A while back, putting together a Board of Directors was a lot like decorating a Christmas tree – the CEO would pick out a nice selection of glittering ornaments, then top off the tree with a flashy star (David A, Nadler, Beverly A. Brian- Building Better Boards: A Blueprint for Effective Governance 27”). This analogy puts into context the traditional and informal process of nomination and appointment of members of the Board of Directors. The CEO had the most influence in the process, nominating his/her friends and professional acquaintances. A Board was considered ‘’balanced‘’ as long as its composition included one or two other CEOs, a sprinkling of bankers, lawyers, academics, retired politicians, and community leaders (and indeed traditional rulers).
In recent years there has been an increasing focus on the Structure and Composition of corporate boards. Regulators, investors and other stakeholders are demanding a more structured and systematic approach to Director selection and Board composition. The recently launched Nigerian Code of Corporate Governance, 2018 has outlined 28 principles intended to foster an improved corporate governance regime in Nigeria. Principle Two deals with Board Structure and Composition.
‘’The effective discharge of the responsibilities of the Board and its Committees is assured by an appropriate balance of skills and diversity (including experience and gender) without compromising competence, independence and integrity’’.
Board effectiveness hinges to a large extent on the diversity, experience, skills, and objectivity of Board members. The Code does not prescribe a minimum or maximum Board Size. It however encourages the Board to ensure appropriate balance of knowledge, skills, experience, diversity and independence to objectively and effectively discharge its governance role and responsibilities while determining its composition, size and structure taking into account the scale and complexity of the Company’s operations; the need for sufficient members to serve on its Committees and the need to secure quorum at meetings.
Diversity has been widely defined to include a variety of attributes including knowledge of the field, skill and experience as well as age, culture and gender relevant for promoting better decision-making and effective governance. Interestingly, the diversity discussion has mostly focused on gender. However, age and cultural diversity can only be ignored to the detriment of Board effectiveness. In an age of disruption and fast passed technological advancement, it is in the interest of a forward-looking Board to ensure the younger generation is appropriately represented in its membership. A pan-national, regional or multinational entity would better serve the interests of its stakeholders if its Board is composed of members from diverse cultural, racial and ethnic backgrounds.
The Code encourages the Board to put in place a Diversity Policy and establish measurable objectives for achieving diversity in gender and other areas.
The Board is required to periodically invigorate its capabilities by ensuring the appointment of new members with relevant skills and fresh perspectives, while retaining valuable knowledge, skills, experience and diversity and maintaining continuity. Thus, whilst not setting term limits for Non-Executive Directors (save for Independent Non-Executive Directors), the Code encourages the Board to periodically refresh its membership. A periodic evaluation of its membership against the objectives of the Diversity Policy as well as the skills set required to lead the organization is useful.
The Board is expected to ensure and maintain its own independence to ensure effectiveness. The Code recommends that no individual or small group of individuals should dominate the Board’s decision-making. In this regard, the Code provides that a person (or group of persons) who is not a serving Director of the Company should not exercise any influence or dominance over the Board and/or Management. Such a person or group of persons would be deemed a shadow director as defined by extant laws.
Similarly, whilst Directors are permitted to hold concurrent directorships, such shall not affect their scope of engagement on the Board or generate conflict of interest. Accordingly, during the process of nomination and appointment, proposed directors should disclose their memberships on other Boards, and current Directors should notify the Board of prospective appointments to other Boards. The Board will then consider the disclosed directorships within the context of the time requirements of the respective Board and determine whether the individual can discharge his/her responsibilities and contribute effectively to the performance of the Board.
To further safeguard Board Independence, the Code recommends that the Chairman of the Board should not serve on any Board Committee. Similarly, the MD/CEO or an Executive Director should not serve as Chairman of any Board Committee. This is to ensure that undue influence by virtue of their office is not brought to bear on Committee deliberations.
The Code recommends an appropriate mix of Executive Directors, Non-Executive Directors and Independent Non-Executive Directors – with the majority being Non-Executive directors. To underscore the place of independence, the Code recommends that majority of the Non-Executive Directors should be independent.
Incorporating independence into the boardroom means that the status quo is constantly challenged and critically reassessed. Independent directors bring an unbiased view, distinct from that of shareholders and Management, which provides reassurance to external parties that the Company is being run in an effective manner. Due to their perceived “distance” from the Company, they act as a balancing element in boardroom discussions involving multiple stakeholder interests and managing conflicts of interest affecting board members. Their objectivity also allows them to safeguard the interests of minority shareholders and other stakeholders who may not be represented on the Board.