This article examines the role of an effective structure of the board of directors based on the recommendations of the corporate governance and presents tips for improving the structure of the board of directors.
The role of the board of directors for company government
One of the successes of effective company management is the presence of a solid and independent board of directors, which will allow forming the company’s strategy, ensure control over its observance, and impartially assess the company’s performance. The competence of the board of directors includes a whole range of tasks that determine the direction of the company’s activities and are responsible for building its business processes. They are:
- the implementation of strategic management and the formation of the company’s priority goals;
- protection of shareholders’ rights, settlement of corporate conflicts, and formation of dividend policy;
- asset and authorized capital management;
- preliminary approval of the company’s annual report and ensuring its transparency.
The structure of the board of directors
There is no universal formula for determining how many directors a company should have. For the effective operation of the board of directors, its quantitative composition should make it possible to effectively organize the work of the board, form committees of the board of directors, and also provide minority shareholders of the company with the opportunity to elect a candidate to the board of directors for whom they vote.
In line with the experience of the world’s largest companies, it can be argued that the critical attribute of an effective board of directors is that it consists of a majority of independent members. The presence of the majority of dependent members of the board of directors is considered an ineffective collegial body due to the lack of objective assessments, and the desire to guess the top management, thereby obtaining personal benefits within the company, especially when the general director is present on the board. An independent board of directors is understood as a member of the board of directors who, in the opinion of the shareholders who elect him, is independent of all interested parties (stakeholders) that may affect the independence of his judgments.
The best board members: what should they be?
The board of directors is composed of the following members:
- Executive directors
They are full-time employees of the company and therefore have two relationships and a set of responsibilities. They work in a company in a management position, usually in policy or functional business areas that are of major strategic importance. Large companies typically have executive directors in charge of finance, production, marketing, etc.
- Non-executive directors
They are not company employees and do not participate in their day-to-day work. They usually work full-time elsewhere and may occasionally be prominent figures in public life. Non-executive directors must maintain high standards of business ethics and act openly and honestly. They must support and monitor the behavior of the executive team by demonstrating a willingness to listen, question, debate, and challenge.
- The chairman
The board’s leader is the chairman of the company, who is responsible for ensuring that the board works efficiently and effectively, extracting the maximum benefit from all its members. The chairman should, for example, encourage regular attendance at the board meetings and the full participation of each member in the discussions. In addition, the chairman determines the scope of each session. He is responsible for managing the time of the board meetings, ensuring that all issues are thoroughly discussed, but not spending unlimited time on individual agenda items. In most companies, the chairman is a non-executive director. The main characteristics include authority and reputation, moderator, and practical experience.