Substance over form in board composition

So much water has passed under the bridge since the publication of the Cadbury report and Code on good corporate governance in the UK in 1992.

It had a great influence on the design of codes and principles of corporate governance around the world. The Code has also been revised and expanded over the years reflecting changes in the social and economic environment as well as experience. Far from being a tick-the-box set of principles, the Code was intended to create the correct and appropriate culture to ensure properly accountable structures, systems of controls and transparency.

Many companies, even regulated companies, do not understand the spirit of the Code and consider boards as a necessary nuisance and time-wasters at a time of frantic competition and market aggressiveness. This way of thinking is a result of a complete misunderstanding of the reason behind the Code. It is there to be of guidance and support to business and not to obstruct it. This is what we occasionally miss out when setting up a board of directors. Let us take only three points here.

First, the board needs to be entrepreneurial. It is there to be forward looking and innovative while ensuring the sustainability of the enterprise. It is far from a risk averse and compliance obsessed structure. It has a great responsibility for the success of the business whether through growth or consolidation.

Second, there has a clear division between the board of directors and management. There are items that fall under the remit of the board and others that fall under the remit of management. Don’t confuse both. The board is responsible for the direction of the company and its effectiveness in execution of policies and decisions for the benefit of the shareholders while considering the needs of all other stakeholders. Management is responsible for the execution of these decisions and it has to be held accountable for its performance and results. A mix of non-executive and executive directors is productive and useful, however there are moments when executive directors may be asked to leave the board meeting for a free and open discussion amongst themselves. Non- executive directors have to challenge constructively the executive and hold it to account.

Third, never, never treat your directors as “token” directors. Take non-executive directors seriously. They need to have the time to allocate for their board responsibilities and should be reasonably remunerated for the hours they spend on board duties which go beyond the duration of their regular meetings, their expertise and experience and their guidance and judgement. They should never feel dominated by one or more members of the board, but they have to be prepared for temporary tenures as succession planning is a linchpin of good corporate governance.

Can you rate your board of directors from one to ten on these three factors that contribute to the success of your company?

About the author(s)

Joseph F.X. Zahra is a Malta based economist with over thirty five years of corporate leadership and business consultancy experience.