What can we expect of Board Directors?

1. What can we expect of Board Directors? Professor Blanaid Clarke McCann FitzGerald Chair of Corporate Law Trinity College Dublin ESRC People Risk Seminar, Dublin 26 March 2014

2. The presentation will examine: • Our expectations of the role to be played by directors • Our expectations in terms of their qualification and competences • Will this improve the contribution of directors?

3. I. Background Hard Law • Statutory qualifications and duties of directors at national level • Common law fiduciary duties • Criminal Law sanctions EU Corporate Governance Green Paper (2011), EU Company Law Action Plan (2012) EU Commission Study on Directors’ Duties and Liability (2013) identified “gaps and deficiencies exist less with regard to the substantive rules on directors’ duties, and more in relation to enforcement”

4. Soft Law • EU Commission Recommendation on Strengthening the Role of Non-Executive or Supervisory Directors (2005) • National, International and transnational Corporate Governance Codes (http://www.ecgi.org) • A significant number of the changes have been implemented on foot of perceived corporate scandals

5. Ireland • Corporate Governance Code for Credit Institutions and Insurance Undertakings 2013 • Code of Practice for Good Governance of Community, Voluntary and Charitable Organisations in Ireland 2012 • Corporate Governance Code for Collective Investment Schemes and Management Companies 2011 • Corporate Governance Code for Irish Domiciled Collective Investment Schemes 2010 • Code of Corporate Governance for Independent Directors of Investment Funds 2010 • Corporate Governance Code for Credit Institutions and Insurance Undertakings 2010 • Irish Development NGOs Code of Corporate Governance 2008 • Corporate Governance for Reinsurance Undertakings 2007 • Corporate Governance, Share Option and Other Incentive Schemes 1999

6. - The UK Corporate Governance Code 2012 - The UK Stewardship Code 2012 - Corporate governance in central government departments: Code of good practice 2011 - Corporate Governance Guidance and Principles for Unlisted Companies in the UK 2010 - The AIC Code of Corporate Governance October 2010 - The UK Stewardship Code 2010 - The UK Corporate Governance Code 2010 - A Stewardship Code for Institutional Investors 2010 - The Audit Firm Governance Code 2010 - A review of corporate governance in UK banks and other financial industry entities (The Walker Review) 2009 - The Combined Code on Corporate Governance 2008 - Guidelines for Disclosure and Transparency in Private Equity 2007 - The Combined Code on Corporate Governance 2006 - Good practice suggestions from the Higgs Report 2006 - Internal Control: Revised Guidance for Directors on the Combined Code 2005 - Corporate governance in central government departments: Code of good practice 2005 - Pension Scheme Governance - fit for the 21st century: A Discussion Paper from the NAPF 2005 - Good Governance: The Code of Governance for the Voluntary and Community Sector 2005 - Corporate Governance: A Practical Guide 2004 - The Combined Code on Corporate Governance 2003 - Audit Committees - Combined Code Guidance (the Smith Report) 2003 - The Higgs Report: Review of the role and effectiveness of non-executive directors 2003 - The Responsibilities of Institutional Shareholders and Agents - Statement of Principles 2002 - The Hermes Principles 2002 - Review of the role and effectiveness of non-executive directors (Consultation Paper) 2002 - Code of Good Practice 2001 - The Combined Code: Principles of Good Governance and Code of Best Practice 2000 - Hermes Statement on International Voting Principles 1999 - The KPMG Review Internal Control: A Practical Guide 1999 - Internal Control : Guidance for Directors on the Combined Code (Turnbull Report) 1999 - Hampel Report (Final) 1998 - Greenbury Report (Study Group on Directors' Remuneration) 1995 - Cadbury Report (The Financial Aspects of Corporate Governance) 1992

7. RiskMetrics Study on Monitoring and Enforcement Practices in Corporate Governance in the Member States (2009) • Overwhelming support for comply-or-explain regime from regulators, companies and investors • Wide consensus it does not function perfectly • Poor quality of company disclosure and insufficient explanations • Information on board and remuneration constitutes 2/3 of all explanations for deviations • Monitoring and enforcement remains problematic

8. Influencing Factors • Trend towards shareholder engagement • Changes in corporate ownership and investment and trading practices • Lessons from the Financial Crisis

