditors.
The degree to which the committee has discretion over awards has been the
subject of much debate, and committees have been criticised for resetting
targets and making individual exceptions, particularly when these exert an

Board committees
upward momentum on remuneration. We believe that remuneration packages

should be capable of going down as well as up, depending on performance.
Committees should therefore be happy to exercise discretion in the interests of
a dynamic and effective remuneration policy.
Frequency of meetings is dictated more and more by regulatory requirements.

The need to set targets and frame the report to shareholders generally requires
at least two to three meetings a year. This might increase when the corporate
remuneration policy has to be reframed. All committee members must be
prepared to meet whenever circumstances demand it.
6.5 Nomination committee

The principal role of the nomination committee is non-executive and executive
director succession, but in recent years its scope has expanded to the point
where now, in many companies, it is the repository of knowledge and guidance
on all matters relevant to corporate governance.
The nomination committee’s principal tasks are fourfold:
First, managing board composition. This will involve succession planning,

recruitment, skill-profiling and responding to current regulatory pressures. It
is the committee’s responsibility to define the ideal composition of the board
to ensure a mix of relevant expertise and experience, as well as diversity. This
responsibility includes the membership of board committees.
Second, overseeing executive director succession and ensuring that the whole
board is informed of the candidates, their strengths and weaknesses.

Board committees
Third, the nomination committee is often the forum for the evaluation of board
performance. This includes administration of the annual performance review,
consequent training initiatives, and the induction of directors, giving guidance
to the company secretary whose day-to-day responsibility this usually is.
Fourth, the committee takes general responsibility for corporate governance,

including oversight of potential conflicts of interest, the preparation of the
governance report and, of course, the resolution of any issues that arise. It is
responsible for the public reporting of the company’s governance initiatives
and policies.
Whilst the remit of the nomination committee differs from country to country,
to have too narrow a remit would be an opportunity missed. The better
nomination committees take responsibility for leading the corporate debate on
matters of governance generally.
Given this expanded remit, nomination committees should consider appoint-

ing succession advisors in just the same way that remuneration committees
can call on the advice of remuneration specialists.
Some companies are combining the work of the two people-related commit-
tees — nomination and remuneration — since their work is interconnected.
It is too early to call this a trend, but there is a close connection between the
increased scrutiny on remuneration and the people who benefit from it. Consid-
ering these two topics together might be a way forward.

Board committees
Whilst meetings were originally on a needs-only basis, sometimes once or

twice a year, the growing agenda and the committee’s involvement in govern-
ance matters generally means that two meetings each year is now a minimum.
All committee members must be prepared to meet when necessary.
6.6 Strategy committee

The board has a responsibility for approving corporate strategy and overseeing
its proper implementation. Whatever is deemed important in terms of cor-
porate strategy can be delegated to a committee. There, due to the focus and
concentration of expertise, detailed examination can take place and an effective
summary be provided to the board.
Giving oversight of strategy preparation to a committee goes some way

towards avoiding the problem that many non-executive directors express,
namely that they are insufficiently engaged in the strategy process.
The creation of a strategy committee should not exclude other best practices,
notably an annual strategy day at which all directors are present and engaged
with management.
In some jurisdictions, a strategy and investment committee focuses on work

that elsewhere is shared between the board and the audit committee. The
role is one of oversight and challenge as the investment proposals within the
strategy obviously derive from the executive.

Board committees
6.7 Other committees

Certain industries require specialised committees but, as we have stressed
above, the number of committees needs to be compatible with the size of the
board and the time available to directors.
In some sectors, health and safety issues are increasingly recognised as so

mission-critical that a dedicated committee is essential both for practical over-
sight and to stress the significance of the issue to the organisation.
Another area that is often recognised as appropriate for committee review

is the broad area of corporate social responsibility, sustainability and social
impact.
The importance of reputation to business success, in both B2B and B2C

industries, and the potential catastrophic impact of existential risk, are major
preoccupations in boardrooms. Some see a solution in the committee struc-
ture, by monitoring and considering the “unthinkable” and then to bring their
thinking to the board.
Similarly, increased business dependence on IT and the internet in all its forms,
and the threats to business integrity manifested by poor cybersecurity, can
benefit from the scrutiny of a board committee.
So, the best companies see the committee system as providing a flexible yet
focused response to issues of the day, one that permits concentrated attention
and harnesses the contribution of specific expertise among outside directors.

Board committees
Ad hoc committees of the board may be set up to deal with special events,
the most familiar being an approach to acquire the company or even a major
investment by the company.
Exceptionally, a chairman might decide to form an ad hoc committee and

invite to run it a director who is less confident of their contribution, giving this
person the chance to take ownership of the topic. This can be an effective way
of integrating such a person on to the board and developing their ability to play
a full part.

7. Managing meetings
Executive Summary
»» The chairman and the board should agree on an annual programme to
discharge formal and informal business.
»» Any director should be free to ask for items to be placed on the agenda at
any time.
»» Board discussions should be actively managed by the chairman including an
accurate oral summary before any item is considered closed.
»» The chairman’s challenge in resolving conflict is to achieve consensus with-
out sacrificing principle.
»» All board presentations should be circulated one full week in advance of a
meeting and only an executive summary presented. A balance should be
struck between retrospection and looking forward.
»» The chairman should sit with the outside directors alone at regular intervals.
»» All the recordable business of the company should happen in the boardroom
and be properly minuted.
»» Directors should be given easy and secure access to board papers via the
internet and tablet devices and have the opportunity to store earlier papers.
»» Everything must be done to correct the inevitable asymmetry of information,
knowledge and familiarity in the boardroom between outside directors and
executives.
»» The company secretary or similar should be the conduit for advice to the board.
»» Directors should be supported in taking external advice at the company’s
expense whenever they feel it appropriate.
91
Managing meetings
7.1 The board agenda

A board meeting is clearly the chairman’s meeting, but the framing of the
agenda is generally a joint effort between the chairman and the CEO. In this
way, issues relating to both the company’s operation (internal) and its govern-
ance (external) get on to the agenda.
The chairman and the board should agree an annual programme of issues to
be brought to the board. It is at this stage of framing the annual agenda that
the contribution of the directors is most useful. Subject to that, any director
should be free to ask for an item to be placed on the agenda at any time — this
right is protected in most legal systems.
The benefit of an annual programme is that it ensures all relevant operational

and strategy issues receive a regular hearing and, most importantly, that
the specific responsibilities of the outside directors are identified, exercised,
debated and recorded.
7.2 Strategy
In recent years, it has been a common complaint of board members that
the preoccupation with governance has resulted in less and less time avail-
able for the discussion of strategy. Moreover, as we have observed, the lack
of opportunity to make a meaningful contribution to the development of
strategy has long been a frustration for outside directors, particularly in those
countries where there is an expectation that the final strategy is the product
of boardroom debate. Too often, strategy has been presented fully formed,

