A Primer on Boards

1. A Primer on Boards February 2011

2. Introduction • This document is a primer on boards offering information on the following: • The definition and purpose of boards • Board composition and selection criteria • Board structure and compensation • Prerequisites for an effective board • The document also provides some case studies of the boards in a number of different institutions including • National Museums e.g., the British Museum and Smithsonian, and museums run as Private-Public Partnerships (PPPs) e.g., the Museum KunstPalast in Germany • Training Institutions e.g., the INP and OpificiodellePietreDure • Global corporations e.g., Total Oil and Gas

3. BoardsDefinition and Purpose What are boards? • Boards are a group of elected or appointed members who oversee the activities of an organization determined by authority vested in it • While management of the organisation remains within the institution, board members will advise and make decisions on strategic activities through regular annual meetings • Ensuring oversight for the activities of the organisation • Helping plan long-term strategic directions • Undertake performance and fiduciary monitoring activities • Mentoring the senior management of the organisation • Supporting the selection process and compensation for senior management • Playing a significant role in fundraising activities Boards add value to an organization by* ... 1 2 3 4 5 6 *In addition corporate boards have some or all of the following functions: safeguard shareholder interests, provide counsel to executives, manage efficiently Board processes, attract better directors, create a solid front to the outside in times of crisis to minimize risk, manage high degree of fiduciary execution (regulatory and compliance), help to influence critical constituents and, manage effectively directors’ and senior executives’ succession

4. BoardsComposition and Selection Criteria Composition • Boards typically range in size from 8 to 16 members • Members have a representative set of skills, e.g., industry knowledge, expertise in domains critical to strategy • Boards typically include the Director of the institution being overseen who may serve without having voting rights • Most boards have a 4:1 ratio of external members to executive members • The practice of separating the Chairman and CEO roles is gradually becoming more common in Boards Selection Criteria • There is a growing trend for boards to include individuals with diverse talents, backgrounds and perspectives, as well as to encompass different ages, genders and races in order to broaden the collective perspective of the directors • Directors typically devote the time and attention necessary to fulfill their obligations – a general guideline at least four full 40-hour weeks annually for each board on which they serve • The membership period of boards is usually five-year terms, subject to renewal

5. BoardsStructure and Compensation • Many Boards have an Executive Committee, a subset of the Board that can make certain decisions in between Board meetings • Additionally, sub-committees are usually set in place for the following areas: • Finance & Investment • Governance & Nomination • Audit • Compensation • These committees allow board members to address certain key areas in more depth • It is recommendable that all committees, other than the Executive Committee, be composed of a majority of external directors to maintain objectivity and independence from the management Organizational Structure Compensation • Board member compensation should reflect industry practices and the burdens placed on board members • For NGOs, compensation is rare, however some do provide a level of compensation to executive members in recognition of the significant time commitment required • Equity remuneration is common among most corporate boards

6. BoardsPrerequisites for an Effective Board There are four areas that combined encourage Board effectiveness An Effective Board 1 2 3 4 Well prepared board members Clearly allocated roles and decision rights High quality dialogue and group dynamics High quality staff support

7. How to be an Effective Board Clearly Allocated Roles and Decision Rights (1/2) 1 • Boards have a clearly defined role to concentrate on setting strategy and delegating implementation and operational decision making • There should be clearly allocated decision rights between the Board and the organisation with the appropriate level of transparency • There should be a clear chain of delegation within the board • If existing, the delegation to the Executive Committee (a subset of the board members which has the authority to make certain decisions in between Board meetings) must be clearly defined • Subcommittees toimprove board efficiency must be operated efficiently. The Board's delegation to its committee should be complete so that once issues have been delegated and resolved by the Committee and ratified by the full Board, they cannot be debated again Clearly allocated roles and decision rights

8. Strategy Evaluation, Approval and Monitoring Strategic Planning, Formulation and Implementation Operational and Tactical Tasks / Issues How to be an Effective Board Clearly Allocated Roles and Decision Rights (2/2) 1 It is necessary to clearly allocate decision rights as there is a fundamental overlap between a board and the management of an organization • Potential • Overlap Board • Management • Oversight • Long term strategic direction • Performance monitoring • Mentoring to executive management • Executive management selection and compensation • Fundraising activities • Operate the business • Implement the strategy • Report to the board

