Question

Briefly explain the Code’s guidance on the appointments to the Board and succession plans. b) Illustrate THREE examples of how Associated British Foods PLC has complied with the Code regarding the establishment and composition of the nomination committee.

.   c)Discuss how Associated British Foods PLC has performed regarding appointments and succession plans of the Board in 2019 d).Explain the role of diversity in the Board of directors and give THREE examples of how Associated British Foods PLC has complied with the Code.

e)Under the Code, serving on the Board more than nine years is likely to impair, or could appear to impair, a non-executive director’s independence, while the Chair is not subject to the independence test other than on appointment. Critically discuss the difference between the guidance on the length of service of the chairman and that of non-executive directors above.

Answer 1

Please mentioned below the answers

Ans a) Many best practice companies have crafted sophisticated processes for board succession which helps ensure continuity and sustainability of corporate performance. However, a large number of listed companies are still characterised by a haphazard approach to board succession planning, ranging from a process wholly outsourced to consultants with limited control by the board to an opaque “friends and family” approach where the ultimate decision maker is management or a controlling shareholder.

Boards are responsible for directing the long-term success of companies, and their optimal composition over time is of key importance to investors. Therefore, establishing and maintaining entrepreneurial, independent company boards with the right competences and levels of diversity depends on robust board succession planning. This Viewpoint serves to highlight the principles underlying effective board succession planning as part of the process of good corporate governance to help inform investor and company dialogue on the subject. This includes independence, refreshment, engagement, competence, integrity, transparency and inclusiveness.

The process described in this Viewpoint primarily applies to non-executive directors (NEDs) whether they are independent or non-independent. It is important to note that executive succession planning at the level of the C-suite or below is also of great importance, but is outside the focus of this report. However, in the case of executive succession planning, some of the general principles identified in this Viewpoint would also apply.

Composition and independence

Effective board succession planning starts with a clear idea about the optimal board composition: the required knowledge, skills and experience; the percentage of the board that should be composed of independent non-executive directors (INEDS), the level of executive participation and the level of diversity, especially gender diversity. Best practice Codes often contain guidance in these areas. For example, the ICGN Global Governance Principles and the UK Corporate Governance Code both call for a majority of the board to be composed of independent directors while the French AFEP/MEDEF Code requires female board representation of at least 20% in listed companies—supplemented by more stringent legal quotas. Competence and integrity standards are also key in defining the collective profile of the board over time.

. Board refreshment

Another prerequisite for good board succession planning is a clear idea on board refreshment through the periodic appointment of new members and retirement of incumbent directors. The aim is to appoint directors who provide diverse perspectives, while replacing directors who may no longer have the requisite skills aligned with the company’s evolving strategic direction. The effect is to unlock board vacancies and allow for appropriate board diversity to improve board quality. Diverse boards are less prone to ‘group think’ and more likely to embrace new ways of thinking to meet future company threats and opportunities.

Board service should be contingent on individual director performance and annual re-election premised on satisfactory evaluations of his or her contribution to the board. Refreshment is most often achieved by setting director mandates of an appropriate duration. Most best practice Codes also suggest overall term limits for INEDs, beyond which director re-appointment as an independent director should be exceptional and adequately explained to investors.

Significant shareholders and engagement

In companies with a significant shareholder of reference - whether an entrepreneur, a family or the government- one or more directors are typically appointed to represent the interests of that shareholder. The presence of these (non-independent) NEDs is not necessarily harmful to the interests of other shareholders, as long as there is a robust system to manage conflicts that might arise from their presence on the board—as well as appropriate transparency on the control of the company by certain shareholders and their representatives on the board.

Best practice companies will make the nomination process inclusive, allowing for various consultations with key shareholders and, often, with other stakeholders (for example, management, banks, employees). Such consultations are even more important for companies with “vocal” shareholders in their registry. Detailed, timely planning and execution of shareholder consultations in this context might avoid the hostility of proxy fights at later stages of the director appointment process --often accompanied by significant waste of funds—at the shareholders’ ultimate expense. It is important that all nomination-related discussions with shareholders are conducted in a way that ensures the fairness of all disclosures made in this context.   

Board skills and evaluation

The board succession planning process should be described in a clear policy which ensures consistency and rigor in board succession planning. Another key element of the board succession “toolkit” is the board profile “matrix”. This is usually a document in which the skills, competences and diversity needs of the board are mapped against the ones available through the board’s current composition. The matrix helps the board focus its search and write relevant “job descriptions” for the selection of new NEDs in view of upcoming vacancies.   

