Words that describe service for boards of directors are highly competitive, disruptive and technologically challenging. Every board director brings their own perspectives into discussions. This is why it’s so important to bring ethnic and gender diversity into the board. Multiple perspectives aid in strategic planning and decision-making. A well-composed board brings vast knowledge of strategic partnerships, mergers & acquisitions, finance and networking to the organization. Under the best of circumstances, board directors hold each other accountable for oversight, auditing and hiring. Productive boards, along with implementing good governance practices, lead organizations to ultimate success and sustainability.
Poorly functioning boards decrease productivity, create liability issues and promote unrest in the boardroom. Boards that don’t function well don’t typically support management as well as they need to. Getting the right board composition can be especially challenging for middle-market companies where founders make up most of the board and also have the final say on all key decisions. Middle-market companies tend to rely on a team of longtime trusted advisors. While they’re aware of the need for an objective board, they’re often hesitant to cede control to a new board of directors.
Board Composition 101: A Step-By-Step Guide
Good governance requires qualified board directors, diversity, multiple perspectives and independence. Develop your board with this step-by-step guide to forming a well-rounded board.
Step #1: Establish Board Director Duties and Responsibilities
In taking an objective look at your board’s composition, it’s always a good time to review the board director description duties and responsibilities.
One of the major responsibilities of board directors is to select and appoint a chief executive. The board is also responsible for reviewing and evaluating the CEO’s performance on a continual basis. The board offers guidance to the CEO and has the final say on whether to retain or dismiss the CEO. CEOs are responsible for the daily operations of the company, including program planning and implementation, managing the organization and its employees, and keeping the board informed.
Boards are also responsible for allocating resources and ensuring that the board has adequate resources to finance programs and services. Board directors are responsible for ensuring sufficient cybersecurity protection and for enhancing the company’s reputation and branding.
The board is accountable to stockholders for the company’s performance and they’re responsible for developing all company policies and assessing their own performance.
Step #2: Assess Current Board Composition
Before a board can pursue a responsible recruiting effort, they need to determine what their current needs are and what their needs will likely be for the next three to five years, so that the board has the necessary talent and expertise to lead the company into the future.
The strategic plan will provide an indication of the skills and expertise that the board needs. Boards that are focused on global expansion will need someone with international board experience on the board. Companies that are prime targets for cybersecurity risk will want to look for board directors with strong IT expertise on their boards.
The first step in determining the board’s current skills and expertise is to do a board self-evaluation. At a minimum, boards should do a whole board self-evaluation. Boards that choose to also do individual board director evaluations or peer evaluations will acquire even more information that will help them to form the best possible board composition.
A digitized boardroom solution for board assessments will provide a quick, easy and intuitive way to complete board self-evaluations. The tool makes it possible to form various types of questions. Boards will find the tool to be efficient, as it automates the processes for monitoring completion and creating custom charts and reports, including automatic averages.
Step #3: Right-Size Your Board
One of the things that many companies overlook during times of redeveloping their boards is considering whether the size of their board is appropriate for maximum productivity. A board that is too small will lack the necessary members to fill the committees. Boards that are overly large can be unmanageable and unproductive.
The right size board will be able to stay focused on their goals and objectives and not have board meetings that are overly long. According to the Corporate Library’s study, the average board size is 9.2 directors. The general rule of thumb is that seven board members is a good number for corporate boards.
Consider that the board will need enough independent board directors to fill the audit and compensation committees. An independent director is someone who has never worked at the organization, isn’t related to any of the key employees and has never worked for the organization’s major suppliers, customers, vendors or service providers.
Boards should always have an odd number of directors to prevent deadlocked votes. In addition, there should be an odd number of committee members for the same reason.
Step #4: Nominating and Succession Planning
It’s important to consider the many factors in planning to compose your board in addition to the board’s current skill set.
Candidates who have previous board experience have the advantage of knowing how boards work. They understand complicated
issues like auditing, compliance, finance, strategy and board dynamics. They also know what to expect and what will be expected of them. Former CEOs usually have board experience and they make good board candidates. Former CEOs and board directors with experience have a shorter learning curve so it’s easier to bring them up to speed on a new board.
Non-CEOs also make good candidates for board directors. The marketplace offers a field of CFOs, COOs, development directors and sales directors from larger companies looking for opportunities to join a board. They bring valuable experience with them from their former positions. Often, they’re willing to serve on the boards of smaller companies so they can get board experience.
Step #5: Divide Board into Focused Committees
Boards will need to plan for the right people to serve on their various committees in selecting talent for board vacancies. The audit and compensation committees are very important. Boards will need to plan for at least three directors for each committee and they should all be independent directors. The audit committee also requires having committee members who have accounting or financial expertise. Both committees should be led by an independent committee chair that is qualified and has experience leading committees.
Other committees that boards may want to consider filling are the nominating and governance committee and the mergers and acquisition committee.
Some boards follow the three-committee model, which comprises a governance committee, an internal affairs committee and an external affairs committee. The governance committee recruits new board members, conducts orientation meetings, produces board materials and takes the lead in the annual board self-evaluation process. The internal affairs committee handles all internal operations including finance, investments, capital acquisitions, human resources and facilities. The external affairs committee manages public relations, marketing and any other external issues.
Step #6: Consider Availability of Board Commitment
Shareholders and regulatory authorities place much pressure on boards to fulfill their duties responsibly, so it’s vital for nominating committees to consider the availability and time constraints of the candidates they’re considering. Board candidates should be fully aware of how many board and committee meetings they will be expected to attend before accepting a position. Board director candidates also need to be able to meet face-to-face during times of crisis as necessary.
It’s common for board directors to serve on more than one board. Nominating committees should be concerned about overboarding, which refers to board directors who serve on multiple boards. Most governance experts frown on board directors who serve on more than four or five boards.
Step #7: Use Technology to Identify Board Candidates Efficiently
Diligent Corporation developed an innovative resource to assist boards in planning for board composition with the Diligent Nominations tool.
Diligent Corporation recognizes that it’s more complicated to get board composition right than it used to be. Diligent Nominations gives nominating and governance committees access to data and analytics to help them identify opportunities to improve the board. The tool opens the door to the largest global governance data set for boards so they stay current with opportunities and can reduce governance risks.
Diligent Nominations opens up access to a search and connect process of over 125,000 profiles of board directors and executives from over 5,500 companies. The results come from 24 global markets and 40 indexes. The tool makes easy work of the search process, with granular filters for experience, demographics, region, sector and discipline.
The tool is a valuable resource for comparing candidates against your board skills matrix to gain insights into the board’s strengths and weaknesses. Also, the tool helps to identify director interlocks and problems with director overboarding.
The Nominations tool is integrated directly into your Diligent platform. Nomination and Governance committees can gain instant insights into their board’s composition, benchmark against competitors and support their executive search firm to identify potential candidates.
Optimizing Board Composition & Board Diversity
In setting up the most diverse, experienced board, you’re setting up your board for success. Outside experience and diverse perspectives will help your company avoid problems and take advantage of opportunities. It’s vital for nominating and governance committees to choose their board directors wisely because it helps guide the company toward growth and prosperity.