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Director tools
This is part of a series of Director Tools prepared by the Australian Institute of Company Directors. The tools have been designed to provide our members with general information and as a starting point for undertaking a board-related activity. These tools are not designed to replace legal advice or a detailed review of the subject matter nor are they intended to cover all circumstances where such a tool might be considered appropriate.
Board Charters
Introduction
Board charters have become a popular tool for boards to rst discuss and then document the policies and guidelines that guide governance for their particular organisation. The governance framework for most organisations is rst set out by the act of parliament which allows the creation of the organisation, for example, the Corporations Act 2001, and then the constitution, which provides greater legally binding detail on governance matters. There may also be other legally binding contracts among the owners and/or between the owners and the directors, which specify governance details, such as a shareholders agreement. However, there are many aspects of modern governance which are important for the board to have considered and agreed how they will act, but where it is either undesirable or unnecessary to have such aspects codied contractually. Documenting these governance arrangements is the role of a board charter. A board charter is dened as: A written policy document that clearly denes the respective roles, responsibilities and authorities of the board of directors (both individually and collectively) and management in setting the direction, the management and the control of the organisation. Board charters have become an accepted part of the governance landscape. Many major inquiries, reports and leading practice recommendations refer to the need for board charters in delivering effective governance. For example: Boards should adopt a formal statement of matters reserved to them or a formal board charter that details their functions and responsibilities.
ASX Corporate Governance Council, 2010, Corporate Governance Principles and Recommendations, p.13
Entities should develop and implement a Governance Policy [A]n entity might like to consideras part of their Governance Policy a board charter.
Standards Australia, 2003, Good Governance Principles, 2.2.2
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Board Charters
A board charter serves a number of important functions: As the top level policy document - Serves as a reminder for the board of the legal framework within which it operates. - Documents the policies that the board has decided upon to meet its legal and other responsibilities. - Assists the corporations leadership in delivering good governance. - Allows communication of the boards policies and expectations to management. - Provides guidance and comfort to shareholders that the board has implemented robust governance processes. - Is a point of reference for disputes. - Serves as an induction tool for new directors and senior managers. As a top level process. - Ensures that boards focus on how they can continuously improve their governance processes for the benet of the organisation. - Provides a forum to discuss some hard-to-mention governance issues. - Serves as a team development technique for both board members and senior management, to clarify roles and expectations.
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This provides one checklist of areas to consider, either for the board charter itself or associated policies. Not all the policies and documents suggested in the ASX guidelines need go in to the board charter itself. The charter might provide an overview of the companys policy in a particular area and a reference as to where the major policy, such as a diversity policy, can be found. A complete set of policies and documents in board charter format which meet the requirements of the ASX Corporate Governance Council Principles is available see reference 4 in Further Reading. Charters based on the Boards that Work model have four major sections: 1. Dening governance roles requires the board to elaborate on the role of the board, policies related to board composition and the specic expectations of the various key governance players 2. Key board functions outlines nine key roles which the governance literature suggest are central roles of all boards 3. Improving board processes concentrates on the actual activities of governance policies in relation to the conduct of board meetings, board papers and the role and function of committees 4. Board effectiveness reviews a range of activities required to ensure that directors are best equipped to undertake their role. Table 1 contains the 26 topics under the Boards that Work model where it is suggested that boards discuss and dene their policies.
Table 1: Board charter headings based on the Boards that Work model
Board effectiveness
Director protection
Role of the board Role of individual directors Role of the chair Role of the company Secretary Role of the CEO
Board evaluation
Monitoring
Board papers
Director remuneration
Risk management
Board calendar
Director selection
Compliance
Committees
Director induction
Policy framework
Director development
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Further reading
Further information on Board Charters can be found at: ASX Corporate Governance Council, 2010 Corporate Governance Principles and Recommendations with 2010 Amendments, www.asx.com.au/ governance/corporate-governance.htm. Boards that Work: A New Guide for Directors 2003, Kiel, G.C. & Nicholson, G.J., McGraw-Hill, Sydney Boards that Work 2012, Kiel, G.C., G.J. Nicholson, J. Tunny & J. Beck, Thomson Reuters, Sydney The ASX Corporate Governance Councils Principles: A Compliance Toolkit, Rev. 2nd edn, Effective Governance Pty Ltd 2011, Kiel, G.C., K. Kiel-Chisholm & J. Beck, Brisbane
Appendix 1
Frameworks and content for a board charter based on the ASX Corporate Governance Principles
ASX Principle and recommendations Policies/documents to be drafted
1. Lay solid foundations for management and oversight Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. Principle functions and responsibilities of the Board Delegations to management The role of individual directors Letter of appointment on non-executive director Letter of appointment for CEO Letter of appointment for CFO Job description for CEO Job description for CFO Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. CEO evaluation policy Senior executive evaluation policy
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ASX Principle and recommendations 2. Structure the board to add value Recommendation 2.1: A majority of the board should be independent directors.
Policies/documents to be drafted
Recommendation 2.2: The chair should be an independent director. Recommendation 2.3: The roles of chair and chief executive officer should not be exercised by the same individual.
Chair an independent director (see board structure policy) Separate role of chair and CEO (see board structure policy) Lead independent director (see board structure policy) Nomination committee charter Board composition policy Board structure policy Election of directors policy Vacation of office policy Draft resolutions for appointing directors where enough vacancies on board for all nominees to be elected Draft resolutions from appointing directors where more directors than vacancies Term of directorship policy
Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.
Board, director and committee evaluation policy Director induction Director development Access to independent professional advice procedure Access to the company secretary procedure CEOs report Information seeking protocol
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Policies/documents to be drafted
3. Promote ethical and responsible decision-making Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to: The practices necessary to maintain confidence in the companys integrity. The practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders. The responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Recommendation 3.2: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them. Recommendation 3.3: Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them. Recommendation 3.4: Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board. 4. Safeguard integrity in nancial reporting Recommendation 4.1: The board should establish an audit committee. Audit committee charter Procedure for the selection and appointment of external auditor Procedure for the rotation of external audit partner Diversity policy Company code of conduct OR Code of conduct for directors and senior executives Expectations of directors policy Emergency contact procedures policy Whistleblowing policy
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ASX Principle and recommendations Recommendation 4.2: The audit committee should be structured so that it: consists only of non-executive directors Consists of a majority of independent directors. Is chaired by an independent chair, who is not chair of the board. Has at least three members. Recommendation 4.3: The audit committee should have a formal charter. 5. Make timely and balanced disclosure Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. 6. Respect the rights of shareholders Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. 7. Recognise and manage risk Recommendation 7.1: The board or appropriate board committee should establish policies on risk oversight and management.
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ASX Principle and recommendations Recommendation 7.2: The board should require management to design and implement the risk management and internal control system to manage the companys material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the companys management of its material business risks. Recommendation 7.3: The board should disclose whether it has received assurance from the chief executive officer (CEO) and the chief nancial officer (CFO), or their equivalents, that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to nancial reporting risks. 8. Remunerate fairly and responsibly Recommendation 8.1: The board should establish a remuneration committee. Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors remuneration from that of executive directors and senior executives.
Policies/documents to be drafted Risk and internal control assurance Internal audit function policy
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