Companies with best practices will perform collective effectiveness reviews of the board as well as individual director performance reviews, often led by the chairman or the senior (or “lead”) independent director when the chairman is an executive. ICGN recommends that a board evaluation is conducted by an external consultant once every three years to help inform candidates of strategic relevance to the company. It is important that the results of these assessments inform the director re-appointment process in the run up to the approval of director elections by shareholders.

Nomination / Governance Committee

The criticality of board succession planning requires clear “ownership” by a board committee. Most companies would ask their nomination (or governance) committees to take such ownership. Director nomination is fraught with potential conflict with major shareholders, management or other shareholders, so most corporate governance codes, including ICGN’s Global Governance Principles, call for the committee to include independent directors, at least in its majority. It is also good practice to include the non-executive chair of the board in the composition of the committee, given his/her role in director performance evaluation, and his/her understanding of the board’s needs. The committee would normally run the process from start to finish; it would also select and manage the search consultants, if any. At the end of the process the committee would typically submit its proposals for the approval of the whole board.

Disclosure

If shareholders are to play a positive role in encouraging better board succession planning, they need to be provided with adequate and timely relevant information. While few companies would share publicly their full nomination/succession planning policy and “matrix” due to their sensitivity, some best practice companies provide a good glimpse of how succession is managed in the corporate governance section of their annual report while others do so in the annual report of the chairman of the board or the nomination committee. In any case, disclosure is about the principles, the policy and the process, not about specific details of individual nominations and appointments. Disclosure of the parameters involved in the above discussions is pertinent, for example, stating that new directors are generally given an expectation that they will serve on the board for an identified period of time or an understanding of what areas the board assessed itself on, including specific objectives, delivering returns or oversight of certain key areas.

Ans b) Associated British Foods is a diversified international food, ingredients and retail group with global sales of £6.0bn, and 75,000 employees in 46 countries. Our aim is to achieve strong, sustainable leadership positions in markets that offer potential for profitable growth. We look to achieve this through a combination of growth of existing businesses, acquisition of complementary new businesses and achievement of high levels of operating efficiency.

  The business and the management of the Company are the responsibility of the whole board. The board met formally nine times during the year. The individual attendance by directors is detailed on page 33. There is a formal schedule of matters reserved to the board for decision which include the approval of annual and interim results, the Company’s strategic plans, annual budget, larger capital expenditure and investment proposals and the overall system of internal control and risk management. Other specific responsibilities are delegated to the board committees, notably the Audit, Remuneration and Nomination committees, which operate within clearly defined terms of reference, reporting regularly to the board. The board comprises the non-executive Chairman Martin Adamson, the Chief Executive George Weston, the Finance Director John Bason and six non-executive directors, with effect from 1 November 2006, who are independent of management and have no relationships which would materially interfere with the exercise of their independent judgement. The board also includes Galen Weston, a non-executive, who is not regarded as independent. The board considers that the non-executive directors provide a solid foundation for good corporate governance for the group and ensure that no individual or group dominates the board’s decision making. Details of the full board are set out on pages 28 and 29. The roles of the Chairman and the Chief Executive are separately held and are so defined as to ensure a clear division of responsibilities. Lord MacGregor, who has served on the board for 12 years, is the recognised senior independent director. The board is fully satisfied as to his independence, given the manner in which he discharges his duties with the Company, but reviews this annually in the light of the provisions of the Combined Code. The Articles of Association require that one third of the directors retire by rotation at the annual general meeting in each year subject to the requirement that each director seeks re-election every three years. Furthermore, in accordance with the Combined Code, each non-executive director who has served for more than nine years is required to stand for annual re-election. Accordingly, in addition to those otherwise seeking election, Galen Weston and Lord MacGregor, who have served for more than nine years, and Jeffery Harris will be subject to re-election at the forthcoming annual general meeting. On joining the board, directors are given background documents describing the Company and its activities. The Company offers major shareholders the opportunity to meet new non-executive directors. New directors are provided with an appropriate induction programme and site visits are arranged to major business units. Ongoing training is provided as necessary. Board and committee papers are circulated to members in advance of the meetings. In addition to formal meetings, the Chairman and Chief Executive maintain regular contact with all directors. The Chairman also holds informal meetings with non-executive directors, without any of the executives being present, to discuss any issues affecting the group. Senior executives below board level are invited, when appropriate, to attend board meetings and make presentations on the results and strategies of their business units.

