presentation outline

agenda
(1) Understanding the Board Structure & Composition
(2) Role of Executive vs. Non Executive Directors
(3) Director Independence
(4) Structuring Board Committees
(5) ‘Fit & Proper’ Board Qualification Criteria

•2
Introduction
Board Composition – Executive/Non-Executive/Independent Mix

Boards should include an appropriate mix of executive,

non-executive and independent directors

✓ Assess the contribution of independence to the

functioning and efficiency of the board
✓ Encourage the board to agree on a definition of an
independent director
✓ Encourage board to appoint independent directors, as
needed, including for key board committees
✓ Ensure director has appropriate skillsets – not just
independence alone.
Board Composition – Proper Skillsets

Boards should optimize the mix on the board,

especially of skills

✓ Evaluate the skills required for the board to fulfill its duties
given strategic direction of the company.
✓ Develop a target board profile.
✓ Evaluate the existing board skills and gaps.
✓ Use nomination committee to facilitate objective process for
identifying potential new nominees.
Understanding Board Structure & Composition
Board structure – Various operating models

▪ Unitary Board model ▪ Dual Board model

✓ (Anglo-Saxon model) ✓ (Continental European model)

Supervisory
Supervising and Board
steering level

Board

Chairman and CEO

Executive level
Chairman and CEO

▪ Anglo-Saxon model where executive ▪ Supervisory function of the BoD is

and non-executive directors sit performed by a separate entity known as a
together ‘supervisory board’ that has no executive
functions
Board structure – Various operating models

▪ Alternate operating model

▪ Separation of the Chairman and CEO roles
Board
Chairman
Supervising and
steering level

Executive level

CEO
Evaluating the operating models - Pros and Cons

Unitary Board model Dual Board model

(Anglo-Saxon model) (Continental European model)
▪ Board access to management ▪ Model provides a simple way to make
information access is much faster in the oversight function independent
case of the unitary model ▪ Poor information flow from executive
▪ Independence of the Board has to be board, inefficient monitoring role
explicitly incorporated by appointing ▪ Lack of cohesion in membership
majority NEDs as a part of the Board ▪ Missing exchange between executives
▪ Use of a strong and independent audit and NEDs (separate meetings between
committee in this system can fulfill Supervisory and Executive Boards)
some of the functions of a supervisory ▪ In case of a co-determination model
board (employees on Supervisory board), the
oversight cannot be deemed
independent
Board Composition

Types of Directors

Directors

Executive Directors Non-Executive Directors

Directors simultaneously serving as Board members who are not members

members of the company’s executive of the company’s executive
management management

Independent

Non-executive, outside directors who

meet criteria for independence
Board Composition – Primary functionaries
» EU commission definition: Any member of the administrative body who is engaged in
Executive the daily management of the company
•
Director » OECD definition: A board member who holds a senior management position, with full
board responsibilities

» EU commission definition: Any member of the administrative body of a company other

than an executive director
Non-executive » OECD definition: A board member who does not take part in the day-to-day operations
•
Director (NED) of the company, and is not an employee of the company
» An NED may or may not be independent (example a former CEO is an NED but cannot
be considered as independent)

• OECD definition: A non-executive board member who:

Independent » Has no material business or contractual relationship with the organization
Director •
» Is not under the undue influence of any other board member or group of shareholders
» Is generally capable of acting in an informed and objective manner
Board Composition – Other functionaries

▪ In addition, practices worldwide have identified other functionaries of the Board:

» OECD definition: Although a Shadow Director is actually not a member

Shadow Director of the Board, he/she exerts significant influence on its deliberations
(possibly a controlling or a significant shareholder)

» When the Chairman and CEO positions are not split, the role of lead
Lead Director director, an independent director, ensures that the inherent conflict of
interest in the common Chairman-CEO role is minimized

▪ Some organizations also have regulators or other government appointees acting as Board
members
Board Composition
The Right Mix of Directors

Boards to include appropriate mix of directors on the board – considering skill sets and balance
between executive, non-executive, and independent directors.

• Assess if the board functioning would be improved by adding more non-executives and/or independent
members.

• Encourage board to appoint non-executives and/or independent directors, as needed, including for key board
committees (e.g., Audit).

• Evaluate the skills required for the board to fulfill its duties given strategic direction of the company and
evaluate the existing board skills and gaps.

• Use board committee (e.g., Nomination) to facilitate objective process for identifying potential new nominees.

