Guidance on Board Effectiveness

The 2018 Guidance on Board Effectiveness was released by the Financial Reporting Council (FRC) to accompany the UK Corporate Governance Code ("the Code") and has been structured to reflect the Code. It includes guidance on areas such as culture, relations with the workforce and wider shareholders and diversity, alongside sections on the workings of board committees.

In May 2023, the FRC launched a con­sulta­tion on changes to the Code, with key changes reflecting elements of the Government’s corporate reform package. The FRC has stated that the revised Code is expected to apply for periods commencing on or after 1 January 2025. The Guidance on Board Effectiveness will be updated so that it can be aligned with the revised Code and Audit Committees and the External Audit: Minimum Standard.

The Guidance includes questions for boards to ask themselves or, in some cases, to ask management, about effectiveness in key areas.

Board leadership and company purpose

This section covers the nature of the effective board, its focus on generating and preserving value for shareholders for the long-term whilst taking account of the interests of the workforce and the impact on other stakeholders (Section 172), its focus on values, behaviours and culture, the importance of diversity and avoiding “group think”, and achieving high-quality decision making.

It covers relations with shareholders, with the workforce and with wider stakeholders, including examples of workforce engagement activities that some companies use to achieve meaningful, regular two-way dialogue.

Division of responsibilities

This section focuses on clarifying and delineating the roles of board members including the chair, senior independent director, executive and non-executive directors, and board support functions, such as the company secretary/secretariat.

Composition, succession and evaluation

This section covers the role of the nomination committee and the focus on values, behaviours and the balance of skills, experience, knowledge and diversity on the board.

It also discusses methods of improving diversity and inspiring diversity throughout the workforce through mentoring and sponsorship schemes and positive action. The section on succession proposes that boards should discuss tenure at the time of appointment to help inform and manage the long-term succession strategy and again encourages looking at succession as an opportunity to motivate employees throughout the organisation.

On board evaluation, there is a call for boards to obtain input from the workforce and other stakeholders on the board’s performance.

Audit, risk and internal control

This short section covers the role of the audit committee and reiterates some key points that are also in the Guidance on Audit Committees. It also highlights the FRC’s focus on viability statements.

Remuneration

This section covers the role of the remuneration committee. Boards can choose to delegate responsibility for overseeing wider workforce remuneration, incentives and workforce policies to the remuneration committee, or, where appropriate, another committee with relevant responsibilities.

It calls for an integrated approach that joins up consideration of wider workforce pay and policies with the consideration of executive remuneration, and proposes that the remuneration committee should engage with the workforce to explain how executive remuneration aligns with wider company pay policy and promotes long term value generation.

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