Ans c) At Associated British Foods, our purpose is to make millions of people’s lives better through the provision of safe, nutritious food and affordable clothing. In this report, you can find out how our activities over the last year have supported our people and suppliers, contributed to the communities in which we operate and helped to improve the world in which we live. We also demonstrate how everything we do is guided by our core values.

Committee activities during the year Succession planning Given the relatively recent changes to the board with the appointment of the current Chairman in April 2018, the appointment of Graham Allan as a new independent non-executive director in September 2018 and the appointment of Ruth Cairnie as Senior Independent Director in late 2018, the focus this year has been on consolidating existing board responsibilities. Priorities identified for 2019 include continuing to emphasise generalist skills in board recruitment and continuing to factor in gender and racial diversity. As noted in last year’s report, the Company engaged Spencer Stuart, an external executive search and leadership consulting firm and a signatory to the ‘Voluntary Code of Conduct for Executive Search Firms’ on gender diversity and best practice, to help identify potential candidates as part of a process of progressive refreshment of the board. That process resulted in Graham Allan joining the board with effect from 5 September 2018. In March 2019, the Chairman joined the advisory board of Spencer Stuart. Spencer Stuart is otherwise independent of the Company. Re-election of non-executive directors The committee members reviewed the results of the annual board performance evaluation that related to the composition of the board and the time needed to fulfil the roles of Chairman, Senior Independent Director and non-executive director. Wolfhart Hauser, independent non-executive director of the Company, stepped down from the role of Chair of FirstGroup plc with effect from 25 July 2019. Ruth Cairnie, Senior Independent Director of the Company, was appointed Chair of Babcock International Group PLC in July 2019. Ruth stepped down from the board of ContourGlobal plc with effect from 30 September 2019 and it has also been announced that Ruth will be stepping down from the board of Rolls-Royce Holdings plc on 31 December 2019. The committee members considered the re-election of directors prior to their recommended approval by shareholders at the annual general meeting.

Governance ;- Members of the Nomination committee are appointed by the board from amongst the directors of the Company, in consultation with the Chairman. The committee comprises a minimum of three members at any time, a majority of whom are independent non-executive directors. A quorum consists of two members being either two independent non-executive directors or one independent non-executive director and the Chairman. Only members of the committee have the right to attend committee meetings. Other individuals such as the Chief Executive, members of senior management, Group HR Director and external advisers may be invited to attend meetings as and when appropriate. The committee may take independent professional advice on any matters covered by its terms of reference at the Company’s expense. The committee Chair reports the outcome of meetings to the board. The terms of reference of the Nomination committee are available on the Investors section of the Company’s website: www.abf.co.uk.

Board appointments process : The process for making new appointments is led by the Chair. Where appropriate, external, independent consultants are engaged to conduct a search for potential candidates, who are considered on the basis of their skills, experience and fit with the existing members of the board. The Nomination committee has procedures for appointing a non-executive or an executive director and these are set out in its terms of reference.

Diversity : As a board, we recognise that diversity is important for introducing different perspectives into board debate and decision-making and that this is a wider issue than just gender and ethnicity. We believe that members of the board should collectively possess a diverse range of skills, expertise, industry knowledge, business and other experience necessary for the effective oversight of the group. Accordingly, the board has decided not to set any measurable objectives in relation to diversity. The Nomination committee considers diversity as one of many factors when recommending new appointments to the board, although gender and ethnicity remain important factors and are a factor in searches for new candidates, as identified in our priorities for 2019. It continues to be our policy to ask any executive search agencies engaged to ensure that half of the candidates they put forward for consideration are women. We recognise that our approach of not setting a target, but instead focussing on initiatives to achieve no barriers to talent, means that we are unlikely to meet the 2020 expectations of the Hampton-Alexander Review. However, we believe that our approach is right for the decentralised structure of our broader business and will continue to deliver a strong, stable and increasingly balanced senior team.

Ans d) Diversity brings competing perspectives and is an important protection against groupthink at the board level. In this regard, diversity of board members ensures that decision-making perspectives are enhanced. Diversity is also important to reflect a changing customer base and to promote employee morale.

For a long time, boardrooms were commonly jovial, affable places where board directors were like-minded and knew each other well. An agreeable atmosphere is certainly nice, but it can cause some unintentional problems. Where everyone usually agrees, everyone tends to continue to agree and the group becomes exceedingly insular. Tight-knit boards often feel like they have an obligation to go along with the CEO or the executive director for various reasons. Some board directors may feel that it’s the right thing to do, others don’t want to veer from the crowd and others are just happy to go with the flow.

