Bob Tricker Corporate Governance Principles Policies and Practices

Board assessment – reviewing directors and boards In which we consider: – assessing boards and board committees – assessing individual director's performance – corporate governance rating systems for companies – corporate governance assessment systems for countries Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees New York Stock Exchange rules require boards of listed companies to conduct a self-evaluation at least annually to determine whether the board and its committees are functioning Effectively. Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees UK CG Code requires boards to: • undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors • state in the annual report how the performance evaluation of the board, its committees, and its individual directors has been conducted • have the review conducted independently at least every third year. Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees A regular board performance review can: • check directors' knowledge of the business and its strategic situation • assess the board’s skills, knowledge and experience • identify director weaknesses • review current board and board committee practices • review the effectiveness of the board's strategic thinking and decision making • challenge attitudes of long-serving directors • create the climate for a change of chairmanship • provide information for the board's corporate governance report and respond to questions. Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees A board review: • holds a mirror to the board, its behaviour and its performance • should take a strategic perspective, considering the directors ability to handle long -tem issues as well reflecting on recent experience • is as important for well performing boards a poorly performing. Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees UK Stewardship Code (2010) states that institutional investors should monitor investee companies to determine when it is necessary to enter into an active dialogue with their boards ‘This monitoring should be regular and the process clearly communicable and checked periodically for its effectiveness’. Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees As part of this monitoring, institutional investors should: • Be satisfied that board and committee structures are effective and that independent directors provide adequate oversight • maintain a clear audit trail, on their share voting • attend the general meetings • consider explanations given for departure from the CG Code, giving a timely explanation to the company, in writing where appropriate • be prepared to enter a dialogue UK Stewardship Code (2010). Tricker: Corporate Governance, 3 rd edition

Assessing boards and board committees Sir Bryan Nicholson, chairman of the UK's, Financial Reporting Council commented: • ". . . the evaluation process is particularly important. It provides the opportunity for companies to create a virtuous circle of sustained improvement in board effectiveness based on regular objective assessment of past performance and the company's changing needs and circumstances. It introduces a new dynamic which companies can use to improve the quality of their corporate governance and secure competitive advantage. " Tricker: Corporate Governance, 3 rd edition

Board assessment Reviewing board performance • • • Requirement of many codes Chairman initiative, board policy Corporate governance and board review Strategy for board development Led by INED, past chairman, expert The board review Tricker: Corporate Governance, 3 rd edition

Board assessment Board review procedures • • • Establish power structure of entity Board size and characteristics Board style Board activities Board processes Board committees: Board information Director induction, training, continuing development Corporate controls and risk assessment systems Report, evaluate, conclusions Strategy for board development part of corporate strategy Tricker: Corporate Governance, 3 rd edition

Board assessment Tricker: Corporate Governance, 3 rd edition

Board assessment Benefits of an external review • objectivity and a fresh perspective • wide ranging discussions with candour and insights • uncomfortable issues can be addressed • root causes of board-level problems diagnosed • independent review of board papers • objective interviews with key players • observation of the dynamics of board meetings • questionnaires based on industry experience • professional board presentations and facilitation • focuses the board on continuous improvement. Tricker: Corporate Governance, 3 rd edition

Board assessment The Conference Board’s CG Research Centre • How effectively does the board monitor company performance? • Does the board have sufficient independence to perform its duties properly? • Does the board have the right mix of skills to achieve its goals? • Does the board have the right size and structure? • How does the board oversee auditing functions to limit risk? • How does the board use its nominating committee? • What is the board’s role in determining director compensation? • How does the board plan CEO appointment and succession? • Are the board’s decision-making processes effective? • Does the board evaluate whether it is achieving its goals? • Can the board make course corrections if necessary? • Does the board communicate effectively to investors? Determining Board Effectiveness (1999) Tricker: Corporate Governance, 3 rd edition

Assessing individual director's performance Previous rejection of individual director assessment - appointment to the board meant experience and skill - board level activity is a collective effort. - directors' contributions differ But governance codes and listing rules demand performance assessment of individual directors Most directors now accept director-level appraisal - just like management appraisal. Tricker: Corporate Governance, 3 rd edition

Assessing individual director's performance • How? Informal by chairman Pressure to formalise • Board policy needed • Leading the exercise: – board chairman instigates – senior INED, a past-chairman, consultant, or specialist firm • Approach to the appraisal Tricker: Corporate Governance, 3 rd edition

