CORPORATE GOVERNANCE
Lesson n. 8
The Board and its functions
a.y. 2015-2016 – 1st semester
Francesca Buzzichelli
f.buzzichelli@lumsa.it
Functions of the Board
Contents
1. BoD tasks:
• Strategy formulation
• Policymaking
• Executive supervision
• Accountability
2. BoD’s perfomance vs conformance
3. BoD committee: functions and authority
4. Interplay between BoD and management
5. Corporate transparency
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
What the BoD does
Every BoD has a governance responsibility to ensure that its
corporate strategy, risk assessment and ethical profile are in
place and appropriate
Strategy formulation
Policy-making
Executive supervision
Accountability
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
WHO
WHAT
HOW
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
What is strategy formulation?
It is a process of generating and reviewing alternative long-term directions for the
company, that lead towards the achievement of its purpose
(and core values and risk profile)
Many companies include their purpose in a MISSION STATEMENT:
a concrete statement proclaiming what and how the company is trying to achieve
The mission statement to represent an idea, a vision of the company to be
followed for strategic decisions, to inspire employees, to inform customers and
stakeholders
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
Who is responsible for formulating strategy?
Responsibility is in the hands of the Board.
However a distinction could be relevant according to company’s size:
Small companies
Big companies
The board is much
involved into strategy
formulation due to the
twofold role of directors
The board leaves strategy
to be driven by top
management
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
How is strategy formulated?
 Formal approach: the creation of a long-range plan, which extends the
annual budgeting process over a two-three years horizon
 More deep approach: SWOT analysis to provide experience for those
involved and valuable information to the board
but
Francesca Buzzichelli
It focuses on existing business and it could fail to
identify what is driving change in the market
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
ELICOPTER VISION
the challenge is to determine the
appropriate level at which to view
the territory
DIRECTORS NEED TO BE AWARE AND
CONVERSANT
WITH
INTERNAL
SITUATION
BUT
SHOULD
UNDERSTAND
THE
EXTERNAL
SITUATION AS WELL
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Strategy formulation
ELICOPTER VISION
the challenge is to determine the
Despite its relevance,
manylevel at which to view
appropriate
the territory
boards do not devote
enough
time and attention to strategy
formulation (even after
DIRECTORS NEED TO BE AWARE AND
financial crisis)
CONVERSANT
WITH
INTERNAL
SITUATION
BUT
UNDERSTAND
THE
SITUATION AS WELL
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SHOULD
EXTERNAL
CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Policy-making
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Policy-making
Strategy should be translated into
POLICIES, PROCEDURES, PLANS AND PROJECTS
Policies contain rules, systems and procedures needed by the board to guide
and contrain executive managers
SOME POLICIES CAN BE DELEGATED TO TOP MANAGEMENT
(as policies on customers and marketing, pricing, technology, innovation and
research, risk assessment, ethics etc..)
SOME OTHERS NO!!!
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POLICY ON RESERVED POWERS
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Policy-making
Strategy should be translated into
POLICIES, PROCEDURES, PLANS AND PROJECTS
BoD has
a procedures
duty to ensure
Policies contain rules, systems
and
needed by the board to guide
thatcontrain
appropriate
and
executivepolicies
managers
exist, their effectiveness and
SOME POLICIES CAN BE DELEGATED
TOP MANAGEMENT
regularyTO
reviewed
(as policies on customers and marketing, pricing, technology, innovation and
research, risk assessment, ethics etc..)
SOME OTHERS NO!!!
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POLICY ON RESERVED POWERS
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Policy-making
One of the main important policy is the
RISK MANAGEMENT POLICY
exposure to
risk
After financial crisis, several codes of
CG recognize directors’ responsibility
to ensure RM policies in place and an
adequate risk assessment
Strategy formulation and policymaking are part of the
PERFORMANCE ROLE of the board
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Policy-making
RISK MANAGEMENT POLICY
GENERAL CONTENTS
- Objectives and scope (which are the risks to be covered and to which
the company is exposed);
- Processes and procedures to identify risks, to design a risk map,
measurements for risks, and risk management (preferences, risk
profile, monitoring, control)
- Governance issues: roles and responsibilities, related functions in the
company’s organization chart, training
- Reporting: reports and documentation, reporting lines
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Executive supervision
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Executive supervision
Tracking and supervision of executive activities by the board are
performed by:
• FINANCIAL MEASURES
• PROFIT CENTRES
• MANAGEMENT CONTROL SYSTEM
EXEPTION REPORTS
To avoid redundant reporting, some companies produce this
kind of report, emphasizing to the BoD only main significant
variations from planned performance
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Accountability
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Accountability
To whom is the BoD accountable?