• Consider if increasing/decreasing the size would aid in board efficiency and also in the provision of effective
strategic stewardship.
Board Composition

Considerations for Board Composition

TYPE: Executive - Non-Executives - Independents

EXPERIENCE: Industry – Geographical - Market

SUBJECT EXPERT: Financial - Risk - Legal - Other

PERSONAL ATTRIBUTES: Leaders – Tacticians

DIVERSITY: Age – Gender - Cultural

VIEW POINTS: Risk Adversity – Differing Perspectives

OTHER VALUE ADDED: Business Contacts – Reputation

Role of the Executive Directors

★ Run the company on a day-to-day basis

★ Constitute the link between the board and management
★ Provide knowledge to NEDs on the day-to-day running of the org. and
its markets
★ Periodically report to the Board on the activities of the org., the
competitive position and any material changes to the risk profile of
the org.
★ Accept responsibility for delivering the strategy and provide updates
to the board
★ Alert board to key areas of concern
Role of the Non-executive directors
Summary of Higgs’ recommendations
» NEDs should constructively challenge and actively participate in the development of
strategy and decision making process of the org.
•Strategy •
» Challenge tendencies toward the emergence of a comfortable “group-think” among
the executives

» NEDs should scrutinize the performance of management in meeting the agreed upon
•Performance •
strategy of the org. and monitor the reporting of performance

» Non-executive directors are also responsible for the risk oversight of the org.
•Risk • » NEDs are responsible for financial oversight and ensure that financial information is
accurate and that controls and systems of risk management are robust and defensible

» NEDs are responsible for determining appropriate levels of remuneration of executive

directors
•People •
» NEDs also have a prime role in appointing, and where necessary removing, senior
management and in succession planning

Independence provides an additional assurance to stakeholders that the role is being

carried-out objectively
Independent Directors

What Value Do Independent Directors Add?

• Help ensure a professional member with the right qualifications, skill sets, and
commitment is appointed.
• Help ensure that situations are assessed openly and objectively and bring an unbiased
view to board deliberations.
• Are able to act in the best interest of all shareholders (and not just the one it might
represent).
• Help ensure the long-term interests of the company are being considered (and not being
influenced by the potential near-term strategy of one or two particular shareholders).
• Provide assurance to minority shareholders that their views are being represented (and
the directors are not just representatives of major shareholders).
Director Independence – Regulatory view
International Regulators

The Combined Code (UK)

At least 50% of the Board (excluding the Chairman) has to be independent

NYSE, NASDAQ
A majority of the board must be comprised of independent directors

Council of Institutional Investors

2/3 of board should be independent directors

Securities and Exchange Board of India (Capital market regulator)

1/3 of directors to be independent if the Chairman is an executive
50% if the chairman is non-executive

OECD Principles of Corporate Governance

Sufficient number of non-executive board members capable of exercising independent judgment
Separation of the role of CEO and Chairman is a good practice, but not one that is mandatory
Director Independence – Regulatory view
MENA Regulators
Regulator/Country Guidelines on Director Independence
Amman Stock Exchange ▪ Role of Chairman and Chief Executive MUST be separated
▪ At least (1/3) of the board members as independent directors
Corporate Governance Code for ▪ At least two members of any committee are independent

Shareholding Companies ▪ All committees shall be composed of not less than 3 NEDs
Egyptian Institute of Directors ▪ Majority members of the Board should be non-executive directors with
the technical or analytical skills to benefit the board and the
organization
Code of Corporate
▪ Role of Chairman and Chief Executive preferably needs to be separated,
Governance in absence of which the deputy chairman should be independent
Capital Market Authority, ▪ Majority of the members of the Board of Directors shall be
Saudi Arabia nonexecutive members

▪ Role of Chairman and Chief Executive needs to be separated

Corporate governance regulation ▪ Independent members of the Board of Directors shall not be less than
for KSA 2members, or 1/3 of the members, whichever is greater

▪ Role of Chairman and Chief Executive needs to be separated

▪ Audit committee must be comprised of independent Directors

Central Bank of Kuwait
▪ No overlapping of jurisdiction between the board and the Senior
Management
Director Independence – Regulatory view
MENA Regulators
Regulator/Country Guidelines on Director Independence
▪ Majority of board must be comprised of non-executives
Capital Market Authority, Oman
▪ Role of Chairman and Chief Executive needs to be separated
Code of Corporate Governance
for MSM Listed Companies ▪ Minimum of one-third of the board must be independent (subject to a
floor of two)
▪ The Chairman of the Board should preferably be non-executive and
independent
Central Bank of Bahrain, Bahrain
▪ Role of Chairman and Chief Executive needs to be separated

▪ “Adequate” number of independent members (At least 1 independent

CBB Rulebook Vol.1 and 2 – For member for local banks)
Conventional and Islamic banks
▪ Independent and/or NEDs should convene periodically in the absence
of the executive management team of the bank
▪ At least one-third of members shall be independent members and a
majority of members shall be non-executive.
The Securities and Commodities
Authority (SCA), UAE ▪ The board of directors shall meet at least once every two months.

