CP18/15 Corporate Governance: Board Responsibilities

Published by Kim Durniat on

Lloyd Richards contributed to the writing of this blog post

In CP18/15 – Corporate Governance: Board Responsibilities the PRA sets out its proposals for the supervisory statement and requests feedback by 14 September 2015. The draft supervisory statement provides guidance on the PRA’s expectations relating to 12 areas of interest; below we set out the key aspects of the guidance in each area.

Area Key Guidance
Setting strategy
  • A key role for any board is to set the firm’s strategy; the strategy of the firm should be owned by the board as a whole
  • The board should be able to give evidence that the firm is managed to a clear and prudent strategy and risk appetite
  • The PRA recognises that the chairman and chief executive have leading individual roles to play in the board’s development and maintenance of the firm’s business model
Culture
  • The board should maintain a culture of risk awareness and ethical behaviour for the entire organisation
  • This culture should be embedded using appropriate incentives
  • The non-executives should hold the management to account for embedding and maintaining this culture
Risk appetite and risk management
  • The risk appetite should be well-articulated, measurable and clearly understandable by employees throughout the business
  • The board should be able to give evidence of the active oversight of risks according to the risk appetite
  • The risk control framework should flow from the risk appetite and be kept under active review
Board composition
  • The key message is that non-executives should be able to hold management to account effectively
  • In order to do so, the board should include a sufficient number and quality of non-executives who are independent and who between them have sufficient breadth of understanding of the business
  • In the case of listed firms, established best practice is that at least half the board is comprised of independent non-executives. Smaller firms should ensure they have at least two independent non-executives
  • The chairman should be non-executive; where this is not the case the firm should be able to explain how its governance arrangements otherwise satisfy the need for independent oversight of the executives
The respective roles of executive and non-executive directors
  • Once more, the key message is that the non-executives should be able to challenge the executives, and hold them to account
  • The PRA expects that boards will do so in a collegiate and supportive manner
Knowledge and experience of non-executive directors
  • Between them, non-executive directors need to have sufficient current and relevant knowledge and experience to understand the key activities and risks in the business
  • The PRA will expect to see evidence of effective challenge, particularly in relation to key strategic decisions
  • The board should make decisions as a whole, and not simply delegate responsibility for major decisions to individuals among them who are considered specialists
  • Non-executive directors should be able to call on appropriate professional advice, although the directors will always remain ultimately accountable for all the board’s decisions
Board time and resources
  • Non-executive directors should ensure they have sufficient time to fulfil their duties
  • Discussions may take place outside formal board meetings, but meetings themselves should be genuine, open discussions and not 'stage-managed'
  • The chairman should take a lead in the training and ongoing professional development of board members
Management information and transparency
  • The provision of information in a timely, accurate and complete fashion is fundamental in allowing the board to fulfil its duties and responsibilities
  • The board should actively guard against the risk that too much data renders their role unworkable
  • Management should not confine information reported to the board to those matters solely reserved for the board’s attention; management should understand when the size, nature or impact of an issue suggests that escalation to the board is appropriate
Succession planning
  • Boards should ensure they have robust succession plans, including for the unexpected loss of key individuals 
Remuneration
  • Remuneration should align incentives with prudent risk taking
Subsidiary boards
  • The PRA considers it undesirable for key positions on subsidiary boards (e.g. chairman, chief executive, finance director or chairs of sub-committees) to be occupied by executive members of the parent company’s board
Board committees
  • The role of a board sub-committee is to support the board. The committees are accountable to the board but should not relieve the board of any of its responsibilities

You can read the full consultation paper on the Bank of England website.   

Feedback is due by 14 September 2015; you can send any feedback to CP18_15@bankofengland.co.uk by this date.

The FCA’s Corporate Governance Code can be found on their website


Key points

  • The key theme is of accountability; the board must be able to hold the management to account effectively
  • There are a number of areas where the PRA will expect to see evidence of compliance with the supervisory statement
  • Board members should familiarise themselves with the FCA’s corporate governance code