A company’s Board of Directors plays a crucial role in supporting the long-term success of the company on behalf of its shareholders and stakeholders.  The blueprint for an "Ideal Board” outlined in this article is applicable to publicly listed Companies on both the main FTSE exchange as well as those listed on the smaller AIM exchange. The UK Corporate Governance Code applies to companies listed on the Main Market and the Quoted Company Alliance Code (QCA Code) is used by the majority of companies on AIM.

The "Ideal" Board Overview

The ideal Board should be simultaneously entrepreneurial, driving the business forward while keeping it under prudent control with appropriate financial and risk management expertise. The entrepreneurial drive (the accelerator) and the governance and oversight structures covering finance, risk and compliance (the brake) are polar opposites so it is essential that a Board has Directors with strong skillsets and experience in both areas to ensure a vibrant Board which balances healthy debate and challenge with strong support to the CEO and executive team.

The ideal Board should be sufficiently knowledgeable about the workings of the company, be answerable for its actions, yet can stand back from the day to day management of the company to retain a long-term view. In order to do this successfully, a balance of different skills and personality types are required around the Boardroom table.

The Board should be sensitive to the pressures of short term issues and yet be informed about broader long term trends in the industry and should focus on the long term commercial needs and goals of the business while acting responsibly towards stakeholders, employees, customers, suppliers, business partners, shareholders and society as a whole. 

The "Ideal" Board should have the following key attributes:

  • Highly strategic with strong co-operation between the Non-Executive Directors and CEO/Executive team
  • Strong levels of healthy debate, challenge and oversight
  • Comprehensive oversight of executive performance against the strategic objectives it sets through Key Performance Indicators (KPIs)
  • Genuine diversity of thinking styles, skills, personalities, age, gender, ethnicity, professional background and industry knowledge (this helps to avoid "group think" which happens when a Board has Directors from a similar background which means the Board view things in the same way and problems get overlooked)
  • Six core competencies: Strategic Management, Risk Management, Market Knowledge, Governance, Financial Management and Regulation.

 

The diversity of skills and experience a Board should have, will depend on the size and type of business. However, in addition to the above, there are other skills Boards benefit from such as sector experience, HR, legal, technology, cyber, fund raising, property and new skills such as technology, digital/E-Commerce and an understanding of social media; many of these can be provided by specialist Non Execs.

Every Board also needs the right balance of types or categories of people to operate effectively. One of the simplest ways to assess the character of people was developed by David Kolb who categorised people in four ways: activist, pragmatist, theorist and reflector. True for business, and also true for learning how to ride a bike:

  • The Activist – tests by trying (and failing, and hopefully learning).
  • The Pragmatist – tests implications: copies, improves.
  • The Theorist – forms abstract concepts. Natural planner.
  • The Reflector – observes and reflects and asks why/why not?

 

It’s vital for a Board to keep up to date with all regulatory legislation, market activity, the competitive landscape and key sector trends to enable it to respond constructively and quickly to opportunities, problems or crises.

The ideal Board will be well led by an effective Chair.

Non-Executive Directors

As per the UK Corporate Governance Code (except for smaller companies), at least half the Board excluding the Chair should comprise Non-Executive Directors (NEDs) who are truly independent. A smaller company should have at least two independent NEDs.

Companies should strive to appoint truly independent NEDs (the independence criteria are set out in the UK Corporate Governance Code) with relevant skills who are capable of making a significant impact to the Board and company. Outstanding NEDs demonstrate a very strong work ethic and commitment to the company (high-calibre NEDs put in > 40 days a year, compared with 19 days for the less engaged NEDs (McKinsey survey)). High impact NEDs do not spend any more time on Board attendance, Sub-Committees, compliance and Governance issues - they instead spend more time on Board meeting preparation, inputting to strategy, getting to know the company and its culture, visiting clients and company sites and talking informally with key managers, other staff, customers, suppliers, shareholders and other stakeholders.

The NEDs, who on joining should be provided with a full, formal and tailored induction, should be well prepared and well informed for each Board meeting, having read the papers thoroughly, devoting sufficient time and effort to understand the company and its business. NEDs should ideally attend a Non Exec training course and the Board should be aware that training never ends!

Non Execs should make strong contributions to Board meetings especially on the two key areas of developing the strategy and risk management. There is no justification for a Board retaining underperforming Non Execs or ones who contribute little. Non Execs should be resolute in maintaining their views whilst constructively resisting pressure from others and effectively follow up areas of concern.

NEDs should think and speak independently, challenge the CEO and executive team constructively, be business-savvy, be genuinely interested in the company, care deeply, be shareholder orientated and bring significant value to the Board – we see many Boards where this is simply not the case!

The rarest quality of a NED is to be “business savvy” and if it is lacking, the other criteria are of little help to a Board as many people who are smart, articulate and admired have no real understanding of business and while they may shine elsewhere, they don’t belong on Corporate Boards (Warren Buffett).