Good governance doesn’t call for dissension in the boardroom, but it does call for diversity. When governance is good, it’s a benefit to the CEO and the organization and all its benefactors. The benefits of diversity on boards become more apparent as boards become more accustomed to it. There are a lot of good ideas circulating about the best ways to bring diversity into the boardroom. Best practices for diversity of board composition are still evolving. Big changes in board recruitment call for modern governance practices and digital board management solutions.

Key duties

In accordance with its terms of reference, the Nomination committee’s primary responsibilities include:

· leading the process for board appointments and making recommendations to the board;

· regularly reviewing the board structure, size and composition (including the skills, knowledge, independence, experience and diversity), recommending any necessary changes;

· considering plans for orderly succession for appointments to the board and to senior management to maintain an appropriate balance of skills and experience within the Company and to ensure progressive refreshment of the board;

· keeping under review the leadership needs of the group, both executive and non-executive, to ensure the continued ability of the group organisation to compete efficiently in the marketplace; and

· being responsible for identifying and nominating, for the approval of the board, candidates to fill board vacancies as and when they arise.

Ans E) As members of the Board, all directors are required to:
· Provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed.

· 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.

· Set the Company's values and standards and ensure that its obligations to its Association Members and others are understood and met.

The Board as a whole is collectively responsible for promoting the success of the Company by directing the company's affairs. In addition to these requirements for all directors, the non-executive directors are expected constructively to challenge and help develop strategy, to participate actively in the decision-making process of the Board, and to scrutinise the performance of management in meeting agreed goals and objectives.

1.Key Accountabilities

The role of the Non-Executive Director has the following key elements:

· Strategy. Non-Executive Directors should constructively challenge and help develop proposals on strategy.

· Performance. Non-Executive Directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

· Risk. Non-Executive Directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.

· People. Non-Executive Directors are responsible for determining appropriate levels of remuneration of executive directors, and have a prime role in appointing, and where necessary removing, executive directors and in succession planning.

In order to fulfil their role, Non-Executive Directors will:

· Meet from time to time, if appropriate, as a group without executive directors being present, and at least once a year without the Chairman being present. In this case the meeting is led by the Senior Independent Director.

· Be entitled to seek independent professional advice, at the Company's expense, in the furtherance of their duties.

Non-Executive Directors may be asked by the Board to serve on one or more of the board committees. If appointed to a board committee, Non-Executive Directors will be advised of the committee terms of reference, and any specific additional responsibilities involved.

2. Time Commitment

All directors must be able to allocate sufficient time to the Company to perform their responsibilities effectively. Non-Executive Directors will be required to:

(i) Undertake that they will be able to allocate sufficient time to meet the expectations of the role, as set out in their letter of appointment, or as agreed from time to time.

(ii) Disclose their other significant commitments to the Board before appointment, with a broad indication of the time involved.

(iii) Inform the Board of any subsequent changes.

A Non-Executive Director should seek the agreement of the Chairman before accepting additional commitments that might impact on the time he or she would be able to devote to the role as a director of the Company.

3. Duration

Non-Executive Directors are appointed for an initial term of three years. The term may be renewed if both the director and the Board agree. Appointments are subject to the provisions of the Companies Act and the articles of association, including those relating to election/re-election by the Association Members at annual general meetings and the removal of directors. No compensation for lost fees is payable if a director leaves office for any reason.

There is an expectation that appointments are renewed for one term of three years only. In line with the corporate governance code issued by the Financial Reporting Council ("UK Corporate Governance Code"), any extension of a term beyond six years (ie two three-year terms) for a Non-Executive Director will be subject to a particularly rigorous review.

4. Independence

As recommended in the UK Corporate Governance Code, the Board will identify in the annual report each Non-Executive Director it considers to be independent.

The Board will determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement. The Board will state its reasons if it determines that a director is independent notwithstanding the existence, of relationships or circumstances which may appear relevant to its determination, including if the director:

· Has been an employee of the Company or group within the last five years.

· Has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, Association Member, director or senior employee of a body that has such a relationship with the company.

· Has received or receives additional remuneration from the Company apart from a director's fee.

· Has close family ties with any of the Company's advisers, directors or senior employees.

· Holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; or

· Has served on the Board for more than nine years form the date of their first election.

In the event that the Board agrees to retain or recruit Non-Executive Directors who do not meet the independence criteria, in order to achieve the appropriate balance between independence and relevant industry experience on the Board, where this would mean that the board composition no longer has a majority of independent Non-Executive Directors, the annual report will include an explanation of the appointment.