Members of corporate entities, shareholders, members with voting rights
(depending on type of organization)
Level and detail of accountability reporting is defined by:
 Constitution of the organization;
 Company’s laws;
 Requirements by Regulator Authorities
however
Francesca Buzzichelli
Current view recognize to the BoD some
accountabilities towards a wide range of
stakeholders
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Board’s conformance and performance
UNITARY BOARD
TWO-TIERS BOARD
It has to combine performance role
(strategy formulation and
policymaking)
with conformance (executive
supervision and accountability)
in a balanced way
Francesca Buzzichelli
The two roles are separated:
• the Management Board
follows the business
• the Supervisory Board
oversees performance and
ensures accountability
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Board’s conformance and performance
UNITARY BOARD
TWO-TIERS BOARD
What is important is that:
It has to combine performance role
The two roles are separated:
(strategy formulation and
• the Management Board
• directors have to direct the company,
policymaking)
follows the business
therefore they are involved in strategy and
with conformancepolicymaking
(executive
• the Supervisory Board
supervision and•accountability)
Sufficient and balanced time oversees
should be performance and
in a balanced
way to all the four functions
ensures
accountability
dedicated
of the
BoD
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Board committees of UNITARY BoD
Strongly required or promoted by laws, codes, regulations
WHY
?
1.
2.
3.
4.
To enable directors to meet separately from
the board as a whole
To delegate board activities to reduce the
burden on the board as a whole
AUDIT COMMITTEE
REMUNERATION COMMITTE
NOMINATION COMMITTEE
others
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1. Required/recommended by
codes
2. Mostly composed by
independent outside directors
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Audit committee
Aimed
to…
support BoD decisions about internal control
system and risk management, taking into
account:
- nature of the business
- size of the company
- complexity of the business
- number of employees
- market capitalization
- jurisdictions and regulations
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Audit committee
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Audit committee
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Audit committee
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Remuneration committee
Aimed
to…
Suggest to the BoD a remuneration policy of
executive directors and managers with strategic
responsibilities
Remuneration plan should be defined to avoid short-term objectives
Therefore, the main tasks concern:
 Balanced definition of the two components of remuneration (fixed
+ linked to pursuit performance objectives)
 Monitoring of BoD decisions, to check the effective pursuit of
objectives
 Reporting to shareholders on its activity
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
The Nomination committee
Aimed
to…
Select new directors for the BoD
The committee has to:
 Formulate opinions on BoD compostion and dimension;
 Suggest those professionists needed by the BoD for an effective
functioning
 Propose candidates in case of substitution of independent
directors
 Supervise the self-assessment process of directors
 Propose plans for executive directors appointments
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Remuneration and Nomination committees
Presence and composition of Remuneration and Nomination Committee
Sector
REMUNERATION committee
n. companies
NOMINATION committee
n. components n. companies n. components
financial
54
3,3
23
4,3
industrial
121
3,1
21
3
51
3,2
8
3,5
226
3,2
52
3,6
services
Source CONSOB, 2012, A survey on Italian listed companies
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Other Board committees
Governance and Compliance Committee
To ensure compliance with legal,regulatory, and CG code requirements
Executive/Finance/Strategic planning Committees
Specific committees to develop specific tasks of the BoD.
Their minutes become reports to the BoD
Enterprise Risk Management / Corporate Risk Assessment and
Control / Strategic Risk Governance
Committees with specific responsibilities for overseeing company’s
exposure to and acceptance of risks
Ad Hoc Committees
Committees with specific responsibilities connected to ad hoc projects
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Interplay between board and management
ACCOUNTABILITY
STRATEGY FORMULATION
APPROVE AND WORK
WITH/THROUGH CEO
EXECUTIVE SUPERVISION
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POLICYMAKING
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Interplay between board and management
ACCOUNTABILITY
13%
22%
EXECUTIVE
SUPERVISION
24%
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41%
STRATEGY
FORMULATION
49%
23%
POLICYMAKING
14%
14%
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A survey on
Directors view on
Board activity
«Should»
vs
«Do»
CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Interplay between board and management
Effects of financial crisis and recent years:
 directors emphasize the need to attribute greater relevance to
ACCOUNTABILITY, due to both greater regulatory demand and pressure
from society
 Moreover, directors feel the need to concentrate themselves on
STRATEGY FORMULATION.