Assessing individual director's performance Chairman’s original invitation and induction briefing – Expectations from that director, time, special contributions – expertise, skills, knowledge, service on committees – Criteria for evaluation of actual performance • Formalised assessment – Data collection, interview, peer review 360 degree • Report to chairman • Discussion with chairman • Strategy for development – Self development, formal training, informal learning – Chairmanship of board committees, leading inquiries • Who evaluates the chairman? Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies • Interest in corporate governance post Enron and SOX • Corporate governance now recognised as vital • Need for comparison rating systems Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies S&P’s GAMMA governance metric reflect the company’s opinion of the relative strength of companies’ corporate governance practices Proprietary methodology produces a score based on a synthesis of best practices and codes around world. based on: – ownership structure and external influences – shareholder rights and relations – transparency, disclosure and audit – board structure and effectiveness. Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies Institutional Shareholder Services (ISS) proprietary analytical tool called Governance Risk Indicators™ (GRId) • helps listed companies improve their corporate governance practices • helps investors to assess the governance quality of their investments The GRId indicators rank companies on: • • • compensation schemes for directors director stock ownership equity structure, and protection of shareholder rights board structure and processes, director independence and integrity of the audit process Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies Governance. Metrics International (GMI) system rates corporate governance on an independent evaluation of companies’ governance characteristics across over 4, 000 companies The GMI rating based on securities regulations, stock exchange listing requirements and corporate governance codes and principles GMI research reviews companies public data, regulatory filings, company websites, news services and other specialized websites GMI produces ratings for each company on a scale of 1. 0 (lowest) to 10. 0 (highest). Tricker: Corporate Governance, 3 rd edition

Corporate governance assessment systems for companies The most comprehensive country level corporate governance rating is the FTSE ISS corporate governance index The index is based on five major areas: • structure and independence of the board (44%) • equity structure 21% • compensation system, for executive and nonexecutive directors (17%) • executive and Non-Executive stock ownership (9%) • independence and integrity of the audit process (9%). Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies TRIS - Thai Rating and Information Service Corporate Governance Rating TRIS interviews chairman and members audit committee, CEO and other stakeholders familiar with the company TRIS obtains information: • • • Invitation letters and correspondence with shareholders Minutes of board and board committee meetings Annual reports and registration statements Records of any penalties, fines violations Letter from CEO or Chairman confirming information is accurate. Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies TRIS - Thai Rating and Information Service Corporate Governance Rating Process of review: – company supplies information – information analysis – site visit – rating committee consider and decide rating – company accepts or rejects rating – company considers disclosure TRIS publicises – monitoring and review TRIS ratings: • 9 – 10 excellent • 8 very good • 7 good • 5 - 6 moderate • Less than 5 improvement recommended. Tricker: Corporate Governance, 3 rd edition

Corporate governance rating systems for companies Corporate Governance Assessment for Listed Companies in China An evaluation tool, involving Y/N answers to 194 questions. Based on model of significant attributes of good corporate governance ©Ho and Chan 2006 HKBU 1. 2. 3. 4. 5. 6. 7. 8. CG commitment and policy Ownership structure Shareholders’ rights and participation Controlling shareholders’ behaviour and activities Board of directors and supervisors Top mangers and pay Internal controls, risk management and audit Disclosure and transparency Tricker: Corporate Governance, 3 rd edition 10% 5% 10% 25% 10% 15%

Corporate governance rating systems for companies Core. Ratings is a European based rating agency, providing independent investment analysis of corporate responsibility risks The rating assesses the company's risk profile in seven areas: – governance policy and business ethics – risk management processes – ownership structure and control – financial reporting, audit, and verification – board structure and management – board executive compensation – investor rights and relations Tricker: Corporate Governance, 3 rd edition

Corporate governance assessment systems for countries • The World Bank and International Monetary Fund joint initiative – Reports on the Observance of Standards and Codes (ROSC) program • The European Bank for Reconstruction and Development (EBRD) – EBRD tries to help governments, policy-makers and all those promoting new legislation for the development of corporate governance-related legal reform. Tricker: Corporate Governance, 3 rd edition

Corporate governance assessment systems for countries The International Finance Corporation (IFC) works with countries which have an important potential for growth but weak corporate governance practices. They engage at various levels: • firm : corporate governance assessments and advice • sector : capacity building of local consulting firms, institutes of directors, educational institutions and stock exchanges • market : alignment of standards and practices, development of corporate governance codes and listing requirements • public policy and awareness. Tricker: Corporate Governance, 3 rd edition

Corporate governance assessment systems for countries • Group A - very high compliance – no countries qualified • Group B - high compliance – e. g. Hungary, Poland, and Russia • Group C - medium compliance – e. g. Bulgaria, the Czech Republic, and Slovenia • Group D - low compliance – e. g. Georgia, Romania, and Turkmenistan • Group E - very low compliance – e. g. Azerbaijan, Belarus, and Ukraine Tricker: Corporate Governance, 3 rd edition

Board assessment – reviewing directors and boards We have considered: – assessing boards and board committees – assessing individual director's performance – corporate governance rating systems for companies – corporate governance assessment systems for countries. Tricker: Corporate Governance, 3 rd edition