(b) Induction and CPD
Induction for the new NEDs
Induction is a process of orientation and familiarisation that new members of an organisation undergo upon joining. It is
designed to make the experience as smooth as possible and to avoid culture or personality clashes, unexpected surprises or
other misunderstandings. In the case of the problems with NEDs at Lum, an effective induction programme will enable the
new NEDs to gain familiarisation with the norms and culture of Lum. This might be more important for Lum, being at flotation
stage and having a deep-seated family culture.
15They will be able to gain an understanding of the nature of the company and its business model. This will, as with the culture
and norms, be especially relevant for a company like Lum emerging from a long period as a private company with little need
to explain its business model to outside parties.
Induction will help NEDs in building a link with people in Lum Co and other directors. The building of good quality
interpersonal links is important in NEDs working effectively. This applies to their relationships with other executive and
non-executive directors, and also with relevant people in the company itself. This is especially important in NEDs populating
the board committees.
Induction will enable the new NEDs to gain an understanding of key stakeholders and relationships including those with
auditors, regulators, key competitors and suppliers. In order to understand the business model operated by Lum Co, NEDs
need to understand its external relationships and how these support the company’s operation.
CPD for the existing executives
The purpose of any programme of CPD is to update skills and knowledge as relevant to the professional situation. This will
typically involve content on regulation and law, best practice, new developments, etc. Directors should undergo CPD regularly
to keep these areas up to date and to ensure they do not ‘fall behind’ on key skills.
In the case of the changes at Lum Co, another specific benefit of CPD will be learning about working with NEDs and the new
board procedures that apply to listed companies. For Lum Co this involved creating a new unitary board, employing NEDs
and generally taking a more consultative approach to decision-making.
They would also benefit from learning about compliance requirements as a listed company. Legal and regulatory frameworks
differ between private and public companies. The listing rules that will be imposed by the stock exchange may be seen as
an imposition, especially the need to comply with the corporate governance code. This is likely to necessitate a lot of internal
change in governance and reporting behaviour and the CPD will help to provide the directors with this support.
After the flotation, the board of Lum Co gained a number of shareholders other than the Lum family. This would have created
a new governance environment and so learning about coping with the expectations of shareholders would also be a benefit
of the CPD. This would include, for example, learning about investor relations, dealing with shareholders at an AGM and
similar.
(c) Unitary and two-tier boards.
Distinguish between
In a unitary board, all directors, including all executive and non-executive directors, are members. All directors are of equal
‘rank’ in terms of their ability to influence strategy and they also all share the collective responsibility in terms of legal and
regulatory liability. There is no distinction in constitution or law between strategic oversight and operational management.
In a two-tier board, responsibilities are split between a supervisory or oversight board (chaired by the company chairman),
and an operational board (usually chaired by the chief executive). The supervisory board decides on strategic issues and the
operational board becomes responsible for executing the strategy determined by the supervisory board. Responsibilities
between the boards are clearly demarcated with the supervisory board responsible for many legal and regulatory compliance
issues (such as financial reporting). Directors on the lower tier (operational board) do not have the same levels of responsibility
or power as those on the supervisory board.
Difficulties for the Lum family
The first difficulty for the Lum family is the loss of the tight control they enjoyed prior to the flotation. In a unitary board, all
strategic decisions need to be taken by a full board including the NEDs. It is precisely to prevent small groups of powerful
executives from making decisions on their own that the counterweight of the non-executive board was introduced. This may
lead to frustration in the Lum family members, which may affect the objectivity of some decisions.
The company will lose the capacity for fast decision-making in the family supervisory board because of the need to involve
everybody. Large boards generally meet regularly but on fixed dates. NEDs and other executive directors are likely to seek
explanations for decisions taken outside the main board discussions and can act against any members, including family
members as the Lum family only controls 20% of the shares.
The change in culture brought about by the governance changes are difficult for the family to manage and the movement to
a unitary board is likely to add to the difficulty of this adjustment. The need to consult widely (on a larger board) and to seek
consensus are likely to be significant changes for the Lum family. For those used to the family way of managing the company,
these changes are likely to be difficult to deal with.
[Tutorial note: allow latitude on the ‘difficulties’ part of this answer.]
16Professional Level – Essentials Module, Paper P1
Professional Accountant June 2012 Marking Scheme