▪ The committees shall consist of at least three (3) non-executive board

members, of whom at least two (2) members shall be independent
Rules and Corporate Discipline
members and shall be chaired by either independent member. The
Standards (SCA Code)
chairman of the board of directors may not be a member of any such
committees.
Director Independence - IFC Definition
"Independent Director" means a Director who has no direct or indirect material relationship with
the Company other than membership on the Board and who:

(a) is not, and has not been in the past five (5) years, employed by the Company or its Affiliates;
(b) does not have, and has not had in the past five (5) years, a business relationship with the
Company or its Affiliates (either directly or as a partner, shareholder (other than to the extent to
which shares are held by such Director pursuant to a requirement of Applicable Law in the Country
relating to directors generally), and is not a director, officer or senior employee of a Person that has
or had such a relationship);
(c) is not affiliated with any non-profit organization that receives significant funding from the
Company or its Affiliates;
(d) does not receive and has not received in the past five (5) years, any additional remuneration
from the Company or its Affiliates other than his or her director's fee and such director’s fee does
not constitute a significant portion of his or her annual income;
(e) does not participate in any share option [scheme]/[plan] or pension [scheme]/[plan] of the
Company or any of its Affiliates;
(f) is not employed as an executive officer of another company where any of the Company’s
executives serve on that company’s board of directors;
Director Independence - IFC Definition
(g) is not, nor has been at any time during the past five (5) years, affiliated with or employed by a
present or former auditor of the Company or any of its Affiliates;
(h) does not hold a material interest in the Company or its Affiliates (either directly or as a partner,
shareholder, director, officer or senior employee of a Person that holds such an interest);
(i) is not a member of the immediate family (and is not the executor, administrator or personal
representative of any such Person who is deceased or legally incompetent) of any individual who
would not meet any of the tests set out in (a) to (h) (were he or she a director of the Company);
( j) is identified in the annual report of the Company distributed to the shareholders of the Company
as an independent director; and
(k) has not served on the Board for more than [ten (10)] years.

For purposes of this definition, "material interest" shall mean a direct or indirect ownership of voting shares representing at
least [two percent (2%)] of the outstanding voting power or equity of the Company or any of its Affiliates. Consult with local
counsel as to the relevant percentage, if any, specified by local law (which may apply to publicly listed or unlisted
companies, or both). For example, in the United Kingdom, a shareholder is treated as having a material (disclosable)
interest in a publicly listed company if it holds 3% of the shares; in the United States, the equivalent threshold is 5%.
Director Independence
EIoD/EFSA, 2016

Director Independence

Independent Member of the Board of Directors:

• A non-executive member of the Board of Directors and not a shareholder of the company,
• Appointed as an experienced professional director,
• Relationship with the company is confined to the directorship board seat,
• Does not represent any of the shareholders and has no significant dealings with the company,
• Not paid any salaries or commissions or fees, except for directorship,
• Has no private interest in the company, and has no family relationships to any of the shareholders,
members of the Board, or any of the executives, up to the second degree.
• Not a senior employee in the company, or its advisers, or auditors during the previous three years,
• Must not exceed the term of office as an independent director for six consecutive years maximum.

Source: Egypt Code of Corporate Governance, Egyptian Institute

of Directors, Egyptian Financial Supervisory Authority. 2016
Director Independence

Amman Stock Exchange

The board member loses his independence in any of the following cases:
‣ If he is, or has been, employed by the company or any of its affiliates during the last three years
preceding his nomination for membership of the board of directors.
‣ If any of his relatives is, or has been, employed in the executive management of the company or any of
its affiliates during the last three years preceding his nomination for membership of the board.
‣ If he or any of his relatives has direct or indirect interest in the contracts, projects and engagements
signed with the company or any of its affiliates to the value of JD 50,000 or more.
‣ If the member or any of his relatives is a partner of the company's auditor, or if he is or has been a
partner or employee of the company's external auditor during the last three years preceding his
nomination for membership of the board.
‣ If the member has a control in the company of more than 10% of the company's capital.
Director Independence
Views of rating agencies

Criteria used
for directors
to be deemed
as not being
independent

Qualitative assessment conducted to determine degree

of independence. Look-back period of 3 years for
previous executives on Board

Directors with links to the external or Significant shareholder links or charitable

