April 2011 Issue 8
BoardWorks International
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Letters of Appointment

The practice of issuing a formal letter of appointment to each new board member should be seriously considered by all boards.  It underlines the importance of the commitment a new board member is entering into and makes explicit a wide range of expectations.  It also provides a new director with other important information relating to their appointment.  The very process of drafting of the letter forces the appointing authority (1) to be clear about conditions attaching to the role. 

The indicative contents of an appointment letter set out below are intended to be illustrative rather than prescriptive. They do not necessarily represent the terms applicable to every appointment.  The contents of the letter should be consistent with the governance procedures of the board, the constitution of the entity and any applicable legislative or regulatory provisions.

Appointment

The starting point is usually a general statement indicating the term of the appointment and the commencement date.  Depending on the legal jurisdiction there may also be a reference to the nature of the legal employment status of the role.  In New Zealand, for example, a standard phrase is often used ('It is agreed that this is a contract for services and is not a contract of employment').

There may also be a reference to any termination provisions. For example, 'Your appointment will be for an initial term of 3 years unless terminated earlier by, and at the discretion of, either party on 1 month’s written notice.'

Time commitment and location of meetings

Unfortunately many people accept appointment to boards without understanding or accepting the extent of the commitment expected of them.  The inclusion of a reference to the amount of time required to do the job properly imposes a discipline on both board and incoming members.

For example: 'We anticipate a time commitment of 3 days per month. This will include attendance at:

  • 10 monthly board meetings per annum
  • the Annual General Meeting
  • board strategy workshops (at least 2)
  • site visits (at least one); and
  • membership and participation in at least one Board Committee. 

In addition, you will be expected to devote appropriate preparation time for each meeting. In accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the reasonable demands of the role.'

If the location of board meetings varies this should also be made explicit.  This is to provide guidance on the extent to which the board member may be required to travel to meetings in different locations. Some boards provide specific travelling allowances which are documented in their letters of appointment.

Independence

The extent to which a director is legally entitled to be defined as 'independent' may also need to be addressed explicitly.  In such cases, the appointment letter may well place a requirement on the appointee to advise the chair before accepting any other directorships, or taking other actions that might change their status.  The obligation of the appointee to advise of any relevant changes of circumstances, should be made explicit.

Role (obligations and responsibilities)

The letter of appointment should make reference to the governance-related obligations and responsibilities of the appointee.  Often this will be most easily achieved by cross reference to a board charter or other relevant governance documentation. The appointee should be able to easily access documentation setting out, for example, the entity’s governance philosophy, a definition of the board's role and responsibilities, its policies and key processes and protocols, etc.  In the absence of such documentation the letter of appointment should itself describe the essence of the board’s role and responsibilities.

Committees

Many boards choose to have committees assist them in their work.  It will be a normal expectation that board members will share in the work of such committees.  This expectation should be made explicit along with any remuneration implications (e.g. additional fees).

Fees and expenses

The letter should set out any entitlement to the payment of director’s fees and the reimbursement of expenses.  Where there is a professional payment or even a nominal honorarium it may be necessary to make explicit any arrangements and liabilities for deduction of taxation, superannuation and the like.  While the practice of granting retirement allowances to directors is rare these days, any entitlement of this nature should also be made explicit. 

Even in organisations where the payment of fees to board members is unusual it should be made clear the extent to which the organisation will reimburse directors for reasonable and properly documented expenses incurred in performing their duties.

Disclosures of interest

Circumstances may arise where an appointee has an actual or perceived conflict of loyalty to another role. A director may also have a personal pecuniary interest in a decision facing the board.  It should be clear that the appointee is expected to proactively acknowledge and declare such interests should they arise.  The steps to be taken in doing so should be documented, if not in the letter of appointment, in some other source that can be easily accessed.

Confidentiality

The proper handling of information gained during board service can be a sensitive and contentious matter.  Legal penalties may be incurred for the mishandling of information in certain circumstances (e.g. price sensitive information in relation to listed company activity). 

New board members should be made aware that all information acquired during their appointment is generally confidential to the entity. Such information should not be released to third parties either during their term of appointment or thereafter without prior clearance (usually from the chair).  Information obtained by directors in exercising their duties does not belong to them individually but to the board and the entity, collectively. (2)

Appointees can be asked to enter into confidentiality agreements where this is appropriate.

Induction

After 15 years of conducting board and director performance evaluations we can say with confidence that the process of induction is seldom carried out to the satisfaction of either new board appointees or to the board itself.  All the more reason, therefore, for the board to use the letter of appointment to make a commitment to providing an appropriate and effective orientation process. 

Performance review and continuing professional education

Today, board and director performance evaluation is generally accepted as an integral part of board service and director accountability.  If there is an expectation that a new director will participate proactively in a review and continuing professional development process this should be made explicit in the letter of appointment.

Independent professional advice

Circumstances can sometimes arise when it is appropriate, in the furtherance of his/her duties for a director to seek independent professional advice at the organisation's expense.  Any provision for this should be described in the letter itself, including the process for obtaining such advice.

Indemnity and insurance

Many organisations provide some form of indemnity and/or liability insurance to board members.  The extent of these should be documented in the letter of appointment.

Access to information

Subject to any legal limitations, board members are generally entitled to gain access to all appropriate financial and operating information necessary for the performance of their duties.  The letter of appointment is a chance to prescribe the degree of access to information or employees when they feel they need such access in order to carry out their duties.

Agreement to appointment

The final and, arguably, the most important provision in the letter of appointment, should be a request to the appointee to confirm in writing their agreement to the terms and conditions set out in the letter of appointment.

 

(1) While letters of appointment are commonly signed by the board chair that is not always be the case.  For example, in a government owned entity a letter of appointment would likely be signed by the responsible Minister.  
(2). The governing boards of some types of entity (e.g. local authorities) are required to hold their meetings in public and their deliberations are subject to official information requirements.  The implications of these requirements for the handling of sensitive information should be made explicit.  Again, this can be done in the letter of appointment or by cross-reference to other policies and protocols. 

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