9. How to be an Effective BoardKey Allocated Roles 1 The positions of Chairman and CEO, play an important part in determining the effectiveness of the Board and the organization and must drive further clarity Chairman Chief Executive Officer • Works with management to define problems, influence strategy and monitor performance • Develops an effective board by planning board composition, recruiting new directors and evaluating directors’ performance • Represents the company to staff, customers, the public and government • Manages shareholder relations • Manages the board agendas and forms key committees • Responsible for setting the organization's vision and developing its strategy • Informs the board of the status of key initiatives and long term milestones to check the strategic course of the enterprise • Measures the best competitive practices and informs the board of comparative trends • Identifies potential successors (for both his role and those of senior managers) and communicates a management succession plan to the board on a regular basis

10. How to be an Effective Board High Quality Dialogue and Group Dynamics 2 High quality dialogue and group dynamics • The Board should be a consensus oriented forum which actively encourages open dialogue and debate. Good dialogue is characterised by • The Board operating at the right level; its deliberations are neither too detailed nor too removed from the organisation’s activities • The Board bringing in outside perspectives and willing to explore differences in points of view • The Board knowing when to close the debate and drive for a decision • The role of the Chair is crucial to ensure a high quality dialogue and group dynamics at Board meetings • Strong communication channels are essential both within the Board and between the Board and the organization

11. How to be an Effective Board Well Prepared Board Members 3 Well prepared board members • The Board should be composed of high level individuals with a range of talents, backgrounds and perspectives in order to broaden the collective perspective • Members must demonstrate a commitment to the organisation and its vision, as well as have relevant experience, information and capabilities • Members need to understand the way the organization operates and how to make an effective contribution to the Board • Board members need to reserve time to learn about the organization, to fulfill all duties and attend Board meetings fully prepared

12. How to be an Effective Board High Quality Support Staff 4 High Quality Support Staff • The organization's staff is responsible for helping the Board members be fully informed to perform their role • Board meetings should be well prepared in terms of having a clear agenda that the Chair frames and sends in advance • Board documents prepared by staff need to be • Well structured helping Board members understand the issues • Convey the right level of detail • Be oriented toward decision making • Be provided in a timely way • In between meetings there has to be high quality staff support for follow up and implementation of Board decisions

13. Case StudiesThe British Museum Role Operating Mechanisms • The Board of Directors meets at least four times a year • In between these quarterly meetings, the board delegates authority to a standing committee which meets as often as required • The Standing Committee has limited powers e.g., it cannot amend the strategy and annual plan • It includes the chairman and up to 9 other trustees • Ordinarily it meets 6-8 times a year • Oversees the general management of the Museum as “guardian of the museum’s interest” • Defines and approves the strategic direction of the museum and approves its execution in the annual plan, drawn up in consultation with the director • Appoints the Director and determines the salary • Approves all formal partnership arrangements with other cultural and educational organisations • Approves any major alterations to the museum site • Upholds the museum’s legal guidelines towards its collection and other museum assets e.g., approves loans Relationship with the Museum Director • The relationship between the Board and the Director is clearly outlined • The director has delegated responsibility for the general administration of the museum, who also reports to the Government. He is entrusted by the board to achieve the specified results of the museum as outlined in the strategy and annual plan • The Director reports regularly to the Chairmanat each Board meeting and advises the board on the museum’s performance in questions of a strategic, cultural, reputational and financial nature Composition • 25 Members: 15 appointed by the Prime Minister; one by the Sovereign, four by each of four British scientific societies; and five by the trustees themselves • All have significant career experience with the cultural heritage sector and represent diverse interests. Often members of other museum or company boards Source: The Board of Trustees of the British Museum, Governance Policies and Principles, November 2008

14. Case StudiesMuseum Boards • The Smithsonian, US • The Board of Regents • Museum KunstPalast, Germany • Foundation Board of Trustees • Holds the management accountable for their performance • Reviews and approves the Institution’s strategic plans • Articulates the Smithsonian priorities to reinforce and affirms its mission • Elects the Secretary of the Smithsonian • The Foundation is a partnership of private and public sector members b/wthe city of Dusseldorf and an energy corporation E.ON • Responsibility for ensuring the observation of the founders’ interests outlined in the Charter, yet has no role in the day to day operations e.g., exhibitions Purpose Composition • 17 Members: Two ex officio members, the US Chief Justice and Vice President; three senators, appointed by the President, three representatives, appointed by the House Speaker; and nine citizens nominated by the Board • Citizen members share many of the traits of British Museum members such as career experience and leadership • 14 Members minimum; 7 of these are from the city of Dusseldorf; 4 from E.ON corporation and additional members consisting of representatives from the industry and arts sector National Museum boards are comprised of seasoned and preeminent individuals with backgrounds in government, academia, business and cultural heritage to manage the funding, strategy and accountability of the museum as well as to liaise with equivalent institutions across a museum system Source: Smithsonian website, Museum KunstPalast website