7 8
outsourced internal audit firms agency connections
Overall Board independence is questioned if Board interlocks and cross holding among two or
5 6
Director pay is substantially higher than peers more Directors and Boards respectively
Financial, legal or any other form of transaction Directors with familial or other links to current or
3 4
between a Director and the org– Not independent former executives, or a controlling shareholder
Current or former executives and founders cannot be Current or previous Consulting arrangements
1 2
deemed independent between a Director and the Organization
 Board Composition

Survey of Board Composition at Large Banks after Financial Crisis

Board size #New NEDs CEO/Chair Independent Former CEO on
Bank Board size
Current added split? Chair Board

Bank of America 17 15 8 Y Y N
Barclays 16 13 3 Y Y N

BNP Paribas 15 14 1 Y N Y (as chairman)

Citigroup 13 17 8 Y Y N

Credit Suisse 13 14 3 Y N (new chair) N

Deutsche Bank 20 20 3 Y N N

Goldman Sachs 12 12 2 N N/A N

HSBC 18 21 7 Y N Y (as chairman)

Lloyds Group 14 14 5 Y Y (new chair) N

Morgan Stanley 12 14 2 Y N (new chair) Y (as chairman)

RBS 16 12 7 Y Y (new chair) N

Source: Moody’s, Bank Boards in the Aftermath of the Financial Crisis

Board Composition
Board Composition
Board Committees
 Establish Effective Board Committees

Consider what committees are

needed based on depth of focus Ensure committees have
required in certain areas (e.g., charters and staff to support
audit, risk, strategy, nomination, them.
remuneration, investment)

Committees
Committees to be
comprised
independent, so far
exclusively of
as possible.
board members.

Educate board that

it continues to hold Committees report
responsibility for to the full board
committee on a regular basis.
decisions.
General Principles for Committees

Aid to the board, not substitution

01 02
Generally no executive powers

Defined terms of reference and limitations

04 03
Key cttees ideally chaired by and
composed of independent non-executive
directors (NEDs)
Board composition is linked to cttee
05
requirements
Why Create Board Committees?
Handle a greater number of
issues in a more efficient
manner
By allowing experts to focus on
specific areas and provide
Enhance the objectivity and
recommendations to the board as
a whole
independence of the board’s
judgment
Insulating it from potential undue
influence of managers and controlling
shareholders, in such key areas as
Develop subject-specific remuneration, director nomination and
expertise on the company’s controls oversight
operations,
E.g. financial reporting, risk
management and internal
controls
About Board Committees

Board committees serve as useful means of ensuring

that the Board gives sufficient consideration to all

matters for which it is responsible

Boards can delegate their authority to relevant

The primary reason to have Board Board committees for due deliberations and

committees is to enhance the monitoring recommendations

function of the Board

Board committees are of value especially in case of large,

unwieldy Boards or in case of decisions that require

independent deliberations
Board Committees - Types

Remuneration
Audit Committee Nomination Committee
Committee

Additionally, companies usually have the following committees

Range of combinations used along with

Risk Committee Compliance Committee
Audit committee (see next slide)

Other possible Board Committees

Board Credit Committee Market Risk Committee Strategy Committee

Finance/Capital Management
CSR Committee Ethics Committee
Committee

Human Resources Committee Treasury Committee IT Steering Committee

Committee combinations

Compliance
1
• Audit committee Risk committee

Alternatively, some companies combine the

Nomination and Remuneration committees
committee
Nomination and
Governance
committee
•2 Audit, Risk, and Compliance committee

3 Risk and Compliance committee Audit committee

Remuneration
•4 Audit and Compliance committee Risk committee
committee

•5 Audit and Risk committee Compliance

Establishing committees - Key questions to be answered

Why should an org. establish a When the magnitude, complexity and importance of issues exceed
•
Board level committee? the bandwidth of the Board

For major, long-term activities establish standing committees

Standing committee or ad hoc
• For relatively short-term activities, establish ad hoc committees
committee?
Usually, large org. have 4-6 Board level committees
At least 3 members on each committee (optimal size varies)

How a committee is composed? No membership of more than 2 committees. Independent members

for Audit, Compliance, Risk, Nomination and Remuneration
committees

When a committee shall meet and

• Monthly, Quarterly meetings
what’s the frequency?