Managing meetings
with the contribution of outside directors limited to monitoring its proper

implementation.
In a two-tier board system, the authorship of the strategy is clearly the

responsibility of the executive. The role of the supervisory board is to provide
constructive challenge and support and to monitor successful implementation
of the strategy. Indeed, in Germany the supervisory board is expressly forbidden
from involving itself in the creation of strategy. Elsewhere, directors increasingly
see themselves in an active role, not just a supervisory one, and as a result
expect to have greater involvement in framing strategy.
In the unitary board system, there is a clear expectation among non-executive

directors that they will be closely engaged in the strategic-thinking process.
This should include an understanding of the full context in which the strategic
options were framed and reasons why some options were rejected.
Executives should be focused on the operation of the business, but the outside
directors are required to have a 360-degree vision. Often it falls to outside
directors to strike the balance between short-term performance and long-term
strategic commitments, and to help articulate that balance to stakeholders.
As noted above, the first priority should be to establish where responsibility lies
for strategy and what the respective roles of executives and outside directors
are. For example, historically the role of the board has been to advise, approve
or reject but not to design strategy. Today, the board must be more engaged in
strategy development. A strategy committee is one such solution. Alternatively,

Managing meetings
strategy is increasingly an agenda item for full board discussion in the lead-up
to the strategy meeting.
An annual strategy day is essential and is now best practice. This should be
held outside the regular schedule of board meetings, but of itself this is not
enough. Strategy, in its broadest sense, is no longer a matter for a one-day
debate. The best boards seek mechanisms whereby outside directors can con-
tribute their wider perspective to the framing of a company’s strategic direction
and purpose.
Strategy is not created in a vacuum and is rarely static. Strategy must evolve
through an iterative process at board level, taking account of changing cir-
cumstances, competitive disruption and fresh commercial challenges. Specific
strategic initiatives such as an M&A transaction, a substantial investment or
product launch, however, should always be subject to a rigorous post-mortem
at the board.
7.3 Quality of debate

Good debate does not happen by accident. It requires active management
by the chairman and mutual trust between directors who must feel that their
contribution is neither taken personally nor disregarded. Equally, no one person
should seek to, or be allowed to, dominate the debate. For real discussion to
take place, all directors must be receptive to alternative points of view.
Sufficient time must be allocated to debate. Frequently, presentations by execu-

tives take too much time and repeat what is in board materials, with the result

Managing meetings
that discussion is not focused on the pressing issues. An executive summary or

list of issues can help to focus the discussion. Presentations may be important
for educating the board about complex business matters, but they should avoid
repeating what is in the board papers.
Executives want to benefit from the mix of expertise around the boardroom;
they want to be advised, not merely monitored. Non-executives want enough
opportunity to share their insight and to discharge their responsibilities.
At the close of the debate, the chairman should ensure that all aspects of the
issue have received attention and, once that is done, should summarise the
principal points made and reflect the prevailing view. The responsibility of the
board is collective; the quality of the debate and the way it is recorded are vital.
7.4 Meetings
Some boards have monthly meetings lasting three to four hours, while others
choose to have longer meetings every two months.
Simple logistics may dictate that boards with an international membership are
best served by fewer and longer board meetings.
Most companies now make full use of the freedom to conduct virtual meet-
ings — assuming the company’s governance rules allow it.
Some may say that there is no real substitute for face-to-face engagement,
but time and diary pressure means that attendance in person is not always

Managing meetings
possible. So some amount of “virtual” attendance is permissible, especially as

attendance is now monitored and disclosed in many jurisdictions.
Businesses are complex mechanisms and the board’s responsibilities can only
be properly discharged by frequent interaction with the company and its man-
agement. However, frequency is an elastic concept, stretching from two main
board meetings each half year (the minimum mandated by German law) to one
every month. The average number of scheduled board meetings for different
countries can be found in the chart below.
Of course, events may dictate that meetings become more frequent at times of
M&A, existential threat, etc. Weekly board meetings are not uncommon at such
times, with more frequent meetings often being held by specifically constituted
ad hoc committee.
Scheduled board meetings (average per year)

# # #
Belgium 8.6 Italy2 11.6 Spain 11.3
Denmark 8.6 Netherlands 11.6 Sweden 9.2
Finland 12.2 Norway3 10 Switzerland 11.1
France 9 Russia 6 UK 7.7
Germany1 6.7
1 Germany requires a minimum of four board meetings per year by law
2 Italy has no minimum number of meetings but requires the CEO to report to the board quarterly
3 Norway requires a minimum of two board meetings per year by law

Managing meetings
7.5 Meeting materials

Above all, the policy for meetings should be that there are no surprises.
All board presentations should be circulated at least one full week before the
meeting and only an executive summary presented during the meeting, in order
to maximise discussion time. A balance should be struck between retrospec-
tion and looking forward; the rear-view mirror is important, but setting the
direction of travel is more so.
Directors should be given easy and secure access to board papers via the
internet and tablet devices and have the opportunity to store earlier papers.
However, if individuals are more comfortable with traditional papers, then they
too must be accommodated. Board administration is not designed for the
convenience of the executive.
There is an increasing demand for more concise board papers, executive

summaries and presentations. This way, questions are raised to stimulate the
debate rather than offering lengthy descriptions. Too much detail in board
papers can lead to a lower quality of debate, because directors end up spending
too much time examining the detail and not enough considering the bigger
picture. A clear understanding of the distinction between the detail provided as
background and the issues to be debated during meetings is essential.
Standardisation of presentations can be helpful here. First, many agendas

indicate the time available for each discussion. This requires some discretion
and common sense from the chairman. Second, papers are often marked “for

Managing meetings
information”, “for discussion” or “for decision” or similar. This will also relate
to how the agenda is framed, with less significant items coming at the end.
Each board should develop a common framework for board papers so the lay-
out becomes familiar: for example, an executive summary, a substantive paper
(which should be as short as possible) and background material relegated to
appendices.
Even though the movement to electronic media does not appear to have
reduced the volume of material for directors to read, there is growing pressure
from many chairmen for board papers to be no more than a few pages long,
with points for discussion and decision clearly highlighted.
That said, the information available to directors should not be limited to

formal board meetings but should include a regular flow of material, including
management accounts, analysts’ reports, presentations made on behalf of the
company, media coverage and all significant announcements, both internal and
external.
7.6 Meeting locations

Most boards benefit from seeing more aspects of a company’s operations
than are encountered at head office. Many boards seek to meet from time to
time outside the corporate headquarters and in an operational location, either
domestic or overseas.
Indeed, the annual overseas visit has become a staple of many companies’
boardroom operations. Obviously, the ease and opportunity for such visits

Managing meetings
depend on the structure and international scale of the business, but the simple
point is this: nothing makes a more positive contribution to corporate morale,
or makes the board more visible and relevant, than its presence at the opera-
tional core of the businesses.
7.7 Social dynamics

Boards are social constructs and some element of social cohesion helps the
debate.
A word of caution here. It is a legitimate ambition that fellow board members

should view each other as valued colleagues; however this is different from
viewing them as personal friends.
The best board relationships are characterised by collegial professionalism.

