Genius will be releasing a series of Board Effectiveness articles, drawing on our own experiences of what impacts different Boards and what aspects of governance and people cause Boards to deliver more effectively as the leadership team of a business.
There will be three articles published this week, with the series continuing next week.
For the first phase, we shall use the 11 C’s Governance Model created by Jeremy Cross as a framework to discuss the many myriad of influences on the team and their ability to work effectively.
Part One of Three
This three-part article addresses the first quadrant of Board Governance – that of Board Structure.
Board structure is a lens view on the physical; the things we can typically tick off on a compliance list of requirements. This is a foundation starting point in considering the effectiveness of a Board.
This, as with the other “quadrants” does not stand in isolation when determining, as we will do in these multi-part, four quadrat series, the effectiveness components identified in this governance model.
In this Part One of Three on Structure, we shall discuss “Configuration” identified in the 11 C’s Model.
In Part Two on Structure, we shall consider Genius’ addition to the 11 C’s, the 12th C – “Composition”.
In the Third Part on Structure, we shall address the many other Structural influences that we see impacting Board effectiveness and in the context of all Structure influences, how businesses approach being “Compliant”.
Configuration is the basic structure of the Board. How many people, their appointment, how many Board Committees and frequency of meetings being the key factors that are easily evident.
In this article though we shall also consider other Board structure influences.
a. Size of the Board
The size of the Board, in other words, the number of Directors on the Board will depend on the age of the business, where it is in its life cycle, its industry, whether it is regulated, the size of the business and the ownership of the business.
Therefore, a start-up, family business, public company or financial services organisation will have different needs for the Board size.
Many industries or regulated entities have requirements that will define certain members – an example being a housing trust that has a resident or more on the Board, or an Investment Trust that is entirely non-executive.
The size of the Board is guided by the UK Corporate Governance Code, 2018 (Code) to be complied with by FTSE 350 companies, and considered a best practice guideline for other businesses, except small businesses.
In Part Two of Structure, under Composition, what we consider the 12th C, this issue of size is addressed in relation to other compliance requirements.
b. Director Appointment
Directors should be independent where possible and their independence is defined in Provision 11 of the Code, which is also the test for the independent appointment of the Chairman. This ensures that tenure is contained, that the Chairman was not an executive of the business beforehand and that there is clarity of what defines non-independence.
In the Code, under Provision 20, it is defined that the Chairman and NEDs should be pointed using an external search consultancy. This is to support getting the best NEDs for the roles and ensuring all individuals are independent.
There will always be circumstances where it is appropriate for a Director to be on the Board who does not qualify as being independent, two examples being someone who has been a consultant to the Board or the business, or a relation to any of the other Directors.
All Directors should be effectively inducted such that they understand the business and can contribute effectively in meetings. This should be an ongoing process.
The minimum requirement under the Code is the Audit Committee, the Remuneration Committee ad the Nominations Committee. This is best practice and will be followed by most businesses identifying with best practice.
Often businesses, for example, financial services, whose approach to risk is far more mature, will have a specific Risk Committee. Other common additional Committees will include Governance, Investment, Culture or start and finish Committee that has a specific short term purpose.
Having a Committee allows for deep dive in areas of importance keeping the Board strategic and challenging of that Committee’s work, thus ensuring the Board owns the issue and the Committee owns the detail and is challenged by the greater Board.
Further complexities come with who is on which Committee and why – this is addressed under Composition later in this article.
d. Frequency of Meetings
It is important that each Board or Committee determines what is an appropriate meeting frequency. For example, a Holding Company Board, or an Investment Trust Board might only meet four times a year, often applicable to a smaller business too, whereas a financial services Board may well meet every month.
Most Boards consider an extra meeting to specifically address strategic conversations.
Many Committees meet four times a year but in recent times the Audit Committees and Risk Committees will defer to meeting six times a year to ensure all issues are fully addressed.
In this the first part of three, we have addressed the key “Configuration” components of the Board. In the second part we shall cover “Composition” and extremely important Structure component, the “12 C” and in the last part on Structure we shall address the many other “Structure” based influences on Boards and the concept of “Compliant”.