A board has ten members. The chairman is also the chief executive. Six of the directors are executives who report to him every day. Four are non-executives, two of whom are former executives. When the company is asked to approve a large deal that benefits the chairman’s family firm, nobody objects. The company followed no rule that said otherwise.
What was missing was a board built to say no: the right size, the right mix, real independence, separated roles and committees that check the executives.
This topic covers the role of the board, the difference between decision-making and monitoring, matters reserved for the board, unitary and two-tier boards, the size and composition of the board, executive, non-executive and independent directors, diversity, the separate roles of the chairman, the chief executive and the non-executive directors, the senior independent director, and the board committees (remuneration, audit, nominations and risk).
The previous topic covered governance codes. The next covers directors and the law, director development and audit. The May 2014 Pathfinder paper tested governance in its multiple-choice and short-answer sections.
In 30 seconds
The board’s role is not to manage but to decide key matters and monitor management, and to be accountable to shareholders. It keeps a schedule of matters reserved for the board (strategy, budgets, major contracts, financial reporting, controls, appointments, pay, policies). Most countries use a unitary board. Germany and the Netherlands use two tiers: a management board and a supervisory board.
A board should be balanced so that no one dominates, with a strong presence of independent non-executives. Only non-executives can be independent. The chairman leads the board. The CEO leads management, and the two roles should be separate. Non-executives give strategy, performance, risk and people input. A senior independent director is a back-up.
Committees (remuneration, audit, nominations and risk) monitor areas where executives have a conflict of interest and recommend to the board.
Key terms in plain English
| Term | What it means |
|---|---|
| Unitary board | One board that performs all the board’s functions |
| Two-tier board | A management board of executives under a supervisory board of non-executives |
| Executive director | A director who also has a management job and is usually a full-time employee |
| Non-executive director (NED) | A part-time director with no management role |
| Independent director | A non-executive with no link to an interest group and no significant personal interest in the company |
| Senior independent director (SID) | The independent non-executive who leads the others and acts if governance breaks down |
| Groupthink | A group drifting into agreement to avoid conflict |
| Board committee | A group of directors that monitors an area and reports to the board |
Syllabus check
This topic is in syllabus area D (corporate governance, 5% of the marks). It covers:
- the role of the board and best practice for its composition;
- the definitions of executive, non-executive and independent director and board diversity;
- the roles of the chairman, chief executive and non-executive directors, and the need for board committees.
CAMA 2020 and the board
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 87 | The business of the company is managed by the board of directors, which exercises the powers of the company except those the Act or the articles reserve to the members (ss. 87 and 88) | The board holds the powers that it delegates |
| s. 275(1) | A public company must have independent directors: at least one-third of its directors, as amended by the Business Facilitation Act 2023 (the earlier minimum was three) | Independence on the board |
| s. 305 and s. 306 | Good faith, and no conflict between personal interest and duty | Basis for independent judgment |
| s. 309 | Directors are agents and trustees and must use powers in the interest of the company and all shareholders | Board accountability |
| s. 404 | Provides for the statutory audit committee, and s. 404(7) sets out its functions | The audit committee |
The role of the board
Codes apply to major listed companies, though others may adopt them. In most companies the constitution gives all powers to the board, and the board delegates the running of the business to executive management. No law fixes how much the board must keep. The role of the board is not to manage. Management does that.
A unitary board makes it hard to see the difference between an executive director as a manager and the board as a body that governs.
The Nigerian Code of Corporate Governance (2018), as ICAN describes it, says the board is central and should have a charter.
Its aims include:
- leadership, integrity and judgment in oversight and control
- acting in the company’s best interest
- compliance with the law
- approving long- and short-term strategy and monitoring it
- succession, appointment and pay for the board and senior management
- accountability to shareholders and stakeholders
- setting values and an ethical tone
- overseeing internal audit
- setting the risk framework and monitoring it
- oversight of IT governance
- a schedule of matters reserved for the board
- oversight of internal control
- the communication policy
- appraisal of directors and senior executives
- the integrity of the annual report
- systems to manage environmental and social risks
Decision-making and monitoring
The board does two things. It decides matters it keeps for itself, and it monitors the management to which it delegates. It expects the chief executive to account to it and it monitors the system of internal control. It is accountable to the shareholders for both roles.