Some chairmen believe that social events generate cohesion among board
members and create the kind of atmosphere in which debate can thrive. So it is
commonplace these days for board meetings to be preceded (or followed) by
dinners. These settings provide an opportunity for less formal discussion and
are often used to expose directors to members of the executive they might not
otherwise encounter — all part of long-term succession planning.
A mingling of personal lives is less common, but in some countries chairmen

think it helpful if there is at least one event a year when directors and their
partners are together — this is a growing trend and part of humanising the
board.

Managing meetings
7.8 The non-executive directors’ meeting

The non-executive directors’ meeting — where the chairman sits with only the
outside directors — is a growing feature of good governance. It provides an
opportunity to raise issues of concern without the executive team present.
Meetings of the board without executives present

Belgium Spain
At least once a year Not specified
Denmark Sweden
Not applicable — two-tier system Not specified
France Switzerland
At least one per annum No legal requirement; companies
sometimes prescribe one to two per
Germany
annum in their statutes
Not applicable — two-tier system
UK
Italy
Code recommends that chairman meet
At least one per annum of the independ-
with independent non-executive direc-
ent directors
tors and also that the non-executive
Netherlands directors meet without the chairman at
Recommended in the code but no least annually, a meeting usually chaired
prescribed number by the senior independent director
Norway
Recommended and common practice to
have a short meeting at the end of each
board meeting

Managing meetings
Sometimes such sessions precede the board meeting. More often they follow
it, which is more logical because the agenda often will be driven by issues
arising at the meeting. Some companies favour less frequent meetings, often in
a more relaxed setting.
While this is easy to accommodate in the two-tier structure, unitary boards

must be careful to avoid a “them and us” division between outside directors
and executives.
In our view, the opportunity for directors to have a conversation involving

exclusively the “outside” perspective is of great value.
7.9 Keep it in the boardroom

Confidentiality is vital to boardroom discussions. All directors must feel free to
speak without risk of their views or the board discussion being reported other
than through the medium of the formal minutes or some other authorised
communication.
It is often said that some of the most effective problem-solving on a board is

done outside the boardroom, in the corridors or informally elsewhere. This ebb
and flow of discussion is helpful, but it is far more important that the formal
record of the board’s deliberations — the audit trail — is visible and secure.
This is only possible if all material interactions take place in the boardroom.
All directors should be alert to this requirement. Transparency dictates
that the major discussions and decisions are subject to proper record and
minute-taking.

Managing meetings
7.10 Resolving conflict

Conflicts must be resolved before consensus can be achieved.
It is the chairman’s job to manage conflict on the board. It is our experience that
a dysfunctional board is generally a sign of a weak chairman.
A strong and effective chairman will encourage an open and honest discussion,
will tolerate disagreement but will understand that the discussion must end in
consensus.
It is interesting to note that voting on the board rarely happens in practice.
The risk all boards face is that consensus can mean taking the path of least
resistance. Perhaps the hardest challenge for the successful chairman of any
meeting is to bring issues to the surface, permit disagreement, confront the
arguments and yet achieve consensus without sacrificing principle.
The ultimate protest for the director who cannot support the decision is resigna-
tion. It is surprising how little this sanction is used (although it is possibly more
frequently threatened). In some cases, this may be because boards prefer con-
sensus to confrontation — even when they believe executives could be wrong.
Some outside directors are reluctant to surrender their position on the board,
even on a matter of principle. This is the wrong attitude. An outside director
should not assume a long, untroubled life. The freedom to walk away is essen-
tial; there is no shame in a clear disagreement openly recognised.

Managing meetings
It is telling that few of the corporate catastrophes of recent years have been
preceded by visible board turmoil. Were the boards complacent or ill-informed
about the gathering storm?
7.11 The knowledge gap

Outside directors might spend a maximum of 30 days on the business, while
executive directors are on the case 24/7 — but both sets of directors are
accountable 365 days of the year. By definition, the executives have knowledge
of, and access to, information concerning the company which the outside direc-
tors can never match.
This asymmetry of information is most keenly felt on unitary boards, where

outside directors and executives take equal responsibility for decisions based
on different levels of information and understanding. However, it is also
relevant in two-tier boards when the job of supervision will depend crucially on
the quality of information made available to the supervisory board.
To use an analogy from a court of law, the board papers are the evidence and the
meetings are the opportunity for a cross-examination of the principal witnesses.
The essential point is that the flow of paperwork to the board, and the chance
to interrogate and question in a constructive manner, is the opportunity for the
outside director to rebalance the information deficit.
This underlines the importance of a commitment on the part of the outside

director to understanding the company and how it works — not just in and
around the board meetings, but constantly.

Managing meetings
7.12 The company secretary’s contribution

The most successful boards are those that are administered well. Responsibility
for this often falls to the company secretary, general counsel or head of secre-
tariat — the title varies but the responsibilities do not.
The role of company secretary (or similar) has grown in recent years, as has the
reputation of the function. In some jurisdictions, their authority and position is
protected by law.
The board will require advice both on the legal implications of its operations and
on issues of corporate law, practice and governance.
In larger organisations these separate strands of advice are given by different

individuals. The general counsel or chief legal officer is responsible for opera-
tional legal advice, often reporting directly to the chief executive; the company
secretary is responsible for governance and compliance and often reports
directly to the chairman.
The current trend is towards this separation of roles, given that the scale and
complexity of regulatory compliance has increased so much in recent years. But
this is not an inevitable result. Single point responsibility for all legal matters
is, in our view, the better way. Company secretary expertise can be located in
individual members of a legal team, with one person responsible overall.