•What is the committee quorum? Voting rights, quorum, proxy issues to be identified
Audit committee - roles and responsibilities

» Appoints the external auditor and oversees the org.’s relation with them
» Recommends the audit fee to the Board and approves any non-audit services provided by the external
Relationship with
auditor
External audit
» Discusses with the external auditor, the nature and scope of the audit and reviews the auditors quality
control mechanisms

» Monitors and reviews the activities of internal audit

» Ensures that the Internal audit is adequately resourced and has sufficient standing within the
Internal audit function organization
» Maintains the independence of IA and provides necessary resources
» Considers management response to IA recommendations

Internal control and » Maintains a comprehensive Internal control (IC) framework

risk management » Ensures the presence of a risk management policy document

» Reviews significant reporting issues and accounting policies

» Reviews org.’s semi-annual and annual financial statements
Reporting and
» Reviews formal announcements made to the shareholders
ongoing review
» Reviews primary regulatory returns filed and disclosures made by the org.
» Reviews the going concern assumption of the org.
Risk and Compliance committee - roles and responsibilities

» Review and oversight of the risk profile of the org.

» Making recommendations to the Board on risk appetite and RM practices

Strategic risk » Recommending changes to policies and procedures

management » Periodically reporting to the Board (at least annually)

» Assessment of the overall effectiveness of the RM framework

» Communicating risk implications of strategic decisions made by the Board
» Approving the compliance policy and the compliance function’s charter

Compliance » Ensuring compliance to all applicable laws and regulations

» Establishing and monitoring a permanent and effective internal compliance function
» Reviewing key risk reports and present to the Board

Monitoring » Reviewing and reporting significant risk issues highlighted by BUs and IA
» Reviewing exception reports and developing corrective actions
» Recommending appropriate risk disclosures to the Board
Disclosures
» Validating disclosures against applicable regulations
Nomination/Governance Committee - Roles and Responsibilities

Roles and responsibilities

» Make recommendations to the Board on the appointment of any Director to the Board
» Define the criteria, skills and experience for appointment on the Board
» Ensure smooth succession planning at the Board and the Senior management levels
» Recommend the relevant renewal terms for the office of the non-executive directors
» Recommend to the Board on aspects of the re-election of directors retiring by rotation
» Propose membership of other Board committees in consultation with the Board Chairman
» Review the structure, size and composition skills-set, diversity, knowledge and experience required of the
Board and make recommendations to the Board with regard to any changes
» The committee is also responsible for evaluating the performance of the NEDs and the Executive Directors

Committee reports
» Annual report on the Governance standards followed by the org. for inclusion in the Annual reports
» Annual performance evaluation report of the Committee, comparing the performance of the Committee with
the requirements set forth in its Charter
Remuneration Committee - Roles and Responsibilities

Approve remuneration policy Determine targets for

and compensation packages relating to performance related pay schemes for
Executive and Non-executive Directors, executives and review individual
Senior Management and Employees performance against the stated targets

Review the remuneration policy Make decisions on proposals

and make recommendations to the Board relating to granting and exercising share
and provide needed oversight for top options
management across the org.

Determine the terms of service Ensure the remuneration practices

and pension arrangements relating to the at the org. are in line with regulatory and
Executive and Non-Executive Directors, the legal requirement and are focused on
Senior Management including the CEO incentivizing long-term performance

Liaise with the CRO Monitor compliance

to develop a risk-adjusted compensation to the stated policy
mechanism for the org.’s executives
Board Committees
Board Committees
‘Fit And Proper’ Board Qualification Criteria
Considerations for Board Composition - Fit & Proper Criteria

Executive
Type

Non- Industry
Executives
Geographi Experience Financial

Subject Expert
Independe cal
nt Risk Age
Market

Diversity
Legal Gender Leaders

Personal
Attributes
Audit Cultural Tacticians Risk

View Points
Governanc Adversity
Honesty
e Business

Added
Other Value
Integrity Differing Contacts
Complianc Perspectiv
e Accountab es Reputatio
ility n
Strategic
Planning
Trade-off in Director appointments

» Regulatory requirements (as discussed in

previous section) mandate a majority
independent Board

» Leading practices of Corporate governance also

point to Director independence

Director independence

Industry expertise on the Board is a necessity:

» Given the Board’s involvement in setting the

risk appetite, risk strategy, risk limits etc.
» Owing to the nature of complex products, and Industry expertise
models used in the current scenario

Options available

» Appointment of former executives as NEDs – Inhibited by independence clause in governance codes

» Appointment of former executives at other orgs – Inhibited by the fact that executives may not be too willing to serve on
boards of entities with which they were keen competition in their previous roles

» Appointment of Compliance or Legal experts as independent directors, retaining previous executives as NEDs
Any Question ???

WHAT WHY WHERE WHEN WHO HOW

Thank You

Yehia El Husseiny

Stay in Touch
Corporate Governance
Officer
yelhusseiny@[Link]

[Link]/corporategovernance