Board composition is an inherent part of corporate governance. An effective board of directors provides adequate oversight and keeps the organization moving in the right direction with proper leadership. Organizations can assess a board member’s effectiveness can by evaluating six key characteristics: skills, qualifications, tenure, independence, diversity, and technology. Let’s look at how these determine the board’s performance.
Skills & Qualifications
When putting together an effective board of directors, a thorough skill assessment is critical to gauge its later performance. We can divide the skills and qualifications of the board into two categories: individual and collective.
Every board candidate should provide the shareholders or nomination committee with detailed biographical information. It’s important to include a paragraph or bulleted list of pertinent skills and qualifications in that information. An exhaustive description of relevant background is one of the fundamentals to choose a candidate that can provide tangible value to the board.
Relevant skills in a board member candidate:
- Leadership skills acquired via formal education or participation in leadership positions (senior management roles, director on another board, etc.)
- Financial acumen
- Relevant industry experience
- Strategic and decisive decision-making
- Demonstrated professionalism
- Consistent skill and knowledge development
To grasp a better understanding of the board’s effectiveness, companies can evaluate the skills and competencies of the board as a unit.
This can be done by defining a set of board attributes that apply to the whole board, describing its capability of carrying out board responsibilities and roles. An effective board should include members who will mutually empower each other and establish management advice.
Another important part of board composition is tenure.
The main concern expressed by investors and governance analysts is that a board of directors that hasn’t added new members for years can lose independence and fresh perspectives. Another fear often raised is board complacency.
Stale and complacent boards could affect long-term company performance as well as effective management oversight. A refreshed board, on the other hand, can improve a company’s risk management and performance through broader, innovative perspectives.
Companies can use any of the three approaches to determine board member tenure:
Although still a somewhat uncommon practice, companies can consider term limits measured in years. Term limits of e.g., 10 or 15 years promote regular board refreshment.
Another approach to setting board tenure is a per board member evaluation process.
Annual performance surveys conducted on individual board members could help maintain strong and consistent board performance. Board members who fail to meet the evaluation benchmark can be justifiably removed from the board.
The last approach to keep the board refreshed is to introduce an age-based retirement policy. On average, companies set the retirement age for board members to 75 years.
Board independence is defined as the absence of any relationships between a board member and the company.
Board member independence is important to ensure that nothing impairs a board member’ judgment. Most companies listed on the New York Stock Exchange are required to consist of a majority of independent board members.
A director’s independence can be assessed through a series of independence standards outlined, for example, by the NYSE.
A different, yet similarly important, type of independence is the ability of a board member to challenge management, ask critical, often difficult questions, and get productive and exhaustive answers.
While studies show mixed results on the relationship between diverse board representation and performance, many countries around the world have laws requiring publicly traded companies to include female directors.
It is argued, however, that diversity (e.g., gender, ethnic) aids in the inclusion of valuable perspectives and innovative leadership strategies.
To leverage board diversity, companies should introduce an egalitarian culture where different voices are heard and contrary opinions integrated into deliberations.
Equipping boards with the right tools to help them govern more effectively is another important element of board composition.
To be able to direct an organization regardless of circumstances, boards should implement technology that facilitates communication and compliance. Various technology solutions such as board portals let board members hold board meetings everywhere.
While on-person board meetings can be cumbersome, board portals help boards convene and attend to critical company issues efficiently. The boards of directors that resolve to board portals can increase their responsiveness without incurring travel expenses, setting aside large chunks of time, or preparing paper board packs.
An Effective Board of Directors Steers the Organization to Success
Diverse boards with multidisciplinary experience are characteristics of highly performant and effective boards of directors that move organizations forward. When putting together a board, consider every board member individually but also take a broader perspective on how they perform as a unit. Empowering and motivating each other, board members should be the main drivers behind every company’s positive metrics.
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