Best Practice for Board of Directors Structure

As the UK Corporate Governance Code points out, good governance should be the basis of how a UK board is structured. UK companies have considerable latitude when it comes to board structure, but form should follow function. Having too few directors means too little discussion and creativity; having too many makes decision-making complicated. A good mix of personalities and skills will boost boardroom performance, and board committees should be staffed in consequence.

Boards need the right structure to function efficiently

According to the most recent version of the UK Corporate Governance Code, good governance should be at the heart of how a board is structured.

The Company’s mission statement sets the objectives for the company, and the appropriate corporate governance structure is set up in consequence. Clearly, that structure may differ sharply for a FTSE 100-listed company and a small start-up, or from one sector to another. But the principles are the same: The board and management should be incentivised to further the interests of the company, and monitor its performance to ensure that the company succeeds.

The Code allows great latitude in terms of structure, but form should follow function. Is your company tolerating a high level of risk? Then there should be a risk committee and the audit committee should be properly engaged. If cybersecurity is a particular concern, then there should be an expert on the board, or even a dedicated committee.

“The board should be of sufficient size that the requirements of the business can be met and that changes to the board’s composition and that of its committees can be managed without undue disruption, and should not be so large as to be unwieldy,” according to a report by the UK Institute of Directors.

The UK Corporate Governance Code recommends that at least half of the board should be independent directors – ideally, with a diversity of backgrounds. The code also recommends that the chairman should not be a former chief executive and that the roles of the chairman and the chief executive should not be held by the same individual.

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The Challenge: Represent all of the interests

A study in the UK provides guidelines on how many directors should be on the board. Too few, and there isn’t enough diversity of opinion. Too many, and making decisions becomes difficult. As a general rule, more than seven board members makes assuring performance complex, but, in the interests of diversity of skills and backgrounds, it may be necessary.

“It’s important to make sure the spread of board members represents all areas of the business. Try to assemble a variety of personalities as well as different formal backgrounds.” Directors have to mix well, provoking exchanges of ideas. If all of the directors react in the same way to the same things, then there will be no creative interaction – this was, in fact, the problem in the 1950s and 1960s when board members all wore the same bowler hats and conformed, in the same way, in terms of issues, the study points out.

One area that must be covered on a board is financial knowledge. Someone must head the audit committee and ensure that financial reporting is managed correctly. An understanding of generally accepted accounting principles and financial statements leads to better board oversight and hence will better serve the interests of shareholders, according to a study by Barclays. Companies may also benefit from financial expertise on their board through other avenues. For example, studies find that having directors with a CPA, CFA or similar degree on audit committees translates into fewer earnings restatements, and there is a documented positive stock market reaction to the appointment of directors with accounting knowledge to the audit committee (though not to the appointment of other financial experts).

Fill gaps with non-executive directors

There is bound to be a certain level of conformity among executive directors who all work for the same company.

When structuring the board, assess the executive directors who work for the company. Decide what skills and knowledge they may lack, and whether it would be valuable to find non-executive directors who could fill such gaps, according to the study.

“For example, if you are developing an innovative process but lack know-how about protecting your intellectual property (IP), an IP lawyer could be an invaluable addition.”

“If you are looking to raise investment, you may need to show that you have a strong board. Appointing an accountant as a non-executive director could provide investors with evidence of financial rigour,” according to the study.

Non-executive directors are not involved in the day-to-day running of the business, but can bring many business benefits, possibly by serving as board chair. For example, they may provide specialist knowledge, industry contacts or money to invest, according to the study.

You can use non-executive directors’ experience and objectivity to help make difficult decisions, for example, setting directors’ pay levels or deciding whether your firm should undertake legal proceedings.

Board chairpersons should bear in mind that, although not usually classed as company employees, non-executive directors are exposed to the same risks as other directors and should be remunerated as such, the study reminds.

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