Managing meetings
It is best practice for companies to support directors in taking independent

advice, at the company’s expense, whenever they feel it appropriate to do so. In
some jurisdictions this right is enshrined by statute. This is a recognition that,
on occasion, the interests of individual directors and those of the company
itself might diverge.

8. When things go wrong
Executive Summary
»» The board must remain in charge and provide the lead, not the advisors.
»» Response should always be rapid and proportionate and guided by the princi-
ple of full disclosure, regardless of short-term considerations.
»» To be prepared for the assault of the unhappy shareholder, boards must be
their own fiercest critic, think the unthinkable and take the message seriously
(it is free advice).
»» Litigation risks are real. All directors must approach their task responsibly,
taking independent advice and giving adequate time and consideration to the
issues. Such an approach will discharge their responsibility.
»» Always ensure that comprehensive directors’ and officers’ (D&O) liability
insurance is available.
106
When things go wrong
8.1 Crisis management

That crises will occur is inevitable and boards should be prepared to deal with
them. However, the more successful the company, the harder it is to generate
enthusiasm for crisis planning.
The best planning is specific and related to identifiable risks, even if it turns out
that the actual crisis is unrelated to anything seen on the risk register. Advance
planning should be led by the risk committee, if one exists. If not, either the
appropriate board entity should take the lead, for example the audit committee,
or the lead should be given by the full board.
Applying the principle of making your friends before you need them, the best
advice is to build good political and regulatory connections in your most
important markets. Take care however that political links are non-partisan and
encompass all political interests likely to be relevant not just now but in the
future.
Response should be rapid and proportionate. The speed and quality of response
in the first few hours/days of a crisis will have a lasting impact.The board must
lead the agenda; don’t leave it to advisors, government or the press. First-class
advisors are important and boards should never be embarrassed about taking
and paying for the best advice. However, having advisors does not relieve the
board of responsibility for its decisions. The board should remain in charge at all
times.

Behaviour in a crisis
»» First establish whether this is a crisis »» Which of your managers have the
of character or competence. That will temperament and skill to deal with
dictate what you say and how you specific crises? These will not neces-
say it sarily be the man or woman at the top
»» Your response should be transparent »» Never declare victory; it is for opinion
and truthful. If you don’t yet know the outside the company to decide
truth, say so and don’t speculate whether the crisis is over
»» Take action as soon as possible; any »» Remember that a company can
delay will be seen in a negative light be made great through the way it
»» First reactions will have long-term responds to a crisis.
consequences; listen to external
voices but make your own choices
8.2 Shareholder activism

Shareholder activism can be divided into two broad categories, the active inves-
tor and the shareholder activist.
Thus, at one end of the spectrum are institutional shareholders, often with a
long-term holding strategy. Their interventions will most often be challenging
yet supportive. Nevertheless, there have been occasions when institutional
investors have been responsible for unseating incumbent CEOs, most often in
the context of pressing for a more rapid implementation of existing strategy.
The reason for this development is simply that with a market increasingly
comprising indexed funds, these funds do not have the opportunity to sell the

shares — they must remain holders and therefore require a level of engage-
ment and influence on management to protect their interests.
At the other end of the spectrum are the so-called “activist investors” who take
opportunistic positions in existing companies, having identified unrealised
value resulting from a poor strategy or suboptimal management. Again, these
investors have appeared because they are chasing yield in a low interest rate
environment — one that has prevailed for at least a decade.
Boards should assume that most shareholders of any size occupy a position
somewhere on this spectrum. The issues that attract the attention of activists
may be a combination of unambitious strategy, an under-geared balance sheet
and long-tenured management.
The board should therefore bear in mind the following advice:
»» Be your own fiercest critic. Anticipate the case that might be made against
you, keep all your options constantly under review and prepare your response.
»» Think the unthinkable. How does the incumbent contemplate the kind of dis-
ruption that the objective, dispassionate outsider can envisage as necessary?
»» The board needs to disengage from its emotional investment in the status
quo and the current strategy in order to match the objectivity of the analyti-
cally driven activist.
»» When approached by an investor-turned-activist, take what they say seriously.
They will have done their homework. It is free advice.

»» Increasingly, the focus of attention will be the board itself — its leadership,
composition and effectiveness.
»» Be open-minded when confronted with a demand for board representation.
Each request should be considered on its merits. The board’s response should
be framed by the investor’s attitude to the long-term health of the business.
8.3 The human dimension

Directors must be prepared to experience some tension and to manage the way
in which they question the executives and interact with fellow directors. Things
cannot always go well, for example, when their personal relationship with
colleagues and/or the chairman has fractured or their role and the way they
discharge it is in question.
In this instance, the director should consider the true nature of the problem.
Is it a matter of personal relationships and is the situation recoverable? More
importantly, is the breakdown so severe that the director’s contribution is now
ineffectual or negative?
If the director finds him or herself out of step with the board’s ethos and
modus operandi, then an honest conversation with the chairman or senior
independent director is essential. Preserving the collaborative spirit of the
board is important, but the value of the grain of sand in the oyster should not
be lost.

8.4 Liability
Directors’ liability used to be a significant consideration for those proposing to
join a board. When meetings were infrequent and the asymmetry of informa-
tion was acute, this was a legitimate worry.
In these days of more frequent meetings, enhanced professionalism at board

level and greater levels of commitment and involvement, these worries have
receded somewhat. Add to this the increased due diligence undertaken by direc-
tors before joining a board and one might assume the issue has gone away.
On the contrary: the increasing availability of legal remedy to shareholders

through class or derivative actions, allied to a high level of public scrutiny and
expectation, means that litigation risks are real.
8.5 Legal consequences

In all legal systems, directors are expected to execute their duties in good faith
and with due diligence, at least to a standard expected of a person with their
particular experience. It is sometimes said that if directors meet these expecta-
tions, then they need not worry about legal liability. In other words, directors
are allowed to be wrong, but not reckless or negligent. Provided their opinions
are properly thought through, honestly held and expressed, then the director’s
duty is normally considered to have been discharged.
This does not prevent a director or a board facing legal action from sharehold-
ers and others seeking to prove negligence. Legal actions of this kind, often
originating with investors hoping to replicate a US-style of jurisprudence, have

recently been made easier by developments at both European and national

levels.
Potential directors should be alert to the risks, but not alarmed. Approaching
the director’s task responsibly — by devoting adequate time and giving all
issues full attention — is the best defence.
8.6 D&O insurance

Proper behaviour will ultimately defeat a legal assault, but what happens in the
meantime? Defending actions brought against directors will be an expensive
and troubling business. The provision of directors’ and officers’ (D&O) liability
insurance, paid for by the company, is of real comfort here — and directors
should always insist on it.
This will ensure, at a minimum, the payment of all legal expenses and fees
incurred in defending an action. The responsible director should have little to
fear if a good D&O policy is in place.