The Institute of Chartered Secretaries and Administrators (ICSA) suggests a written list of matters reserved for the board, under 12 headings:
- strategy and management: long-term objectives and strategy, annual and capital budgets, oversight of operations, performance review, new areas or markets and closures;
- structure and capital: changes to capital and control structure, and company status;
- financial reporting and controls: approving the statements, dividend policy and treasury policy (currency and derivatives);
- internal controls: a sound system of control and risk management;
- contracts: major capital projects, big contracts, large loans, acquisitions and disposals;
- communication: shareholder and market announcements;
- board membership and other appointments: directors, the company secretary and auditors;
- remuneration: pay of directors and senior managers and major share schemes;
- delegation of authority: committees, and the split of duties between chairman and CEO;
- corporate governance matters: shareholder communication, balance of interests and checking that independent directors stay independent;
- policies: health and safety, environment;
- other issues: pensions, main advisers and major litigation.
Unitary and two-tier boards
Most countries use a unitary board. Germany and the Netherlands often use two tiers. The management board is all executives, chaired by the CEO, and runs operations. The supervisory board is all non-executives, chaired by the company chairman, and oversees the company and the management board. Germany’s approach reflects stakeholders, so the supervisory board may include representatives of major shareholders, employees or a union, and former executives. Such members are not independent.
| Two-tier | Unitary | |
|---|---|---|
| Advantages | Separates operations from monitoring; suits stakeholder representation; different legal duties for non-executives | Can be small and quick; easier co-operation between executives and non-executives; one common purpose |
| Disadvantages | The two boards may not co-operate; larger; stakeholder disagreements | One body does both jobs, so monitoring may be weak; same duties for all directors |
Composition of the board
A unitary board usually has a chairman (often non-executive), sometimes a deputy chairman, a chief executive, other executive directors and other non-executives. The board and its committees need the right balance of skills, experience, independence and knowledge, and directors need enough time. The board should not be too large. ICAN says the Nigerian code sets size at not less than five and not more than fifteen.
The UK Code says the board should not be unwieldy. The Singapore code asks the board to decide a size that supports effective decisions. Diversity should be considered in appointments.
Executive, non-executive and independent
- Executive directors are full-time employees with management duties, such as the CEO and finance director.
- Non-executive directors have no management role, are not employees and are part time. Their legal status as directors is the same as executives’.
- Independence of character means holding and voicing your own views. The Commonwealth principles call for integrity, a blend of skills and a proper selection process to avoid cronyism and tokenism.
- Independent director has a narrower meaning: no link to a special interest group (executives, employees, a major shareholder, a major supplier or customer) and no significant personal interest in the company. An executive can never be independent. Not every non-executive is independent.
Nigeria (as ICAN describes the code):
- an independent director is a non-executive who is not a substantial shareholder (holding must not exceed 0.1% of paid-up capital)
- does not represent a shareholder with significant influence
- has not been an employee or held an executive role in the preceding three years
- is not close family of such a person
- is not a professional adviser
- is not a major supplier or customer
- has no significant contract
- has not been a partner or executive of the audit or consulting firm in the past three years
A public company needs at least one independent director.
UK Code:
- usually not independent if employed within five years
- a material business relationship within three years
- extra pay, share or pension scheme membership
- close family ties
- cross-links with other directors
- representing a significant shareholder
- more than nine years on the board (the nine-year rule has been controversial)
Singapore is less strict, for example three years for employment and family ties.
Balance and domination
The board needs a spread of skills and a balance of power so that no one can dominate. Companies that collapsed, such as Maxwell Communications and Polly Peck, had a dominant leader. After Robert Maxwell’s death in 1991, about £900m was found to have been taken from pension funds, and there were no proper controls.
The UK Code (2018) says at least half the board, excluding the chair, should be independent non-executives. Singapore asks for at least one-third. The Nigerian code recommends a mix of executives, non-executives and independent non-executives, and asks companies to review their composition for competence, independence and integrity.
Diversity
Diversity covers age, race, gender, education, qualifications, experience, attitudes and religion. Benefits: better decisions with less groupthink and wider perspectives; a wider talent pool for non-executives; better reputation and investor relations; a board that reflects society (some investors now consider it). Drawbacks: friction and cliques; tokenism, where minority members feel they are there to fill a quota.
Promoting it: quotas (Norway has required at least 40% women since 2008) act quickly and force change; transparency through codes that require a diversity policy and disclosure of progress (the UK Code, and comply-or-explain in Australia and Hong Kong). The Davies report (2011) set a 25% target for women on FTSE 100 boards by 2015, which was met, and the Hampton-Alexander review (2016) set 33% for FTSE 350 boards and senior executive teams.
