8 steps to build the perfect board

By on September 1, 2014
directors

The best boards are diverse, well trained and have that magic mix of skills, says the

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IoD’s Dr Roger Barker.

1. Understand what it does

Boards govern companies. They provide entrepreneurial leadership, while ensuring risks are understood and managed within a framework of sensible, effective controls. They set out the company’s values, ensuring these underpin shareholder and other stakeholders.

They also approve the company’s strategic direction, ensuring the necessary resources are in place to meet its objectives. The official, legalese-filled extent of a board’s authority will be outlined in the Articles of Association, the company’s constitutional document.

2. Figure out what you need

For most companies, there are no rules about the board’s internal composition of skills and experience. The exception is audit committees in large companies, which are required to have members with recent and relevant financial experience.

Specialists from areas such as finance, HR and marketing, while each having a very different focus, can all play their part in determining strategy and deploying resources effectively. Of course, no two companies are the same, but as a rule a board should be ‘a cabinet of all the talents’.

3. Size it up

There is a legal requirement for limited, privately owned companies to have at least one director, while plcs must have two. Beyond this, the ideal size of a board depends (unsurprisingly) on a number of factors including the age, ownership, structure and financial profile of a company.

The average size of effective boards in the UK is somewhere between 6 and 12 directors, depending on the size and complexity of a company. More than this and the board is in danger of becoming a speaking shop rather than a genuine decision-making body.

4. “I agree with Nick…”

All directors must be able to apply clear and independent thought to the challenges a company faces. ‘Group think’ should be avoided at all costs – it’s far more likely to mean decisions are insufficiently thought through.

There is, then, a clear business case for director diversity in gender, age, background and other factors. However, many organisations are still very conservative in their board appointments, which can make for homogenous, less effective groups of decision makers.

5. Go indie

The huge complexity of large organisations makes full and proper oversight extremely difficult, but the consequences of failure can be devastating. Enron or, more recently, The Co-operative Group are two powerful demonstrations of what happens when oversight and governance procedures fail.

Non-executive directors (NEDs), who the UK Corporate Governance Code 2012 recommend should be in the majority on listed company boards, are there to act as critical friends, providing objective, strategic advice to, and oversight of, the executive team. Non-listed companies, on the other hand, can basically make their own decisions on the proportion of executive/non-executive directors .

6. First day at school

There is not much scope to learn on the job as a director – liability and accountability exist from day one, and continue even after a director has left a board. So, as a starting point, all new directors should be provided with an induction (where they already take place, they’re often organised by the company secretary).

This might include an induction pack, presentations from key managers, discussions with the chairman or company secretary, meetings with other directors, reports from external analysts and site visits to give a balanced, real-life overview. Otherwise, they could be as out of their depth as on their first day at school.

7. Train ‘em up

Incredibly, pretty much anyone over the age of 16 years old in the UK can become a board director, with no requirement for any qualifications or training. A targeted programme of training and professional development can give directors a better appreciation of the complexity of their role and its legal and regulatory requirements, especially if they have no experience of sitting on a board before.

8. The next generation

Supporting board-level diversity should start close to home, with a review of succession planning and talent spotting in-house. Mentoring talented individuals can do a lot to get the right people putting themselves forward for board positions.

Dr Roger Barker is the Director of Corporate Governance and Professional Standards at the Institute of Directors.

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