Although a lot of the "ideal" Board" criteria are aimed at listed and mature Companies, other Businesses should also strive for "best practise" where possible and start out in the way they want to continue.
This is the "ideal" Board for any company:
The ideal Board should be simultaneously entrepreneurial to drive the business forward while keeping it under prudent control with appropriate financial and risk expertise - the entrepreneurial drive and Corporate Governance are polar opposites so it is essential that a Board has Directors in both camps.
The ideal Board is required to be sufficiently knowledgeable about the workings of the company, be answerable for its actions, yet be able to stand back from the day to day management of the company and retain a long term view. In order to do this successfully a balance of skills and types of personalities is 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 and should focus on the commercial needs of the business while acting responsibly towards its employees, business partners and society as a whole.
The "ideal" Board should:
The Board should debate and agree the best strategy for the company and then set itself regular performance objectives and regularly review its achievement against the objectives it sets which are usually done through Key Performance Indicators (KPIs).
The ideal Board should be both entrepreneurial and deliver robust and effective risk management - this requires a diversity of skills, personalities, age, gender and knowledge so it can debate healthily and deliver against future strategies; this helps to avoid "group think" which happens when a Board has all Directors from a similar background which means the Board view things in the same way and problems get overlooked.
New skills such as digital expertise and an understanding of social media should also be considered. The Board should be up to date with all regulatory legislation and market activity in particular with competitive developments and must be able to respond constructively and quickly to problems or crises.
The ideal Board will be well led by an effective Chairman who delivers relevant papers covering the appropriate subjects on the board agenda for consideration by the Board.
As per the UK Corporate Governance Code except for smaller companies at least half the Board excluding the Chairman should comprise Non-Executive Directors who are truly independent. A smaller company should have at least two independent Non-Executive Directors.
The Non Execs 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.
They should make strong contributions to Board meetings especially on the development of strategy and risk management. They should be resolute in maintaining their views whilst constructively resisting pressure from others and effectively follow up areas of concern.
They must have good relations with other members of the board, the CoSec and senior management and listen constructively to their colleagues.
Companies should strive to appoint independent Non-Executives who are rated as very high impact which means they put in 40 days + a year, compared with 19 days for the less engaged Non Execs. High impact Non Execs do not spend any more time on Board attendance, Sub-Committees, compliance and Governance issues they spend more time on preparation, getting to know the company and its culture, visiting clients and company sites and talking informally with key managers, other staff, key customers, suppliers and other stakeholders.
Effective Boards also spend up to 12 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 management being more willing to discuss ideas with the Board. In the best situations, managers feel comfortable bringing forward not just their preferred strategy but also the runner-up. The well prepared Non Execs will know enough about the company’s stress points to make meaningful suggestions on how to improve strategy.
The time commitment of Non Execs raises the issue of Non Exec pay - if a Non Exec role is advertised as a “2 day per month” commitment with a £24k pa remuneration, does this mean two days a month or are they expected to do 4 days per month to be “high impact” in which case the pay should be higher - First Flight can advise on this.
This also fits in with what we say about the maximum number of roles effective Non Execs can have - which is 4-5.
The role of the Chairman:
Good Boards are created by good Chairmen. The Chairman creates the conditions for effective Boards and the effectiveness of individual Directors. It is the responsibility of the Chairman to lead the Board, manage Board Meetings by setting the Board agenda ensuring the Board Pack is not too big (a maximum of 80 pages).
The Chairman should provide strong but not dominant leadership of the Board including the Non Execs, whilst encouraging all Board members contribute and robustly debate all key issues. He/she must ensure the effective implementation of Board decisions.
The Chair should ensure there is an annual assessment of the board's performance and its individual members and have a close working relationship with the Managing Director but challenging where necessary.
Good Chairmanship will often go "unremarked".
A Company's Board should undertake an annual evaluation of its own performance and the evaluation should include a "competency and skills" evaluation to ensure that the company has the breadth & depth of skills it requires to debate all issues effectively. The Chairman is responsible for addressing any weaknesses that the Board has identified.
There should be a formal and transparent procedure for developing policy on executive remuneration and no Director should be responsible for deciding his or her own remuneration.
The Audit Committee should present to the Board a balanced and understandable assessment of the company's position and prospects based on sound systems of internal control and meet regularly to monitor financial info, and provide regular reviews of controls and audit function.
This Committee is often thought of as the weakest committee but if a company's Board is going to be effective it needs the right Non Execs - truly independent with the rights skills and available time to understand the business and contribute effectively. A Board needs a cross section of skills to cover all the key areas: strategy, sector & operational expertise, entrepreneurial flair, finance and risk.
Nomination Committees do not always approach Board appointments in a ‘professional' or ‘scientific' manner and are often unduly influenced by either deep rooted ‘traditions' or fashionable causes and they should take professional advice when determining the role and capabilities required for a particular appointment.
The Nom Com, which should be made up of a majority of independent Non Execs, must lead the process for Board appointments and make recommendations to the Board and identify what skills and competencies the Board requires and fill the gaps with appropriate Non Execs; the Nom Com should manage these appointments so the Chairman and/or CEO don't dominate the process.
It should ensure that the Board has a diversity of background, gender, age, thought and most importantly skills.
The Chairman, MD, Finance Director and Non-Executive Directors should have regular dialogue and meetings with shareholders. The Chairman is responsible for ensuring that the Board are aware of shareholder views.
Chris Spencer-Phillips MD
First Flight Non-Executive Directors Ltd