Effective Boards spend up to twelve days a year on strategy, compared with just four for low impact Boards which adds to the Non Exec’s time commitment.

These factors will result in the executive team genuinely valuing the contribution of the NEDs and being more willing to engage effectively with the Board. In the best situations, executives feel strongly supported and engage collaboratively with the NEDs on strategy and openly discuss performance challenges. High-calibre committed NEDs contribute not only in the strategy area but roll up the sleeves to support the CEO and Executive team in time of crisis and significant market challenges.

The time commitment of NEDs raises the issue of NED pay. In our experience, there is a strong correlation between the NED compensation level and the calibre, impact and the time commitment genuinely needed in a role. We often find for example a NED role is advertised as a “2 days per month commitment with a £25-35k per annum remuneration”, whereas in reality, a time commitment of 4 days per month is needed (including both formal and informal time) and it makes a lot more sense for the Board to set a higher remuneration level to ensure it attracts a high-calibre NED with the required time commitment - First Flight can advise on this.

This also fits in with what we say about the maximum number of roles effective NEDs should have - which is 3-4 at a maximum.

The Role of the Chair

Good Boards are created by good Chairs. The Chair creates the conditions for effective Boards and the effectiveness of individual Directors. It is the responsibility of the Chair to lead the Board (providing oversight of the CEO, managing Board Meetings effectively, setting an optimal Board agenda and ensuring a high-quality Board Pack is distributed well ahead of Board Meetings making strong use of executive summaries).

The Chair should provide strong but not dominant leadership, encouraging all Board members to contribute and ensuring that there is a high level of robust challenge and debate on all major issues and decisions. He/she must ensure the effective implementation of Board decisions.

Chairs in our view should never hold more than two Chair roles.

Please see our separate article on “The role of the Chair”.

Board Evaluations

As per the UK Corporate governance and QCA codes, a Company's Board should undertake an annual Board Evaluation of its own effectiveness and performance. The evaluation should include a "competency and skills" evaluation to ensure that the company has the breadth & depth of skills it requires and types of Directors to debate all issues effectively. The Chair is responsible for addressing any weaknesses that the Board has identified.

Board Evaluations are probably the single most important Governance initiative in the last 20 years – if you don’t measure the performance of the Board, how do you or your shareholders know if it is performing effectively? Best practice in this area consists of an external independent evaluation every three years followed by two internal Board Evaluations.

Audit and Risk Committee

The Audit and Risk Committee has a critical role in a listed company presenting to the Board a balanced and understandable assessment of the company's position and prospects based on sound systems of internal controls. The Audit and Risk committee;

  • meet regularly to monitor the financial health and performance of the company, providing regular reviews of internal controls, internal and external audit functions.
  • have a key responsibility to provide confidence to shareholders on the integrity of the financial results and financial health of the company.
  • have a key role in selecting and challenging the external Auditors.
  • have a critical role in the oversight of the risk management and internal controls of the company including cyber-security. Some larger companies may establish a separate Risk Committee.

 

Remuneration Committee

A core tenet of Governance for listed companies is that there is a formal and transparent procedure for developing and overseeing policy on Executive Remuneration ensuring no Director is responsible for deciding his or her own remuneration. Remuneration Committee members must be independent, able to resist inappropriate demands from Executive Directors and have an increasingly important responsibility to take into account the views of shareholders.

Nomination Committee

The Nominations Committee (NomCom) has a key role in the identification and appointment of Non-Executive Directors ensuring that there is an effective succession planning process in place.

Many Nomination Committees are hamstrung by legacy approaches to identifying a pool of high-calibre NEDs beyond the personal networks of Board members. There is a growing trend of Nomination Committees partnering with specialist Non-Executive Director Search firms such as First Flight, to strengthen the ability of the company to attract outstanding NEDs.

The NomCom, is made up of a majority of independent NEDs and leads the process for new Board appointments. As stated in the Governance Codes, best practice comprises the use of a robust, formal, rigorous and transparent process for the appointment of Directors including NEDs. It should identify what skills and competencies the Board requires and fill the gaps with appropriate NEDs; the NomCom manages these appointments to ensure that the Chair and/or CEO do not unduly dominate the process. The evaluation of the Board’s current skills and where the gaps are, is a complex process. In many cases, a Board skills matrix is developed/updated either with support from external consultants or as part of an external Board Evaluation.

The NomCom also has a key role in supporting the process of when appropriate, of removing underperforming Non-Executive Directors.

Shareholder Relations

The Chair, CEO, Finance Director and Non-Executive Directors should have regular dialogue and meetings with major stakeholders including shareholders both institutions and retail. The Chair is responsible for ensuring that the Board are aware of the views of key stakeholders.  

Written by Chris Spencer-Phillips, Managing Director
First Flight Non-Executive Directors Ltd
April 2020

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