Key highlights
- Corporate board composition, efficiency, and strategies for improvement are important issues that companies need to address.
- Board composition has a significant impact on board effectiveness, and companies should prioritize creating a culture of transparency and accountability to improve board efficiency.
- Five key elements are diversity on corporate boards, board composition and skillsets, board size, board culture, and board evaluation.
- Diversity in corporate boards, mix of skills, experience, and expertise, board size, board culture, and board evaluation are the factors that can affect board efficiency.
Stories are an interesting way to keep children both entertained and occupied. One story that spoke to me a lot growing up was “The Three Little Pigs”.
It is a famous fairy tale about three anthropomorphic pigs who built three houses of different materials and are attacked by a hungry wolf. The story begins with three little pigs who leave their mother to build their own houses. The first pig builds a house out of straw, the second pig builds a house out of sticks, and the third pig builds a house out of bricks.
When the wolf comes, he blows down the straw and stick houses, but he cannot blow down the brick house. The pigs run to the brick house, and the wolf tries to climb down the chimney to get inside. The third pig puts a pot of boiling water on the fire, and the wolf falls into it and dies.
It emphasizes the importance of building a strong foundation and making wise choices to succeed. In a corporate context, this could be seen as a lesson in the importance of having a diverse range of perspectives and experiences represented on a board, to make sound and informed decisions.
In real life, corporate boards are not for entertainment but for the serious business of running a business efficiently, sustainably and, hopefully, successfully.
The role of the corporate board is critical in shaping the direction and performance of any company. The board sets a strategic vision, oversees management, and ensures that the company is run in a manner that maximizes value for shareholders. In recent years, there has been increasing scrutiny of the composition of corporate boards and their effectiveness. In exploring the important issues around corporate board composition, efficiency and strategies for improvement, we’ll look at five elements:
Diversity on Corporate Boards
One of the key issues facing corporate boards is the lack of diversity in terms of gender, ethnicity, and age. Studies have shown that more diverse boards are associated with better financial performance and improved decision-making. However, despite the clear benefits of diversity, many boards remain predominantly male and lack representation from minority groups.
To improve board diversity, companies should set diversity targets and actively recruit candidates from underrepresented groups. Additionally, companies should ensure that their recruitment processes are transparent and free from bias. One strategy is to use blind recruitment practices, where candidate information that could reveal gender, ethnicity, or age is removed from the selection process.
Board Composition and Skillsets
Another important issue is the composition of the board itself. Boards should have a mix of skills, experience, and expertise that align with the company’s strategy and goals. This includes a combination of industry experts, financial experts, and individuals with experience in areas such as technology and marketing.
To ensure that the board has the necessary skills and expertise, companies should conduct regular board assessments to identify any skill gaps. Additionally, companies should consider recruiting board members with diverse backgrounds and skill sets to bring fresh perspectives and insights to the board.
Board Size
The size of the board is also an important factor in board efficiency. A board that is too large can lead to decision-making delays and an inability to effectively communicate and collaborate. Conversely, a board that is too small may lack the necessary skills and expertise to effectively oversee the company.
To improve board size, companies should consider conducting regular assessments to determine the optimal board size. Additionally, companies should consider reducing the size of the board by rotating members off the board and not renewing their terms, or by consolidating committees.
According to a study by The Wall Street Journal, the board should be large enough to carry out the board’s fiduciary and other duties effectively and efficiently. This implies that five to seven board members would be ideal for many organisations.
Board Culture
Board culture is another critical issue that can impact board efficiency. Boards that have a culture of open communication, transparency, and trust are more likely to make effective decisions and hold management accountable. Conversely, boards that have a culture of deference to management and a lack of transparency may struggle to effectively oversee the company.
To improve board culture, companies should prioritize creating a culture of transparency and accountability. This can be done by encouraging open communication, setting clear expectations for board members, and holding board members accountable for their actions.
Board Evaluation
Furthermore, board efficiency can be impacted by the quality of board evaluation. Regular board evaluations can help identify areas of improvement and ensure that the board is functioning effectively. However, many companies do not conduct regular board evaluations, and the evaluations are not robust enough to identify areas of improvement.
To improve board evaluation, companies should conduct regular evaluations that are comprehensive and include feedback from all board members. Additionally, companies should consider using third-party evaluators to provide an objective perspective on the board’s performance.
For those who may be wondering about the importance of corporate board composition, let me say that stories abound about companies that failed because of a lack of diversity on their boards.
These stories highlight the importance of having a diverse range of perspectives represented in decision-making processes.
One such example is Blockbuster, the once-popular video rental chain that went bankrupt in 2010. It is often said that Blockbuster’s board failed to anticipate the shift towards digital media and streaming services because it was comprised mainly of executives from the traditional retail and entertainment industries, rather than from the technology sector.
Consider the example of Uber, which faced a series of scandals related to workplace culture and leadership in 2017. The company’s board was criticized for being too small and too insular, and for failing to hold then-CEO Travis Kalanick accountable for his behaviour. After pressure from investors, several members of the board were replaced, and a new CEO was brought in to help turn the company around.
Undoubtedly, the relationship between board composition and board effectiveness is significant. Research has shown that board composition has a significant impact on board effectiveness. A well-composed board that includes a diverse range of perspectives and experiences can bring fresh ideas and insights to the boardroom, which can lead to better decision-making and ultimately improve company performance. Diverse boards are also more likely to understand and represent the interests of a broader range of stakeholders, including customers, employees, and the wider community.
Conclusion
There is no argument about the fact that corporate board composition and efficiency are critical to a company’s success. By adequately addressing issues related to diversity, board composition and skillsets, the board size, board culture, and board evaluation, companies can improve their boards’ effectiveness and ultimately improve their performance.
Companies that prioritize board composition and efficiency are more likely to make effective decisions, hold management accountable, and maximize value for their shareholders.
About the author: Chioma Mordi is the MD/CEO of the Society for Corporate Governance Nigeria (SCGN)
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria. cmordi@corpgovnigeria.org