STRATEGY SEMINARS
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Corporate transparency
Story behind current and past financial accounts is no more
sufficient!
increased relevance
attributed to NARRATIVE
/ COMMENTARY
FORWARD LOOKING
INFORMATION to anticipate
the future (IASB)
instruments to support financil and audit report
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Corporate transparency
MINIMUM CONTENT OF A NARRATIVE
COMMENTARY REPORT
• review of the business of the company
• analysis of key financial and operating performance
indicators
• explanation of principal risks
• details on recent significant events
• planned future developments
• relationships with stakeholders
• Company’s policies and CSR
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Corporate transparency
•
•
•
•
•
•
•
MINIMUM CONTENT OF A NARRATIVE
COMMENTARY REPORT
TO BE USEFUL….
review of the business of the company
• Balanced
analysis of key financial and operating performance
• Objective
indicators
• Clear and concise
explanation of principal risks
• Unbiased
details on recent significant events
• Transparent
planned future developments
• Forward looking approach
relationships with stakeholders
Company’s policies and CSR
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International case study
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International case study
The case of a STRATEGY of acquisition
The history…
• 1962 :Tyco International founded to undertake research on semiconductors for the government;
• 1974 : listed on the NY Stock Exchange;
• 1980s: an increasing group acquisition strategy , several subsidiaries,
organized in four main divisions (electronic, healthcare, security and fire
protection, flow control);
• 1992: appointment of Mr Dennis Kozlowski, as chairman and CEO. A
strong strategy of acquisitions continued, with more significant
companies joining the group, until a high final value of the company but
an increasing level of debt
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International case study
The case of a STRATEGY of acquisition
The black year
• 2002: several subsidiaries began to show significant losses, rating was
lowered and share prices fell. Kozlowski retirement.
• 2002: appointment of a new chairman, Mr Edward Breen as
president+CEO+Chairman of Tyco
Several concerns were raised on Mr Kozlowski’s leadership
• Treatment of the company as a private fiefdom
• Support by both BoD and management
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International case study
The new BoD and senior executives launched an investigation
on Kozlowski ‘s past activities.
FEDERAL CHARGES against:
• Kozlowski
• Swartz (former vice-president)
• Walsh (former director)
VIOLATIONS of :
• State’s Racketeer Influenced and
Corrupt Organizations Act;
• Securities Act (1933)
• Security Exchange Act (1934)
CLASS ACTIONS for damages against Tyco,
Kozlowski and other former officers from
many shareholders and members of the
retirements pension fund, who faced
relevant losses
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International case study
Subsequent inquiries identified that
hundreds of million of dollars were
addressed to support
Kozlowski private lifestyle!
Kozlowski was
fined US$ 70
million
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Kozlowski was
jailed for up to
25 years
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International BoD - 2015
George R. Oliver
CEO
Herman E. Bulls
Michael E.
Daniels
Frank M. Drendel
Brian
Duperreault
Rajiv Gupta
Brendan R.
O’Neill
Jurgen Tinggen
Edward D. Breen
Chairman
Sandra S.Wijnberg
Francesca Buzzichelli
R. David Yost
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International BoD - 2015
George R. Oliver
CEO
Edward D. Breen
Chairman
Sandra S.Wijnberg
Francesca Buzzichelli
Michael E.
Daniels
1. a new BoD
2. a new set of board governance
principles
3. a new policy to control
Brian
Brendan R.
Rajiv
Gupta
disbursments
of cash
Duperreault
O’Neill
4. a new guide to ethical conduct
Herman E. Bulls
Frank M. Drendel
Jurgen Tinggen
R. David Yost
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International today
Board of Directors
Tyco’s Board of Directors is responsible for overseeing the management of
Tyco's business in the best interests of the shareholders, and consistent
with good corporate citizenship.
Board Governance
1.
2.
3.
4.
Francesca Buzzichelli
BoD Governance principles
Compensation and HR Committee Charter
Nominating and Governance Committee Charter
Audit Committee Charter
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International today
1. INTEGRITY
2. EXCELLENCE
3. TEAMWORK
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International today
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International today
BOARD COMMITTEES
1.
Audit Committee
2.
Compensation and Human
Resource Committee
3.
Nominating and
Governance Committee
All of them «entirely
compose by independent
directors»
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
Tyco International today
TYCO website publishes also the two charters for:
• Compensation and Human Resource Committee
• Nomination and Governance Committee
Contents :





Francesca Buzzichelli
Purpose
Authority
Composition
Meetings
Responsibilities
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CG - Lesson n. 8 – Functions of the Board
Functions of the Board
References
Tricker B., 2015, Corporate Governance. Principles, Policies and
Practices, Third edition. Oxford University Press. Chapter 7
(exclusions: case study 7.2)
Documents referred to Tyco’s current CG principles available at
http://www.tyco.com/
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CG - Lesson n. 8 – Functions of the Board