9. Measuring performance
Executive Summary
»» Annual board assessment is essential; however constant self-evaluation is the
best practice.
»» Internal assessments can never be sufficient — regular independent and
objective evaluation of behaviour and effectiveness are vital: at least every
third year and following significant change.
»» External evaluation should be conducted by professionals with a knowledge of
best practice and the appropriate technical skills.
»» Individual evaluation of a director’s performance is desirable.
»» The performance of the board should be the subject of a report to
shareholders.
»» Disproportionate rewards for outside directors will compromise their
independence.
»» Outside directors’ fees are best paid in salary, not shares.
113
Measuring performance
9.1 Measuring board effectiveness

Public expectation of board performance is increasing and boards must be
ready to demonstrate that they are both fit for purpose and self-aware.
Just as directors are required to be more professional in the performance of

their duties, so the monitoring and evaluation of that performance sets a good
example to the organisation as a whole. It reinforces a culture of self-reflection
and openness to constructive criticism.
How effectively the board carries out its duties should therefore concern every
board member, not just the chairman.
An annual board assessment plays a critical role in ensuring that any problems
in how the board functions are brought to light and addressed in a discreet and
timely manner. Board assessments frequently result in improved processes,
more accountability and transparent communication, enhanced trust and bet-
ter decision-making.
Clearly, multiple factors contribute to board effectiveness, from the chairman’s

leadership and board composition to the quality of the information provided
to directors and the nature of debate. The CEO’s attitude and receptiveness is
also relevant.
These annual evaluations are frequently self-assessments, often conducted by

questionnaire under the direction of the deputy chairman, senior independent
director, or often the company secretary. Frequently, the results are referred to
as part of the governance report published by the company.

A board should discuss how it will measure its own effectiveness and what it
needs to address, for example:
»» What are the key issues for the company? Does the board address the needs
of the business, rather than simply governance or regulatory matters?
»» Is the board ensuring that sustainable value is created and competitiveness
assured?
»» To what extent does the board adhere to or surpass local governance
recommendations?
»» Is the board working well as a group? Is each individual board member fully
effective?
»» Is there trust and collegiality among directors and between the board and the
management team?
»» Are the board committees effective and do they keep the full board properly
informed about their work?
Boards should not expect too much of an internally managed board assessment
exercise. Self-criticism is likely to be muted and any changes recommended will
be modest — a weakness of self-regulation. Those who mark their own home-
work are likely to award high grades.

The ingredients of a successful board assessment

In our experience, clients derive the highest value from an external board assess-
ment when the approach pursues the following key principles:
»» The assessment is specifically tailored quantitative assessment of the areas
to the client’s current business that determine board effectiveness
context »» The board’s performance is bench-
»» The scope is determined on the basis marked against equivalent companies
of a comprehensive briefing by the »» The assessments are conducted
chairman and agreed stakeholders by consultants of seniority and
»» Board members are interviewed indi- experience.
vidually on a confidential basis and
asked both for their qualitative and
9.2 External facilitation

To provide greater rigour in the area of board assessment, we recommend an
externally facilitated exercise — at least once every three years. This appears as
a governance code recommendation in some jurisdictions. In some markets
externally facilitated evaluation happens annually.
An external assessment conducted by an experienced and neutral facilitator

provides a far richer and more nuanced picture of the board’s functioning and
effectiveness. Most importantly, it is more likely to provide a true and honest one.
The identification of substantive issues and the ability to benchmark the board
against best practices elsewhere are the two principal reasons why an external
evaluation can provide the information that shareholders and other stakehold-
ers seek.

A well-conducted external assessment of the board will have a number of objec-

tives going far beyond simply reporting on how things are.
A key ambition will be to enhance the board’s relationship with management

and to ensure that communication among directors and with the executive
is more transparent. An ambition will be to improve the board’s processes of
working together with an aim of building trust among directors, thus allowing
for better decision-making, particularly during periods of crisis and transition.
There is real benefit in board assessments being done on a consistent and

regular basis. It helps set the right tone at the top and many high-performing
boards consider an externally facilitated annual board assessment to be best
practice, not least because it enhances the recruitment process.
An effective performance evaluation requires expertise and professionalism

on the part of the evaluator. Given the growing legislative requirements for
external evaluation, an increasing number of individuals and organisations are
offering their services. However, for the best results boards should choose as
an external facilitator a firm that has the resources and experience to do the
job properly. Each evaluation should be conducted by a specialist in the field of
board and corporate behaviour that offers these services across many jurisdic-
tions, bringing experience and best practice from other relevant markets.

The case for the leadership consultancy as board assessment provider

There are at least three reasons why The experience and depth of boardroom
such a high-quality consultancy should expertise available from a leadership
be appointed: consulting firm is precisely the skill set
required to perform a proper board
»» It will have a unique perspective
evaluation.
on boardroom composition and
has the data to provide meaningful Could such firms be conflicted when
benchmarks seeking to provide a board evaluation
»» Boards are open increasingly to learn- service, at least to their existing clients?
ing from governance practices in other The answer is emphatically not. Such
jurisdictions, and a global consultancy potential conflicts are commonplace in
can provide recommendations based professional services and successfully
on international best practice dealt with by erecting clearly understood
»» It has access to behavioural expertise information barriers. Organisational
and professional analysis of what separation ensures an absence of
works well and makes an effective conflict.
board.

9.3 Individual evaluation

Just as executives are subject to annual performance reviews, so the individual
performance of outside directors has become the subject of regular evaluation
in some countries.
These often take the form of peer reviews. As part of the annual board assess-
ment, opportunity is given to directors to comment, indirectly, on the contribu-
tion of their colleagues.
This is an emerging practice, but as the role of the outside director comes to
be seen as a distinct function (and sometimes a career choice) so their perfor-
mance and contribution will be judged on an annual basis, just like that of any
other professional or executive within the organisation.
However, the annual review should be regarded only as a summary of what is in

fact a constant evaluation of the board’s performance. A good chairman will be
alert to how the board and individual directors are performing and should be
quick to intervene when needed.
In this respect, we urge all boards to be self-aware all of the time — rather than
only turning to this issue once a year.
If an individual is failing to contribute in the way that is expected of an

independent director, it is the chairman’s responsibility to advise on how the
individual’s behaviour and contribution can be changed, just as any other
executive would be managed. Persistent under-performance will inevitably lead
to departure.