Chairman, chief executive and non-executives
Separate roles
The two most powerful posts are chairman and CEO. The UK Code says they should not be held by the same person and that a CEO should not become chairman of the same company, so that no one has unchecked power. In Nigeria, the code says that for listed public companies the roles are separate and held by different people.
Singapore says “in principle”. The rule that a CEO should not step up to chairman is debated, since the company may want to keep his experience. ICAN’s Marks and Spencer example shows a senior independent director arguing in 2005 that the chairman and CEO were too close.
The CEO
Runs the executive management. All senior managers report to the CEO, who answers to the board for operating performance, drafts plans, budgets and strategies for approval and implements board decisions.
The chairman
Leads the board and is responsible for its effectiveness. The UK Code says a chairman is independent on appointment.
Higgs (2003) listed the role:
- run the board and set a forward-looking, strategic agenda
- make sure all directors get accurate, timely and clear information
- ensure effective communication with shareholders and tell the board their views
- manage the board and give enough time for complex issues
- with the company secretary, arrange induction, training and development
- organise evaluation of the board, committees and directors
- encourage all directors to take part
The Nigerian code adds helping to ensure the board has the right skills and acting as the main link between the board and the CEO. The chairman is also the public face of the company.
| CEO | Chairman | |
|---|---|---|
| Status | Executive, full time | Usually non-executive, part time, independent on appointment |
| Leads | The management team | The board |
| Reports to | The board and the chairman | Shareholders |
| Main job | Run operations, propose plans, implement decisions | Make the board effective and make sure every director contributes |
Non-executive directors
Independent non-executives give balance and reduce domination. The Higgs guidance gives four roles:
- strategy (challenge constructively and help develop proposals)
- performance (monitor management against agreed targets)
- risk (satisfy themselves on the integrity of financial information and the strength of risk management and internal control)
- people (decide executive pay and have a major role in appointments and succession for the chairman and CEO)
They act both as colleagues and as “policemen”. They reduce agency costs by monitoring management and negotiating pay.
Senior independent director (SID). One independent non-executive should be named as SID. The SID leads the others, calls meetings away from the executives and acts when governance breaks down, for example by passing on shareholder views when a dispute with the chairman cannot be resolved, or by pressing the chairman to follow the code.
Appointing non-executives
Boards need a mix of skills. In the UK, non-executives came from a very small pool. The Higgs Report (2003) found only 7% were non-British, 6% women and 1% from ethnic minorities. The Tyson Report (2003) recommended a formal appointment process that starts by finding the missing skills, and recruiting from a wider range, including senior managers just below the board, professionals, consultants and the public and non-commercial sectors.
A board should also be refreshed. Independence tends to fade, so a non-executive might serve three years, be re-appointed for three more and then be reviewed after six. Changes mostly affect non-executives, because executives stay while they hold their jobs.
Criticisms of non-executives: they lack knowledge of the company and industry; they spend too little time; and they accept the executives’ views too easily. Even so, a strong presence of independent non-executives is widely accepted, and institutional investors may act when they are not effective.
ICAN’s PIRC example: in 2002 PIRC advised clients to vote against four non-executives at Telewest as not independent (one held share options, two represented a major shareholder, one had served over nine years) and because of poor governance and unjustified bonuses.
Board committees
A board committee is a group of selected directors given the job of monitoring an area on which the board keeps the decision. It has no decision-making power. It reports and recommends. The full board decides, and should have good reasons if it rejects a recommendation. A committee does not replace management and has no executive powers.
A company may have three or four main committees:
- Remuneration committee: considers and negotiates the pay of executive directors and senior managers.
- Audit committee: monitors financial reporting and auditing.
- Nominations committee: identifies and recommends people for appointment to the board.
- Risk management committee: reviews risk management where it is not given to the audit committee.
There are two reasons for them. They let the board delegate detailed, time-consuming work, and they take up matters where executives have an actual or possible conflict of interest. So committees should be wholly or mostly independent non-executives. A remuneration committee of independent non-executives has no personal stake in executive pay, since they receive a fixed fee.
An audit committee checks that executives, such as the finance director, are not hiding information, and monitors the auditors. A risk committee checks that risk and control systems work. A nominations committee makes sure that new directors are not just supporters of the CEO or chairman.
