Board composition heart of good  corporate governance

Board composition heart of good corporate governance

The recent corporate scandals and the failure of some big businesses, as a result of ineffective boards, has prompted investors to demand more accountability from the board of directors. The board of directors are supposed to oversee the performance of the business and its corporate governance.
In light of these governance disasters boards are now taking a critical look at the composition of the board to ensure that companies’ boards have the necessary breadth and depth of board skills to enable adequate oversight of the business now and in the future.

To achieve this, the boards should develop a robust, defensible, logically determined process for identifying the right skills they need today and in the future. The process they follow should be linked to the company strategy.
For investors to have comfort in the board running the company, they need to be assured that the board has thoroughly and systematically given thought to the future skills and diversity needs of their board and have not overlooked any important areas.
There are some key issues that need to be considered when determining the skills sets that should be possessed by the board. The first step is to review the company’s strategic plan and then identify each strategic priority or objective and link this to the skills, competencies, knowledge, and alliances or relationships that are required to achieve these.
You will also need to think about your vision for the future as an organisation and determine what kind of a board will be needed to steer the company in the direction of the vision.
The next step will be to consider the key issues and challenges facing the business. From this list you need to review what skills or experience will be needed to most effectively deal with each of these.

For instance you could be looking for the business to expand internationally or go on an acquisition drive or you need to downsize the business. All these challenges would require different types of skills.
You will also need to look at the organisation beyond the current strategic plan and think on what the most optimistic future scenario could look like and also the most negative possible outlook. Assess what skills, knowledge and competencies that will be needed to achieve the positive scenario or deal with a negative one.
Once you have come up with a list of skills, knowledge and experience required you will need to identify the most important requirements for the board and organisation. The prioritisation criteria can be based on the level of risk, opportunity and strategic importance of each issue.
The skills set identified should be “mission critical” for the business, the skill should help to mitigate a key risk, the skill should help to move the business in the direction of your vision and also help the organisation deliver on key strategic objectives.

It’s also critical to assess whether this skill is in short supply, highly specialised or unique and whether it is needed in the short, medium or longer term.
It is important to note that these skills sets should not necessarily all be represented on the board. Some of the skills and experience required can be filled within management, consultancy or some combination of the above.
This exercise in analysing critical skills and experience required will ensure that the board is adequately composed. SOME regulatory bodies are requiring assurance that boards have financial and managerial skills, and in some cases, have international experience as well.

Board composition is becoming a target for stock exchanges when companies are not performing. The investors usually begin to scrutinise the board composition.
Investors, regulators and analysts begin to look at how the board came to the decisions they made.
Apart from skills and experience investors and regulatory bodies are now calling for organisations to enhance corporate governance by making room for a majority of independent directors. Having some independent directors helps in bringing fresh perspectives and new ideas to the business.

The New York Stock Exchange and other stock exchanges require that their listed companies have the majority of board members being independent. Having independent directors means that board of directors will not have relationships between the company and the rest of the board which might unduly influence or impact their decision-making.
Having a majority of independent directors has some practical sense in that their independence and industry experience will help the board fulfil its duties by being able to question and challenge management without fear or favour and the directors are able to be independent in thought and action.
Recently there has been a call for boards to be diverse with regards to gender and ethnicity and age. Countries like France, Spain, Norway and Sweden, are paving the way with new laws that require boards to have a certain percentage of women on their boards.
This diversity helps in quality decision making and in the effectiveness of the board.

  • Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship.
    He is the Managing Consultant of Shekina Consulting (Pty) Ltd and provides advisory and guidance on leadership, strategy and execution, corporate governance, preparation of business plans, tender documents and on how to build and sustain high-performing organisations.
    For assistance in implementing some of the concepts discussed in these articles or in facilitating workshops or seminars please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062 .
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