The chairman’s own performance should not be overlooked. It is best included

as part of the annual review and is normally led by the senior independent
director or deputy chairman.
9.4 Reporting to shareholders

The performance of the whole board should be the subject of a report to share-
holders, as a matter of principle. The report should detail what evaluation has
been made and, where required, what remedial and/or developmental steps the
board will be taking.
This obligation is best met by the nomination committee, and the resulting
analysis will either be included in the nomination committee’s report to share-
holders or in a more general section on corporate governance — both of which
appear in the annual report.
9.5 Non-executive remuneration

The increasing demands on directors in terms of time commitment and
responsibility has led to a gradual, though small, increase in the level of fees
paid to outside directors. By contrast, there has been a marked increase in the
remuneration of executive directors.
The growing scrutiny and scepticism surrounding levels of executive reward

has already spilt over to board remuneration more broadly.

It is important that levels of reward for outside directors should be reasonable

and defensible. Fees should be commensurate with the time directors are
required to devote and the scale and impact of the business. However, the
overriding requirement is that outside directors should remain independent of
the organisation on whose board they serve.
A few philosophical questions arise when thinking about non-executive director

remuneration, for example:
»» Can an outside director who relies exclusively upon director’s fees from a sin-
gle organisation ever be construed as totally independent?
»» If an outside director is rewarded on a similar basis and on the same metrics
as the executive, how can their judgement ever be objective?
Board director remuneration is a matter for each company to decide. It should

be a matter of common sense to determine when remuneration levels are too
high relative to the salaries within the organisation and to remuneration in
society at large.
Indeed, any organisation with an opaque governance structure but with high
rewards on offer should be avoided by the responsible outside director.
The issue of rewarding non-executive directors with shares provokes strong

opinion. Some investment institutions oppose this practice on the grounds
that it may lead to the directors adopting short-term views. Others object
on the grounds that share price performance may not be linked to corporate
performance. On the other hand, proponents claim they are only aligning their
own rewards with those of the shareholders themselves.

The principal risk we identify is that this very alignment contains the seeds of
its own destruction. If the aim of the board is to promote the long-term success
of the company, part of the role of the outside director is to ensure that the
executives do not take short-term measures to inflate the share price and their
own rewards.
If the directors share in those rewards, they are compromised in performing

one of their central duties. For this reason we would recommend that boards
should consider carefully whether it is appropriate for outside directors to be
rewarded in shares.
An acceptable measure of alignment is best achieved by requiring each director

to purchase shares to a value of at least their annual fee. Some companies
choose to disclose the shareholdings of all directors, executive and non-
executive, including the growth in value of those shares since purchase.
292
Non-executive director fees (€ 000)
257
Retainer
Total fee 201
130 127 120
111 90
79 82 77 107
67 69 88
53
44 68
51 53 48 53
32 33 31
Belgium Denmark Finland France Germany Italy N’lands Norway Spain Sweden Sw’land UK US

10. Beyond the boardroom
Executive Summary
»» Trust in business, for now and in the foreseeable future, will have to be con-
sistently and continuously earned and re-earned.
»» Boards should acknowledge the social contract whereby their licence to pur-
sue profit is conditional upon their not causing social harm.
»» Boards should understand what the current culture is, how well it is aligned
with strategy, how far it falls short of an ideal and how it features in succes-
sion plans and executive evaluation.
»» Companies should offer a coherent and full explanation of their governance
approach, their purpose and their relationship with society and approach to
sustainability.
123
Beyond the boardroom
10.1 Corporate trust

One could point to numerous recent cases of corporate malfeasance that have
fuelled cynicism and mistrust of business in the public mind.
This undermining of the pillars of business and the institutions that sustain
them, both political and regulatory, is a challenge to boards of directors.
If confidence and belief in business is currently being withheld it will only be

extended again in return for a clear demonstration that business is worthy
of public confidence and belief. Trust in business has to be consistently and
continuously earned and re-earned.
Underlying this failure of trust are concerns about the consequences of globali-
sation, executive remuneration, the commitment to sustainability and to the
societies in which companies operate, and a clamour for greater transparency.
So, on the one hand society questions the long-term commitment of corpora-
tions; on the other, boards have to satisfy the short-term demands of the
markets to which they are answerable.
This is the challenging context in which boards must operate.
10.2 Social impact

Companies cannot be judged in isolation — they exist only as part of a social
framework and they will survive only for as long as they retain the confidence
and trust of the societies in which they operate.

Companies will thrive if they acknowledge a social contract whereby their

licence to pursue profit is conditional upon their not causing societal harm.
Consequently, the informed board of directors will take responsibility for, and
have oversight of, the company’s social impact.
In this it will have to be conscious of the views of government, non-govern-

mental organisations and other stakeholders well beyond the traditional list of
boardroom priorities.
Boards of directors are today expected to understand the consequences of

corporate action and to be able to articulate the benefits of corporate activity
outside those accruing to shareholders. We are now in the world of the social
audit, which is permanent and ongoing.
The proper discharge of corporate responsibilities should be pursued in an

ethical and socially aware manner whilst ensuring a profitable return for inves-
tors and equitable treatment of all stakeholders. It is the kind of challenge a
good board will relish.
10.3 Overseeing company culture

Boards can help to foster long-term shareholder value by deepening their
understanding of their company’s culture, placing it on the board agenda and
ensuring management is forging a culture aligned with the business strategy.
A company’s culture can make or break even the most insightful strategy or the
most experienced executives. Effective cultural patterns can produce innovation,
growth, market leadership, ethical behaviour and customer satisfaction. On

the other hand, a damaged culture can impede strategic outcomes, erode busi-
ness performance, diminish customer satisfaction and loyalty, and discourage
employee engagement.
We have found the following questions to be powerful in helping directors

better understand culture and ensure the company is on the right path.
What is the current culture of the organisation?

Culture is the culmination of the shared values, beliefs and assumptions that
shape the behaviour of the organisation. These “unwritten rules” guide the
thousands of decisions employees throughout the company make every day.
Boards should ask: What are those unwritten rules that everyone just knows but
can’t necessarily articulate clearly?
How well-aligned is our corporate culture with our

strategy?
A high-performing organisation with a strong alignment between culture and
strategy produces better financial growth and employee engagement. Boards
should ask: What organisational behaviours are required to achieve our
strategy?
What is the difference between our current and ideal

corporate culture?
Effective leaders can describe both the culture as it currently exists and the
culture to which the organisation aspires. This ability is sometimes called
“cultural fluency,” and it is a critical skill for leading on culture. Boards should
ask: What cultural impediments do we face and how will we overcome them?