15. Case StudiesBoards of Training Institutions • The INP is one of two major French publically-funded organizations dedicated to the study of curation and restoration • The Board is responsible for the general administration of the Institute; day to day management is the responsibility of the Director • Institut National du Patrimoine, France • The Board of Directors • Whilst the world-renowned OPD in Italy is governed primarily by the Florence Superintendent, she is assisted in all decision-making by a Management Committee • The Committee is responsible for the strategic direction of the museum • OpificiodellePietreDure, Italy • The Management Committee Purpose Composition • 19 Members: A President; 6 ex officio members; 6 appointed members, appointed by the Minister responsible for culture, including an INP graduate; 6 elected members, including two current students • Membership is diverse: the 6 appointed members are prominent presidents or directors of museums – currently, for example, the Superintendent of the City of Venice sits on the Board • The Board is assisted in technical matters by a Scientific Council; members are preeminent academics and representatives from the Institute's academic staff • 5 Members: The Superintendent of Florence ; the Head of the Office of Budget and Accounting; the Scientific Technical Officer; and two members of other institutions, currently the Administrative Director of the Special Office for Museums in Florence, and the Professor of Applied Physics from the University of Florence (elected by a State-Regions conference) • The Management Committee is assisted by a small Scientific Committee, again headed by the Superintendent Boards of Training Institutions share similar characteristics of other boards and work closely with a scientific committee to ensure all technical aspects are accounted for in the curriculum and substantiated throughout the cultural heritage system • Source: INP website, Opificio delle Pietre Dure website

16. Case StudiesBoards of Corporations • Total Oil and Gas • The Board of Directors • Determines the strategic direction of the Group • Supervises the implementation of Total’s vision • Appoints the Chairman and the CEO and supervises the handling of their responsibilities • Monitors the quality of information supplied to shareholders • Conducts audits and investigations as it may deem appropriate Purpose • 15 Members as of 2010 with a range of backgrounds, qualifications, and experience from both the public and private sector • All of the board directors are independent with the exception of four directors including the Chairman of the Board of Directors, the CEO, and the directors representing employee shareholders • Independent is defined as “no relationship with the company, its group, or the management of either, that may compromise the exercise of (the board member’s) freedom of judgment • The Chairman, CEO and Board of Directors are selected based upon the recommendations of Total’s Nominating and Governance Committee Composition Activities • The Board of Directors meets at least four times a year • They conduct an assessment of their practices at regular intervals • The Board also conducts an annual discussion of its methods Source: http://www.total.com/en/about-total/group-presentation/governance/corporate-governance/rules-procedure-board-of-directors-922622.html

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18. BoardsObjectives of a Corporate Board While the most critical objective for a corporate Board is to minimize exposure to risks, the scope of activities can be expanded to increase the impact of the Board Objectives • Approve and monitor decisions that are complex and have greatest impact on the enterprise • Mentor executives • Focus on community and other relevant constituents (e.g., patients for healthcare companies) Broad Contributeto Strategy Provide Guidance • Provide guidance on and approve strategy and capital investments • Select and compensate executive team • Focus on employees Contribution to the Business Mitigate Risks Basic Services • Oversee all risk management activities of the enterprise • Manage the governance of the Board • Focus on shareholders and regulators Narrow

19. BoardsFunctions of a Corporate Board The principal functions of the corporate board can be categorized by certain core processes including Board Governance Senior Management Selection and Compensation Ratifying Strategy and Monitoring Performance Mentoring Senior Management • Select optimal board composition • Establish leadership independent of management • Allocate decision rights • Formally and confidentially evaluate board effectiveness • Establish sub-committees to oversee key areas of governance, legal issues and ethics • Ratify proposed strategy and monitor performance • Stay informed about major operating developments • Develop a basic understanding of the firm’s industry • Provide advice and counsel to senior management • Ensure directors have access to senior management • Develop succession plans for CEO and senior management • Conduct performance reviews of CEO and senior management • Ensure compensation packages are appropriate and competitive