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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 first discuss and then document the policies and
guidelines that guide governance for their particular organisation. The governance framework for most
organisations is first 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 codified contractually.
Documenting these governance arrangements is the role of a board charter.
A board charter is defined as:
A written policy document that clearly defines 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 consider…as part of their
Governance Policy a board charter.
Standards Australia, 2003, Good Governance Principles, §2.2.2
© 2012 Australian Institute of Company Directors
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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 corporation’s leadership in delivering good governance.
- Allows communication of the board’s 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 benefit 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.
The content of a board charter
Companies have considerable discretion regarding the contents of a board charter. Some organisations seek to
have a brief document, touching generally on major governance issues but avoiding being overly prescriptive.
Other companies see the board charter as the top level policy document for the organisation and require the
document to address a wide range of governance issues.
In Australia, there are at least two overarching frameworks which have been widely used for
preparing board charters:
1. Board charters that follow the structure of the ASX Corporate Governance Principles and Recommendations
2. Those that follow the model put forward by Geoffrey Kiel and Gavin Nicholson, in their book on board
charters, Boards that Work.
Charters that follow the ASX Corporate Governance Principles and Recommendations deal with the eight
principles of corporate governance and the recommendations. While these are geared towards listed entities,
the vast majority of the recommendations are also seen as having wide governance application.
Appendix 1 contains a listing of the ASX guidelines and the various policies and documentation recommended
by the guidelines.
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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 company’s 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. Defining governance roles requires the board to elaborate on the role of the board, policies related
to board composition and the specific 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 define their policies.
Table 1: Board charter headings based on the Boards that Work model
Defining
governance roles
Key board functions
Improving
board processes
Board effectiveness
Board composition
The board and strategy
Board meetings
Director protection
Role of the board
The board and the CEO
Board meeting agenda
Board evaluation
Role of individual
directors
Monitoring
Board papers
Director remuneration
Role of the chair
Risk management
Board calendar
Director selection
Role of the
company Secretary
Compliance
Committees
Director induction
Role of the CEO
Policy framework
Networking
Stakeholder
communication
Decision-making
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Director development
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Board charter development
For many companies, the requirement for a board charter has become just another “compliance checklist”
item, delegated to the company secretary or company lawyers to write, so that the company can “tick the
box”. Taking this approach means that one of the key benefits of a board charter – the opportunity for
directors to discuss how they want governance in their organisation to operate to improve organisational
performance – is lost.
To develop a board charter that adds value, the following five-step process is recommended by Professor Geoff
Kiel, Chairman, Effective Governance Pty Ltd.
Step 1: Collect information
Document existing board policies and governance practices, including position statements and duty descriptions
for key governance personnel, a copy of the company’s constitution and any board policy documents. In larger
organisations there will be many policy documents to consider, while some small companies may have no
documented policies. In either case, the other task at this stage is to document the “unwritten” practices
that regulate corporate conduct.
During the information-gathering stage, the board may choose to delegate the majority of the work to a single
individual or small group. Depending on the size of the organisation and the experience of individual directors,
it may be appropriate to delegate the task to the company secretary, for example.
Step 2: Analyse documentation
Analyse the documentation to identify any discrepancies between existing board policies and current practice,
as well as areas where no formal policies exist and existing policies that may not conform to normative advice
on good practice.
Step 3: Draft charter
Provided the entire board takes part in discussing the relevant charter policies and guidelines, the initial task of
drafting the charter may be delegated to one person, such as the company secretary. A common question boards
ask is whether or not outside expertise is required to assist in charter development. This will depend on such
factors as the size of the company, the complexity of the governance framework and the ability of governance
personnel, in particular the company secretary, to devote the necessary time to the task.
Step 4: Board approval process
As the board as a whole is responsible for the governance practices of the organisation, its role is to approve or
not approve what is placed before it. This means that the board should approve any new policies, whether they
are charters, codes or other documents the organisation wishes to adopt. It may require several attempts before
the board is ready to approve the board charter. Presenting a draft charter gives the whole board a chance to
have a say, and gives each director a sense of ownership of the final document.
Step 5: Annual review
An annual review of the board charter is recommended. This approach keeps the charter current and
raises the directors’ awareness of the organisation’s overall policy framework.
© 2012 Australian Institute of Company Directors
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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 Council’s 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.
© 2012 Australian Institute of Company Directors
• CEO evaluation policy
• Senior executive evaluation policy
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ASX Principle and recommendations
Policies/documents to be drafted
2. Structure the board to add value
Recommendation 2.1:
A majority of the board should be
independent directors.
• Board composition policy
• Board structure policy
• Maximum term of directorship
Recommendation 2.2:
The chair should be an independent director.
• Chair an independent director
(see board structure policy)
Recommendation 2.3:
The roles of chair and chief executive officer should
not be exercised by the same individual.
• Separate role of chair and CEO
(see board structure policy)
Recommendation 2.4:
The board should establish
a nomination committee.
• Nomination committee charter
• Lead independent director
(see board structure policy)
• 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
• CEO’s report
• Information seeking protocol
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ASX Principle and recommendations
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 company’s integrity.
• The practices necessary to take into account
their legal obligations and the reasonable
expectations of their stakeholders.
• Company code of conduct OR
• Code of conduct for directors and senior
executives
• Expectations of directors policy
• Emergency contact procedures policy
• Whistleblowing policy
• 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.
• Diversity policy
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.
• Procedure on the disclosure of gender diversity
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.
• Procedure on the disclosure of gender diversity
4. Safeguard integrity in financial 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
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ASX Principle and recommendations
Policies/documents to be drafted
Recommendation 4.2:
The audit committee should be structured so that it:
• Audit committee charter
• Audit committee structure
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.
• Audit committee 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.
• Continuous disclosure policy
• Periodic disclosure policy
• Share trading policy
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.
• Shareholder communications policy
7. Recognise and manage risk
Recommendation 7.1:
The board or appropriate board committee should
establish policies on risk oversight and management.
• Risk management policy
• Risk profile
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• Risk management committee charter
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ASX Principle and recommendations
Policies/documents to be drafted
Recommendation 7.2:
The board should require management to design
and implement the risk management and internal
control system to manage the company’s 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 company’s
management of its material business risks.
• Risk and internal control assurance
Recommendation 7.3:
The board should disclose whether it has received
assurance from the chief executive officer (CEO) and
the chief financial 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 financial
reporting risks.
• CEO and CFO assurancee
• Internal audit function policy
8. Remunerate fairly and responsibly
Recommendation 8.1:
The board should establish a remuneration
committee.
• Remuneration committee charter
Recommendation 8.2:
Companies should clearly distinguish the structure
of non-executive directors’ remuneration from that
of executive directors and senior executives.
• Senior executive remuneration policy
• Non-executive director remuneration policy
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© 2011 Australian Institute of Company Directors