Mr Seamus Gillen Policy Director Institute of Chartered Secretaries and Administrators 16 Park Crescent London W1B 1AH

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1 Mr Seamus Gillen Policy Director Institute of Chartered Secretaries and Administrators 16 Park Crescent London W1B 1AH Sent by to 14 October 2010 Ref: ICSA Consultation Dear Seamus Improving board effectiveness The (IIA) is pleased to have this opportunity to comment on improving board effectiveness. Our views have been developed by Chris Baker, our technical manager, through consultation with our members and we are happy for these to be part of the public record contained on your website. Overall, our members feel that you have been successful in your aim of preparing a short, practical piece of advice that will guide boards towards good governance while enabling them to develop their own thinking for their organisations. At the same we believe there are some omissions relating to: The importance of information for effective boards The value of independent and objective assurance from professional internal auditors in helping directors The characteristics of non-executive directors. The attached document answers your three questions and sets out our views in more. If you have any queries, or think it would be useful to meet to discuss these matters further, please contact Chris at chris.baker@iia.org.uk. Yours Sincerely Jackie Cain Policy Director 13 Abbeville Mews, 88 Clapham Park Road, London SW4 7BX tel fax info@iia.org.uk

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3 1. Are any areas not covered? On the whole we feel that the guidance explains the key issues within the various sections on roles and processes. However, we believe there are some omissions. We set out here the changes we recommend to help support the implementation of the Principles in Sections A and B of the UK Corporate Governance Code (the Code). Non-executive directors The original Higgs Guidance of 2003 provides a useful bullet point list of what makes an effective non-executive director. We suggest inclusion of the list at the end of section 7 to support and summarise the preceding paragraphs: upholds the highest ethical standards of integrity and probity supports executives in their leadership of the business while monitoring their conduct questions intelligently, debates constructively, challenges rigorously and decides dispassionately listens sensitively to the views of others, inside and outside the board gains the trust and respect of other board members promotes the highest standards of corporate governance and seeks compliance with the provisions of the Code wherever possible. Information and its reliability One of the main principles within section B of the Code is that the board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The draft guidance contains several references to information. For example, sections 7 and 8 recognises that there is a the need for accurate, clear and comprehensive information ; and section 9 talks about guarding against inadequate information. However, we feel that a separate section bringing together all the considerations related to information would underscore its fundamental importance to governance standards. Currently, the guidance fails to address one of the simplest yet most important questions related to information: how do board members know the information they receive is reliable? We recommend that the guidance should discuss the value to all board members, but particularly to non-executive directors, of independent and objective assurance. Independent and objective assurance It is our view that professional internal auditors are the best source of independent and objective assurance. It is our view that, for this reason, internal audit is a cornerstone of good governance and that it should be recognised as an important part of implementing the Code s principles. We therefore recommend that the section on information should recognise the role of independent assurance provider and that companies be required to consider professional internal audit service as the main source of independent assurance to the board

4 The scope of modern internal auditing is broad, covering all aspects of governance and all kinds of risk. Therefore, internal auditors are well equipped not only to provide an opinion upon the reliability of information but also to support non-executives as they work to understand the organisation, challenge strategy, scrutinise performance and manage risk. As a result, we suggest that the guidance could usefully refer to internal audit at various points, detailed in the table below. 2. Are any areas covered considered superfluous? No, we do not consider any areas to be superfluous 3 Any points of drafting detail? The table provides some drafting points, including suggestions where internal auditors can assist the directors in applying the principles in the Code. Paragraph Detail Amendment or addition nonexecutive directors, 7.2 In discussing the time that non-executive directors need to be able to make available, the guidance outlines some of the activities that they should undertake. We believe this should include meeting Internal Audit. Code Main Principle B.3 makes clear that non-executive directors need to make sufficient time available... should extend beyond the boardroom and include meetings with Internal Audit. nonexecutive directors 7.5 company secretary 8.2 This is the paragraph that refers to the need for accurate, clear and comprehensive information. Given the importance of accuracy, clarity and completeness, we recommend that the guidance should also refer to the need for independent and objective assurance on these characteristics. It is the role of the company secretary to ensure that board and other governance procedures are fit for purpose. However, internal auditors can help the company secretary by providing independent evaluations of governance processes and facilitating valuable improvements. Governance processes are one of the core areas of interest of professional internal auditing, according to the Definition of Internal Auditing promulgated by the global professional body, the Institute of Internal Auditors Inc. Because of the importance of the process of decision-making to the work of the board, non- executive directors should insist on accurate, clear and comprehensive information being provided sufficiently in advance to enable thorough consideration of the issues prior to, and informed debate and challenge at, board meetings. Nonexecutive directors should insist on receiving independent and objective assurance in relation to this information. Given the importance of governance processes in delivering a highperforming board, the company secretary should consider whether board and other governance procedures are fit for purpose and advise the chair of any improvements and initiatives which could add value to the governance of the company. The company secretary should, from time to time, obtain independent and objective assurances in relation to these fit for purpose assessments

5 Paragraph Detail Amendment or addition Decision making 9.4 This paragraph suggests techniques that can help guard against flawed decisions. We applaud the suggestion of commissioning an independent report. We would also recognise the role that professional internal auditors can play on an ongoing basis in helping to guard against flawed decisions, by providing objective and independent assurance directly on aspects of individual projects and decisions and indirectly on the processes used to help reduce bias. Add an additional bullet between the two existing ones: ensuring that the internal audit department considers the need to provide assurance both on the processes used to evaluate and assess projects and on specific projects when doing its planning, and receiving subsequent reports from the internal auditors. Establishing directors skill base induction 11.2 This paragraph outlines the content of an effective induction programme. Given the contribution that the internal auditor can make to the directors work, we suggest that a meeting with the internal auditors should always form part of an effective induction programme. The chair,... Consideration should be given to visiting important business locations and meeting senior and middle management, including the head of internal audit, to develop a meaningful line of sight into the business, and particularly those areas that carry significant risk. A vital part of this understanding is to learn how the organisation manages and reports its risks and how the directors will obtain assurances that the organisation is managing risks effectively.. Evaluating the performance of the board and directors 13.5 This paragraph outlines the questions to ask when evaluating the board and directors. They include questions on how the board oversees the management of risk. However, one very important area is the way time is allocated amongst different risks and between existing and emerging risks. It would be useful to recognise explicitly this aspect of board performance. Add a bullet after the one beginning: how the decision process work, saying: how the board allocates its time between different risks and different categories of risk