‘The strategic board’ 1/3: Board composition

In our three-part series, we look at the different factors that contribute to an effective and high-performing board. Along the way, we present tips and tricks on how to broaden and sharpen your board skills. In the first article, we look at the composition of well-functioning boards. The composition of a board has a significant impact on the success of a company. It then considers several aspects of composition such as size, background, diversity and expertise, leadership, and external competence.

Key takeaways:

• Adapt the size to the phase and needs of the company. Large boards are slower and slower in reaching decisions compared to smaller boards – a figure to aim for in smaller companies is 3-5 members and for larger companies 5-8.

• Members should complement each other. It is important that the board collectively has a broad range of skills that reflect the company’s business and market.

• Members should have strong leadership skills. Having strong leadership skills ensures that they work in the best interests of the group and the company.?
• External directors add objectivity, bring their own experience, and positively influence the work of the board.

Size – One of the most common mistakes

Too many boards have too many members. Of course, the size of the board depends on the size of the company. For smaller companies, 3-5 members are appropriate, and for larger ones between 5-9.?

Two problems arise when there are too many members:

1. There will be inefficiency in decision-making
2. It imposes a high-cost burden

The human factor of wanting to influence decision-making becomes more complex the larger the board group is. For boards to make their meetings more effective, the size of the group needs to be large enough to cover skills and needs, but small enough to avoid ineffective decision-making.

Point two is particularly important for small to medium-sized enterprises, as board remuneration affects a larger share of the company’s performance compared to larger companies. In smaller companies, the allocation of resources has to be considered more carefully than in companies with higher turnover. Regardless of the size of the board or company, a rule of thumb is that each member must bring a unique set of skills, which gives them a reason for their positions.

Background, diversity, and expertise – taking advantage of members’ differences

A board composed of members with different backgrounds and expertise is important for its success. In this section, we look at each area that helps a board gain strategic breadth.?

Background

It does not matter if the members of a board have a combined experience of hundreds of years of company building and strategy if their background is the same. If the group is too homogenous, the board loses the necessary breadth that is needed to make strategic use of their different experiences. As long as all members can contribute with unique skills, then experience from previous board assignments is not required. By having competencies that reflect the company’s strategy, the size of the board can be kept within the limits of what is reasonable while covering the needs that exist.

Diversity

A diverse board can contribute several different perspectives that are important in strategic decision-making. Diversity can include age, gender, ethnicity, and professional background. Enhanced diversity also contributes to greater innovation capacity, which is reinforced in research by, among others, McKinsey. Differences force useful discussions. Innovativeness correlates with developing and inventing. Strong innovation capacity thus increases the chances of a company finding niches, which can subsequently create market advantages.?

Expertise

As mentioned above, board members should cover expertise for needs from different business areas – a measure that can also determine the size of the board. Diversified expertise provides useful insights and guidance for decisions. Particularly valuable skills that help in strategic decision-making relate to areas such as legal regulations, risk management, and corporate strategy.?

Members with strong leadership skills

Significantly, the board has strong leadership skills. This means that the chairperson can effectively manage the board’s work and ensure that all processes are carried out efficiently. At the same time, members must possess leadership skills that create group symbiosis.?

Strong leadership in a board consists of several components, which can be attributed to all members, and especially to the chairperson:?

• Vision: A strong leader should be able to articulate a clear vision for the company.?
• Communication: Effective communication is essential to strong leadership. This means being able to communicate effectively with all members, stakeholders, and the management team. At the same time, communication should be able to facilitate productive discussions and effective decision-making. A sense of trust between members helps to identify important issues, not only related to the business but also to the well-being of members, which also affects the board.
• Strategic thinking: Directors must be able to think strategically about the company’s goals and objectives to successfully implement a long-term strategic plan.?
• Accountability: Directors must be accountable to shareholders and other stakeholders and always assure them that the board is acting in the best interests of the company.??
• Facilitation: Directors should be able to facilitate productive discussions and decision-making, involving all members in the process.?
• Integrity: Strong leaders on a board should demonstrate strong integrity in maintaining ethics and acting with transparency.?

External members

It is easy to be blindsided. If the board consists of a majority of people who are operational in the company, then the board runs the risk of becoming an extension of the management team that avoids working on the issues the board needs to focus on. According to a study by Almi, 76% of respondents believe that external directors have a positive impact on the work of the board, and the most common reasons for populating the board with external directors were to gain better height in the strategic work and when the company entered an expansion phase.?

By choosing external members with the right background and skills that reflect the company’s strategic needs, they will act as excellent sounding boards for the company. In a growth phase, it is tactical to choose someone who has made a growth journey with another company before. External directors bring independent status and expertise to the company and can provide an unbiased perspective.?

The ideal composition

The board’s most important task is to create company value by acting as a strategic sounding board based on solid experience. A well-constituted board can ensure that the company has sound and strategic decision-making and can consider all the company’s stakeholders and act in their interests. To summarize the above points, an ideal composition means that the size of the group is reasonable, there is diversity, a range of skills and all have strong leadership skills.?

How do you get there?

A starting point in changing the composition of the board is to review the current state of the group. Which means mapping and clarifying the company’s vision and reviewing the objectives for the next 3-5 years.? Next, the board should review the existing skills to find the gaps that are preventing them from moving forward. The work towards becoming a high-performing board start when you fill these gaps!

• Arabic translations available on our website.

Website: https://governanceatwork.io/corporate-governance/board-composition/

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