How do we consider culture in our succession plans?

Culture evolves over time. Boards will want to understand how talent manage-
ment systems, employee evaluations and executive recruiting are likely to
shape the future culture of the company. Directors should ask, to what extent
do individuals’ leadership styles contribute to the culture we strive to achieve?
Where on the board agenda should we put questions about

culture?
Given their current demands, boards are unlikely to tackle questions about
company culture unless the issue is explicitly part of the agenda. So where on
the annual board calendar should culture fall?
By placing culture on the board agenda and asking the right questions, boards
can help to ensure that culture supports business strategy, while preserving the
boundary between governance and management.
10.4 Defining the company’s purpose

Boards would be well advised to tackle this issue before regulators create a
framework for them to do so.
Recent governance debate in Europe has raised questions both as to the level
and scope of reporting of general activity and explanations of specific govern-
ance compliance.
In our experience, the market is increasingly looking for a statement from

the chairman and the board about how the company is being run and what

its long-term ambitions are. Some regulatory regimes require that reports to
shareholders and others should contain this overview as part of the board and
management commentaries. This seems to be a good trend: it demonstrates
that the board has thought about the issue of the company’s significance to
society as a whole.
Just as deeper and better explanation of a company’s general purpose is now

required, so too is a closer explanation of adherence to corporate governance
precepts and best practice.
Explanations should be specific to the company’s position and not generic or

off the shelf.
The European Commission’s original intention of making corporate govern-

ance statements “regulated information” is in abeyance. There is still a pos-
sibility that regulators, rather than shareholders, might eventually have the task
of deciding whether an explanation for non-compliance is sufficiently complete.
In our experience, companies that offer a coherent and full explanation of their
corporate governance approach are more likely to find their explanation is
readily accepted when they do choose to deviate from a particular provision.

boardroom best practice
Conclusion
As we said at the start of this document, few endeavours are more fulfilling
than serving as a director on a board alongside committed and stimulating
colleagues. The responsibilities of directors will only increase, along with the
significance of their role. There is no better place to be than at the centre of
events and we trust that this overview of best practice in the boardroom will help
the reader make a telling contribution to the success of his or her enterprise.
If you have questions about any of the recommendations in this publication or

would like to discuss any of the ideas expressed here, please contact a member
of our European Board Practice who would be delighted to hear from you.
Spencer Stuart offers a range of services relevant to the issues raised

in this publication, including:
Board Advisory: We advise board assessments for clients around the

and committee chairmen on gov- world that result in more effective,
ernance best practices and counsel higher-performing boards.
them on succession planning,
Director Recruitment: With our un-
director orientation and
paralleled access to and knowledge
ongoing education.
of the candidate pool, we help place
Board Assessment: Using a outstanding directors who add
methodology refined over many value to the boards they join.
years, we customise board
129 129
Appendices
Appendices
A. Further reading
Spencer Stuart has been publishing annual Board Indexes around the world for
over 30 years. Spencer Stuart Board Indexes provide a unique analysis of the
latest data and trends in composition, committees and director remuneration
among the largest boards in each of the following countries:
Belgium Italy South Africa

Brazil Japan Spain
Canada Netherlands Switzerland
France Nordics (Denmark, Turkey
Germany Finland, Norway, Sweden) United Kingdom
Hong Kong Russia United States
India Singapore
In addition, we regularly publish articles and papers on a wide range of topics

relating to boards and board governance. Here is a selection:
»» Investors and the board

»» The five most common new director questions: Advice for first-time board
directors on getting a strong start
»» Performance in the spotlight: Assessment and board effectiveness
»» The four biggest hidden CEO succession risks and how to avoid them

Appendices
»» Questions boards should be asking about corporate culture

»» Technology in the boardroom: Five things directors should be thinking about
»» Cybersecurity: The board’s role
»» Governance in focus: How boards can respond to heightened investor
expectations
»» Global Board of Directors Survey
»» Becoming a non-executive director
More board-related articles, videos and audiocasts are available on

www.spencerstuart.com.
B. Directors’ Forum
First launched in 1995, the Spencer Stuart Directors’ Forum is a unique educa-
tional programme that uses role play to provide the opportunity for potential and
actual directors to develop their boardroom skills and better understand board
process.
This is done by working alongside highly experienced leading figures from top
corporate boards as a prompt to learning and exchanging best practice.
The programme revolves around 18 months in the life of a mythical company.

Over the course of two days, a number of board and board committee meet-
ings are staged and events unfold — some scripted, some not, but all informed
by real life. The faculty are joined by the participants who play the role of non-
executive directors to tackle the issues the company faces.

Appendices
The Directors’ Forum faculty consists of the chairman, chief executive, finance
director, chairman of the audit committee, chairman of the remuneration
committee and chief legal officer. These roles are all played by leading business
personalities, all of whom hold these exact positions in major publicly quoted
companies.
Participants, who are carefully selected, typically fall into one of the following
categories:
»» Experienced executive directors who are seeking non-executive director posi-

tions or who simply want to broaden their knowledge of boardroom
behaviour
»» Recently appointed directors, both executive and non-executive
»» Directors of subsidiary boards of major companies seeking to gain a better
understanding of the issues dealt with by a public company board, perhaps
prior to their appointment to the main board
»» Senior figures from a variety of backgrounds, for example the public sector,
wishing to join a public company board.
The programme is supported by a group of key advisors, all leading practition-

ers in the fields of banking, law, accountancy, media relations, etc., who both
advise the company as role players and share their experience.

Appendices
Spencer Stuart runs Directors’ Forum programmes annually in both the UK and
Germany. We also host an annual Aufsichtsratsforum in Germany, where senior
board directors, future directors and top executives gather to discuss govern-
ance challenges and share best practices.
All participants in the Directors’ Forum join an alumni group, providing a

ready-made network of peers who exchange knowledge at a series of learning
and discussion events.
If you are interested in attending a future Directors’ Forum event, or nominating

a participant, please contact your local Spencer Stuart office.
C. Spencer Stuart offices worldwide

For a complete list of Spencer Stuart offices please visit
www.spencerstuart.com/global-locations
D. Spencer Stuart consultant contacts

To find a Spencer Stuart consultant specialising in board topics near you,
please visit our website.