The rules in more depth
Why the board should not manage
If the board runs the business, nobody monitors the people who run it. The monitoring role needs distance.
Why only non-executives can be independent
An executive works for the management and depends on it for pay and career, so cannot judge it freely.
Why the chairman and CEO are split
One person leading both the board and management has no one to check him. The split puts someone in charge of challenge.
Why committees must be independent
A committee of executives deciding executive pay or checking executive reports is checking itself.
Effect on analysis
In a case, count the executives, non-executives and independents, say who chairs, and check each committee for independence.
Worked examples
Example 1: board balance. A board has 10 members including the chair. The UK Code asks for at least half of the board, excluding the chair, to be independent. The Singapore code asks for at least one-third of the board.
- UK: non-chair directors = 9. Half = 4.5, so at least 5 independent non-executives.
- Singapore: one-third of 10 = 3.33, so at least 4.
- Nigeria (as ICAN describes it): size between 5 and 15 is satisfied, and at least one independent director is needed.
Example 2: who is independent? (a) A director who was the company’s finance manager two years ago. (b) A representative of a bank that holds 12% of the shares. (c) An accountant who is a partner in the audit firm. (d) A retired professor with no tie to the company.
- (a) Not independent: employed within the past three years.
- (b) Not independent: represents a significant shareholder.
- (c) Not independent: partner in the audit firm.
- (d) Independent, on the facts given.
Example 3: chairman or CEO? Setting the agenda, running the finance team, reporting to shareholders at the meeting, and drafting the annual budget.
- Setting the agenda: chairman.
- Running the finance team: CEO (through the finance director).
- Leading the shareholder meeting and communicating with shareholders: chairman.
- Drafting the budget for board approval: CEO and management.
Example 4: a remuneration committee. A committee has three members: two independent non-executives and the chief executive, who proposes the executive team’s bonus.
- The CEO has a personal interest in executive pay, so he should not be a member.
- The committee should be wholly or mainly independent non-executives, who receive a fixed fee.
- The committee recommends and the full board decides.
How to score full marks
- Separate the board’s decision and monitoring roles from management.
- Count the directors in a scenario and compare them with the code.
- Apply the independence tests to each person.
- Split the roles of chairman and CEO and the four roles of non-executives.
- Link each committee to the conflict it controls.
- Recommend changes and say who should carry them out.
Common mistakes in the exam
- Saying the board manages the company.
- Calling any non-executive independent.
- Letting executives sit on the remuneration or audit committee.
- Confusing the roles of chairman and CEO.
- Giving a committee decision-making power.
- Ignoring the cost and the limits of non-executives.
Quick revision
- Board decides key matters and monitors; it does not manage.
- Unitary or two-tier. Matters reserved for the board.
- Independent non-executives balance the board; executives are never independent.
- Chairman leads the board; CEO leads management; roles separate.
- NED roles: strategy, performance, risk, people. SID as back-up.
- Committees: remuneration, audit, nominations, risk; they recommend, the board decides.
- CAMA 2020: ss. 87, 275, 305, 306, 309, 404.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. The role of the board is mainly to:
- Run day-to-day operations
- Decide key matters and monitor management
- Prepare the accounts
- Sell the products
Show the answer
B. And to be accountable to shareholders.
Question 2. A two-tier board has:
- One board of executives
- A management board and a supervisory board
- Two chairmen
- No non-executives
Show the answer
B. Common in Germany and the Netherlands.
Question 3. Which director can never be independent?
- A non-executive with no ties
- An executive director
- A retired academic
- A former regulator
Show the answer
B. Executives are linked to management.
Question 4. Under the UK Code, at least how much of the board (excluding the chair) should be independent non-executives?
- One quarter
- Half
- All
- One
Show the answer
B. From the 2018 Code.
Question 5. The chairman is responsible for:
- Running the management team
- Leading the board and its effectiveness
- Drafting the budget
- Keeping the share register
Show the answer
B. The CEO leads management.
Question 6. The senior independent director:
- Replaces the CEO
- Leads the other independents and acts if governance fails
- Audits the accounts
- Runs the audit
Show the answer
B. A back-up to the chairman.
Question 7. A board committee:
- Has executive powers
- Reports and recommends to the board
- Replaces management
- Sets share prices
Show the answer
B. The board decides.
Question 8. Executive pay should be set by a committee of:
- The executives
- Independent non-executives
- The auditors
- Customers
Show the answer
B. To avoid a conflict of interest.
Question 9. A drawback of diversity is:
- Better decisions
- Possible tokenism and friction
- A wider talent pool
- Better reputation
Show the answer
B. Quotas can lead to tokenism.
Question 10. Which section of CAMA 2020 describes directors as agents and trustees of the company’s assets and powers?