10. Global Corporate Governance Failings in Financial Institutions • Risk Management and Internal Control Failures • Deficiencies in the Profile and Practice of Directors and Senior Management • Perverse Incentives • Failures in Disclosure and Transparency • Complex and Opaque Corporate and Bank Structures

11. II. Role of the Board • “Every public company should be headed by an effective board which can both lead and control the company”- Cadbury Code (1992) • “We expect [non-executive directors] to behave as hard-nosed businessmen, referees, coaches, visionaries and saints, while giving only a few days a year to the job”. (Economist, 1994)

12. UK Corporate Governance Code 2012 • Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. • The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met. • The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

13. The Role of the Non-executive directors is: • constructively challenge and help develop proposals on strategy • scrutinise the performance of management • monitorthe reporting of performance • satisfy themselves on the integrity of financial information • ensure that financial controls and systems of risk management are robust and defensible • determine appropriate levels of remuneration of executive directors • appoint/remove executive directors and engage in succession planning

14. We expect [non-executive directors] to act as: • Auditors • Risk Experts • Strategists • Corporate Advisers • Recruitment Advisers • Public Servants • Stewards

15. III. Board Composition • “the calibre of the non-executive members of the board” (Cadbury Code, 1992)

16. “The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.” • Sufficient timeto discharge their responsibilities effectively. • Information & Support • Development • Board Evaluation

17. CRD IV • “sufficiently good repute and possess sufficient knowledge, skills and experience to perform their duties” • “act with honesty, integrity and independence of mind to effectively assess and challenge the decisions of the senior management” • “commit sufficient time to perform their functions” (See also: The Corporate Governance Code for Credit Institutions and Insurance Undertakings)

18. We expect [non-executive directors] to be: • Qualified • Experienced • Independent and bringing an independent judgement to bear • Committed • Available (i.e. limited other directorships) • Informed • Challenging • Interesting • Humorous

19. “In Ireland poor governance may well have been exacerbated by the concentrated nature of corporate life where challenge and assertiveness in the Board room was perhaps blunted by the social constraints of working and living in a small business community in a small country.” – Matthew Elderfield

20. We expect Diversity in our Boards UK Corporate Governance Code Principles • There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. • The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender. Provisions • A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives.

21. Proposal for Gender Diversity Directive for Listed companies (excluding SMEs) Binding Minimum Objective of 40% Women Non-Executive Directors by 2020 Appointments on basis of pre-established, clear, neutrally formulated and unambiguous criteria Positive discrimination for candidates of equal merit “unless an objective assessment taking account of all criteria specific to the individual candidates tilt the balance in favour of the candidate of the other sex” Proposal for Directive to provide for Non-Financial and Diversity Reporting ‘Comply or Explain’ requirement for large listed companies Description in the Corporate Governance Statement of the Company's diversity policy for its administrative, management and supervisory bodies covering: age, gender, geographical diversity and educational and professional background the objectives of the diversity policy Manner of implementation and the results in the reporting period

22. Will these boards work?

23. House of Lords & House of Commons Parliamentary Commission on Banking Standards ‘An accident waiting to happen’: The failure of HBOS “I have no doubt that the HBOS Board was by far and away the best board I ever sat on. My recollection of the culture and characteristics of the Board was one of openness, transparency, high intellect, integrity, good working relationships between the Chairman and Chief Executive, and a suitable diversity of backgrounds, mix of experience and expertise to maximise effectiveness [...] If with the benefit of hindsight I was asked if I wanted to sit on this board again I would be saying yes.” - Sir Ronald Garrick, Senior Independent Director, Deputy Chairman

24. Parliamentary Commission on Banking Standards Conclusions • The corporate governance of HBOS at board level serves as a model for the future…It represents a model of self-delusion, of the triumph of process over purpose.” • “The Board made effective but supportive challenges, as necessary, and would not seek to second guess executive management’s formulation of strategy.” – Board Assessment

25. Milgram (1974)

26. 8 Symptoms of Group-Think Overestimations of the Group 1. Illusions of invulnerability 2. Unquestioned belief in the morality of the group Closed-Mindedness 3. Rationalising warnings 4. Sterotyping Opponents Pressures toward Uniformity 5. Self-censorship of deviating ideas 6. Illusions of unanimity among group members 7. Direct pressure to conform 8. Mind guards