Assembling a Good Board
By Adrian Chan
The Business Times, 21 November 2016
The board is the apex decision-making body in the company. The Companies Act makes it clear that the board is ultimately responsible for managing and supervising the company.
What makes a good board that can ensure that the company achieves long term success? In my experience, one will need to have at least these four key ingredients when building a strong board:
- An appropriate board size.
- A good mix of executive/non-executive and independent directors.
- Board diversity.
- Constructive board dynamics.
Guideline 2.5 of the Code of Corporate Governance requires each board to decide what size it needs to be in order to facilitate effective decision making, taking into account the scope and nature of the company’s operations and business.
In other words, if the board is too small, there may not be a sufficient diversity of opinion; too large, and the decision-making process could become unwieldy, slow and cumbersome.
A 2014 study by governance researchers GMI Ratings prepared for The Wall Street Journal found that companies with fewer board members produce substantially better shareholder returns over a three-year period. The report also found that smaller boards foster deeper debates, are nimbler in their decision-making, and provide more effective oversight of management.
Indeed, the trends show that Singapore boards are moving in that direction. While the SID-ISCA Singapore Directorship Report 2016 shows that the average listed board size is 6.6 directors, the movement seems to be towards smaller boards. The number of boards with more than eight directors, for instance, has dropped by more than eight per cent from two years ago.
As one would expect, the Directorship Report confirmed that board size is correlated to market capitalization. For example, nearly three quarters of companies with a market capitalization of over $1 billion have eight or more directors; in contrast with less than 14 per cent for companies with less than $300 million in market capitalization.
Mix of executive and independent directors
A good board needs a good mix of executive and non-executive directors (EDs and NEDs), and among the NEDs, there needs to be sufficient independent directors (IDs) to provide the objectivity needed for decision making.
To start, the Code requires every listed company to have at least one-third of its board made up of IDs and, if the chairman of the board is not an ID, then the number of IDs should go up to at least half.
This is only the minimum number. In general, a good board should have sufficient IDs to provide independent oversight of management and to ensure that board decisions are objectively made in the collective interest of all stakeholders.
At the same time, it should be recognized that EDs provide the intimate understanding of the company’s operations and ability to ensure the implementation of the board’s decisions.
Incidentally, the Directorship Report found that EDs (including CEOs) made up one-third of all directors in Singapore, whilst IDs are half of all directors. The balance of about 18 per cent comprises non-executive non-independent directors. This mix has remained quite stable since 2014, and appears to be a reliable guideline.
Diversity is a key ingredient to an effective board. It encourages rigorous decision making with different perspectives and avoids group-think.
Guideline 2.6 of the Code says that the Board should be comprised of directors who, as a group, provide an appropriate balance and diversity of skills, experience, gender and knowledge of the company. They should also provide core competencies such as accounting or finance, business or management experience, industry knowledge, strategic planning experience and customer-based experience or knowledge.
Singapore companies generally score poorly on board diversity. The Directorship Report showed that women continue to represent a small percentage, only 11 per cent, of the total pool of directors, a paltry 1.3 percentage point increase from two years ago.
The NUS’ and BoardAgender’s Singapore Board Diversity Report 2014 showed similar trends in age and ethnic diversity. More than half of boards are composed of directors from one generation, with 12 per cent of boards where the youngest director is over 60 years old. Some 59 per cent of boards are of a single ethnicity with only 10 per cent having three or more ethnic groups represented.
Despite finding the right mix of persons who check the right boxes on a board selection matrix in terms of independence, skills, gender and other aspects of diversity, it may perhaps be how the directors mix and mesh well, and work as a team that finally counts towards an effective board. So beyond their attributes and capabilities, the contribution of each member towards boardroom dynamics is critical.
Cohesiveness is important, but with a caveat. Directors should be team-players, but must speak up when they feel something is wrong.
Here, the chairman sets the tone as he conducts and molds the dynamics of disparate individuals in a way that, hopefully, contributes to effective decision-making.
In this regard, despite the best modeling and matrixes, it is impossible to know how a board will “behave” until it formally convenes to deliberate on the agenda. In every sense, the making of a good board, as we will see in next week’s article, is very much a continuing work-in-progress.
Adrian Chan is the Deputy Chairman of the Advocacy and Research Committee of the Singapore Institute of Directors.