- Section 309
- Section 400
- Section 405
- Section 409
Show the answer
A. They must act for the company and all shareholders.
Written questions
Question 11 (10 marks). (a) Distinguish the role of the board from the role of management. (4 marks) (b) State six matters that the board should reserve for its own decision. (6 marks)
Question 12 (20 marks). Sahel Industries Plc is listed. Its board has 10 members:
- the chairman, who is also chief executive
- five other executive directors
- two former executives who now act as non-executives
- a representative of its largest shareholder
- one retired professor with no tie to the company
The remuneration committee has the chief executive as a member. (a) Evaluate the independence of the non-executive directors.
(5 marks) (b) Calculate how many independent non-executives the board would need under the UK Code and under a one-third rule, and comment. (4 marks) (c) Explain the problems with the combined chairman and chief executive and with the remuneration committee. (6 marks) (d) Recommend changes. (5 marks)
Question 13 (10 marks). (a) Describe the four roles of non-executive directors. (4 marks) (b) Describe the role of the senior independent director. (3 marks) (c) State the criticisms of non-executive directors. (3 marks)
Model answers
Show the model answer to Question 11
(a) Board and management (4 marks). The board does not manage the company. It decides matters it reserves and monitors management, and is accountable to shareholders. (2) Management runs the day-to-day operations within the strategy and powers the board delegates. (2)
(b) Reserved matters (6 marks). Any six:
- approving long-term strategy and budgets
- major capital projects and acquisitions
- approval of the financial statements and dividend policy
- a sound system of internal control and risk management
- appointments to the board, company secretary and auditors
- remuneration of directors and senior managers
- delegation to committees and the split between chairman and CEO
- company policies such as health and safety
(1 each)
Show the model answer to Question 12
(a) Independence (5 marks). The two former executives are not independent because they come from management. (2) The representative of the largest shareholder is not independent. (1.5) The retired professor appears independent on the facts given. (1.5)
(b) Numbers (4 marks). UK: 9 non-chair directors, so at least half = 5 independent non-executives. (1.5) One-third of 10 = 3.33, so at least 4. (1.5) The board has only 1, well below either standard. (1)
(c) Problems (6 marks). The combined chairman and chief executive holds unchecked power, and with five other executives the board is dominated by management. (3) The chief executive on the remuneration committee has a personal interest in executive pay, which is a conflict. (3)
(d) Recommendations (5 marks). Separate the roles of chairman and CEO. (1.5) Appoint more independent non-executives to reach the standard. (1.5) Constitute the remuneration committee of independent non-executives only, and consider audit and nominations committees on the same basis. (1.5) Appoint a senior independent director. (0.5)
Show the model answer to Question 13
(a) Roles (4 marks). Strategy: challenge constructively and help develop proposals. (1) Performance: monitor management against agreed targets. (1) Risk: satisfy themselves on the integrity of financial information and the robustness of risk management and control. (1) People: decide executive pay and play a major role in appointments and succession. (1)
(b) SID (3 marks). Leads the other independent non-executives, for example by calling meetings away from the executives. (1.5) Acts when governance is not working, such as passing shareholders’ views to the board or challenging the chairman or CEO. (1.5)
(c) Criticisms (3 marks). Lack of knowledge about the company and its industry; too little time; too ready to accept executives’ views. (1 each)
Pathfinder on Board roles, independence, chairman, CEO and committees
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The May 2014 paper asked in the multiple-choice section which stakeholders governance aims to promote and what is not required in a well governed entity (question 3: board members need not hold the most shares), and asked in the short-answer section to name the processes by which companies are directed and controlled (corporate governance). Read the sections on composition and the role of the board for the points behind those answers.
Revise first: Composition of the board
Examples 1 to 4 show how to test board balance and independence and how to assign the roles of chairman and CEO.
Revise first: Worked examples
Source: ICAN Pathfinder, Strategic Financial Management. Diets covered: May 2014 Section A multiple-choice questions 1 and 3 and short-answer question 1.
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