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Impact of board structures on performance - Coggle Diagram
Impact of board structures on performance
Basic set up
Ratio of executive directors to NEDs
UK Code: the board should include an appropriate combination of executive and NEDs such that no individual or small group of individuals can dominate the board's decision taking
At least half the board, excluding the chair, should comprise NEDs determined by the board to be independent
The UK's FTSE 150 - NEDs are 70%
The evidence from research and practice is contradictory on the best ratios and greater or lesser contributions of independent and NEDs
There will be times when outsider dominated boards may be better, for example during restructuring decisions, when creating diversification strategies and during the strategic decision making process
There are times when insider dominated boards are more too in driving research and development intensity and other entreprenurial activities of the company
Board size
UK Code suggets that 'the board should be of sufficient size that the requirements of the business can be met and that changes to the board's composition and that of its committees can be managed without undue distruption and should not be so large as to be unwieldy
It is up to each board to ask, what might be the most appropriate size of membership based on some of the following factors
The current size of the company
The type of industry or sector the company operates in
The current life stage of the organisation
The focus and requirements of the current organisational strategy
The time, skill and knowledge requirements of the various board committees
Practical factors such as the ability to recruit and retain appropriate and diverse board talent
Bob Sutton summarises that teams should be 7 plus or minus 2
Board committee structures
Certain board committee structures are a requirements to create and to disclose in board reporting
The standard requirement is for an audit committee, a remuneration committee and a nomination committee
Chair considerations
Chair and CEO split role
The UK Code is clear that the Chair and CEO role should not be one and the same
There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company's business. No one individual should have unfettered powers of decision
The Code provision notes that the division of responsibilities between the chair and CEO should be clearly established, set out in writing and agreed by the board
These principles are based on the agency theory proposal that company's management may due to their close knowledge of the organisation, be tempted to follow their own, rather than the ownerships interest, therefore the monitoring function is required to protect shareholders interests
Chair not former CEO
A second structural principle concerning the chair of a listed company is that as a general rule, they must be independent when first appointed. The UK code criteria also stipulates ' a CEO should not go on to to be chairman of the same company. If exceptionally a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report'
Chair as an executive vs non-executive
One final configuration of the chair is for them to be more closely aligned with management and act as executive chair
Director considerations
Tenure
The average length of service of FTSE 15 directors is currently 4.3 years
The UK Code states that the chair should not remain in post beyond nine years from the date of their first appointment to the board
There is a recognition that there should be limits as an extended board membership may be problematic but also that having exact deadline may create different problems
There is no valid evidence to suggest that longer tenures are inherently negative and lead to impaired judgement and poorer governance
Diversity
Female directors now account for 34% of directorships
Only 5% of chairs and 5% of CEO are women
Board composition across FTSE 100 boards being only 6% BAME (Black, Asian and Minority Ethnic) and 3.8% female BAME
There are just 99 senior BAME people at board level, comprising 19 executive directorships and 80 non-executive directorships
There are seven CEOs rom an Asian or minority background but no black CEOs and 49% have no BAME representation
There are studies showing that gender diversity has positive outcomes
Firms with more gender diversity on boards hold more board meetings
Firms with more volatility in their stock returns have fewer women on they boards
Firms with more gender diversity on their boards give their directors more pay-for-performance incentives
Director remuneration
Base pay
The basic assumption around director remuneration which aligns to the various theories of boards including agency theory, is that directors will be rationally motivated to perform their board duties in line with the remuneration they receive
Directors may also often receive separate payments for chair ship of committees in recognition of this extra committment. There is a strong correlation between size of organisation and size of director fees
Incentive schemes
Be designed to support strategy and promote long term sustainable success. Executive remuneration should be aligned to company purpose and values and be clearly linked to the successful delivery of the company's long term strategy
Equity involvement
The final aspect of remuneration to consider is the proportion of equity ownership available to directors as part of their incentive package
Equity packages are proposed to be an important tool to ensure both that directors are motivated to govern well but also if appropriately structured to take a long term perspective, that this good governance is aligned with stakeholder needs and shareholder returns
Board tasks
Meeting frequency
Once the composition and remuneration arrangements of a board are configured, there are some final structural decisions to make concerning board and committee meeting frequency - FTSE 150 boards met 7.7 times on average over 2019
Board review
The 'meta' process of boardroom review which involves the ongoing practice of pausing to look inwardly at one's own performance is a relatively recent boardroom phenomenon
A report from McKinsey highlights that those boards that do this regularly especially with the focus of reducing their decision making biases are viewed as the highesting performing
Board induction and development
The final board tasks are those to do with ensuring that directors are match fit to perform their duties both at the start of the term of office through effective induction and throughout their tenure supported by going director development