Appendices
E. Principal governance codes in Europe

Austria Italy
Austrian Code of Corporate Governance (2015) Corporate Governance Code (2015)
Belgium Netherlands
The Belgian Code on Corporate Governance (2009, to Dutch Corporate Governance Code (2016)
be reviewed in 2017)
Norway
Denmark The Norwegian Code of Practice for Corporate
Recommendations on Corporate Governance (2014) Governance (2014)
Finland Poland
Finnish Corporate Governance Code 2015 (2015) Best Practice for GPW Listed Companies (2016)
France Portugal
AFEP-MEDEF Corporate governance code of listed CMVM Corporate Governance Code (2013)
corporations (2015)
Spain
Germany Good Governance Code of Listed Companies (2015)
Deutscher Corporate Governance Kodex (2015)
Sweden
Greece The Swedish Corporate Governance Code (2015)
Hellenic Corporate Governance Code For Listed
Switzerland
Companies (2013)
Swiss Code of Best Practice for Corporate Governance
Iceland (2014)
Guidelines on Corporate Governance (2015)
UK
Ireland UK Corporate Governance Code (2016)
The Irish Corporate Governance Annex (addition to
UK Corporate Governance Code) (2010)
This is not an exhaustive list, but seeks to identify the principal code of
corporate governance in each country. In addition, domestic law imposes
obligations, listing rules of stock exchanges are relevant to many companies
and institutional investors and their respective associations also issue their
own guidelines and best practice. Coupled with national regulators and the
European Commission’s initiatives in this area, the field is crowded.

Appendices
About Spencer Stuart’s Board Practice
At Spencer Stuart, we know how much leadership matters. We are trusted by

organisations around the world to help them make the senior-level leadership
decisions that have a lasting impact on their enterprises. Through our executive
search, board and leadership advisory services, we help build and enhance
high-performing teams for select clients, ranging from major multinationals to
emerging companies to nonprofit institutions.
Privately held since 1956, we focus on delivering knowledge, insight and results
though the collaborative efforts of a team of experts — now spanning 56 of-
fices, 30 countries and more than 50 practice specialties. Boards and leaders
consistently turn to Spencer Stuart to help address their evolving leadership
needs in areas such as senior-level executive search, board recruitment, board
effectiveness, succession planning, in-depth senior management assessment
and many other facets of organisational effectiveness.
We have extensive experience conducting board assessments for a wide range

of leading organisations throughout EMEA. Our consultants have deep knowl-
edge of corporate governance laws, regulations and codes, as well as under-
standing the practices and behaviours that lead to true board effectiveness.
For more information on Spencer Stuart, visit www.spencerstuart.com

About Spencer Stuart’s Board Practice
At Spencer Stuart, we know how much leadership matters. We are

trusted by organisations around the world to help them make the
senior-level leadership decisions that have a lasting impact on their
enterprises. Through our executive search, board and leadership
advisory services, we help build and enhance high-performing teams
for select clients, ranging from major multinationals to emerging
companies to nonprofit institutions.
Privately held since 1956, we focus on delivering knowledge, insight

and results though the collaborative efforts of a team of experts —
now spanning 56 offices, 30 countries and more than 50 practice
specialties. Boards and leaders consistently turn to Spencer Stuart
to help address their evolving leadership needs in areas such as
senior-level executive search, board recruitment, board effectiveness,
succession planning, in-depth senior management assessment and
many other facets of organisational effectiveness.
We have extensive experience conducting board assessments for a

wide range of leading organisations throughout EMEA. Our consult-
ants have deep knowledge of corporate governance laws, regulations
and codes, as well as understanding the practices and behaviours
that lead to true board effectiveness.
For more information on Spencer Stuart, visit www.spencerstuart.com

Social Media @ Spencer Stuart
Stay up to date on the trends and topics that
are relevant to your business and career.
@Spencer Stuart
© 2017 Spencer Stuart. All rights reserved. For information

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contact: permissions@spencerstuart.com.

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Boardroom

1.2 Responsibilities 10 1.5 Regulation 16

1.3 The long term 13 1.6 Structures 17

2.2 Board size 22 2.8 Number of directorships 37

2.3 Independence 24 2.9 Skills and attributes 38

2.4 Term 27 2.10 Fit 43

2.5 Diversity 30 2.11 Board culture 44

2.6 Diversity at the top of the business 35

3. Induction and education 45

3.2 Mentoring 47 3.5 Outside directorships as a career 50

3.3 Role assignments 47

4.2 The chairman as CEO 56 4.4 The relationship between the

boardroom best practice 2

5.4 Chairman succession 67 5.8 Executive assessment 76

6.2 Reporting back 79 6.6 Strategy committee 88

6.3 Audit committee 80 6.7 Other committees 89

6.4 Remuneration committee 83

7.2 Strategy 92 7.8 The non-executive directors’ meeting 100

7.3 Quality of debate 94 7.9 Keep it in the boardroom 101

7.4 Meetings 95 7.10 Resolving conflict 102

7.5 Meeting materials 97 7.11 The knowledge gap 103

7.6 Meeting locations 98 7.12 The company secretary’s contribution 104

8. When things go wrong 106

8.2 Shareholder activism 108 8.5 Legal consequences 111

8.3 The human dimension 110 8.6 D&O insurance 112

boardroom best practice 3

9.2 External facilitation 116 9.5 Non-executive remuneration 120

9.3 Individual evaluation 119

10. Beyond the boardroom 123

B. Directors’ Forum 131 E. Principal governance codes in Europe 134

C. Spencer Stuart offices worldwide 133

About Spencer Stuart’s Board Practice 136

Boards Around the World

boardroom best practice 4

We seek to provide a framework through which best practice can be identified

1 Hereafter the term chairman is used to include any gender.

boardroom best practice 5

how changing business requirements and thinking about governance affect

The nature of board debate and decision-making, as well as the management

The level of engagement expected of directors is increasing and we believe this

boardroom best practice 6

What good governance looks like

What constitutes good corporate governance and proper board behaviour is

However, it is not the job of codes or regulations to provide a straitjacket that

So, whilst there is no universally applicable definition of what makes for an

boardroom best practice 7

»» Trusting and open working environment

What follows is an exploration of the conditions, practices and behaviours that

boardroom best practice 8

As a minimum, that purpose is to accomplish the formal objectives set out in

boardroom best practice 10

oversight of the executive through ongoing active questioning, constructive

boardroom best practice 11

boardroom best practice 12

1.3 The long term

A long-term vision for the business is a necessary precursor to the develop-

Is the board focused on the long term?

boardroom best practice 13

If long-term considerations are going to prevail over short-term interests, then