“Every company should be headed by an effective board which is collectively responsible for the success of the company.” – UK Corporate Governance Code 2010
Boards govern companies. They provide leadership, set its direction and major policies, appoint and supervise senior management, ensure it complies with the law and is accountable to shareholders. And as this quote from the Code highlights, all directors are equal in the eyes of the law, and all are jointly and severally responsible for the conduct of their organisation.
In essence, a board is a decision-making body, with responsibility for oversight and which delegates authority (but not responsibility) to management.
To be effective, boards must be a working group of members who trust and understand one another. The group must be the right size, with the right balance of executive and non-executive directors, and have a good mixture of abilities, knowledge and experience.
There is a legal requirement for limited companies in private ownership to have at least one director (two for plcs). Beyond this, the ideal size of a board depends on a number of factors including the age, ownership, structure and financial profile of a company.
The Articles of Association may give further clarity, but it is important to remember that being the wrong size may limit a board’s effectiveness. Too many members and meetings can become protracted, with cabals developing, and potentially poorer decision-making – with some choosing to let others do the hard work.
As a result, companies have been known to shrink their boards to improve strategic thinking and development. At the opposite extreme, too few directors may limit the knowledge and experience around the table.
The average size of effective boards in the UK has been suggested as being between six and ten directors, depending on the size and complexity of the company.
Small company boards are likely to have a greater representation of the senior management team, perhaps bolstered by external individuals who have a stake in the business or recognised expertise. But, it is important to remember that the board’s duty is to the company – any personal financial stake or vested interest must be put to one side at all times.
It should also be remembered that every board evolves. It goes through transitions in its development as the company changes from inception, through periods of growth, maturity and possibly decline. The constant nature of change in today’s global economy creates real problems for boards that want to maintain their full effectiveness and a failure to evolve and develop is likely to be a sign of weakness.
In terms of the internal composition of skills and experience, within the board itself there are no rules. No two companies are the same and their boards must reflect an organisation’s uniqueness, needs and the context in which it operates.
Audit committees in listed companies are an exception – there must be at least one person with “recent and relevant financial experience”, which typically is interpreted as meaning a former auditor or financial manager. Of course, smaller private companies may not have boardroom committees.
As yet, there is no legal requirement for gender composition, unlike Norway, France and other European countries, but it is a growing consideration for boards.
Organisations looking to fill identifiable skills gaps in their senior team should pay close attention to director development, particularly as the needs of the company change. Training can improve board effectiveness and also give an organisation potential access to a wider pool of seasoned executive and/or non-executive directors.
This is a view endorsed by Paul Fox, a qualified Chartered Director and MD of Merryhill Envirotec, a £4m asbestos removal company. He says: “The primary duty of all directors, regardless of company size, is to act as representatives of the shareholders.
“Professional director training should be an integral element of all businesses continual development and lifelong learning plans. Directors who really understand what their responsibilities entail are essential in my opinion to ensure a board of directors spends the majority of its time doing what is vital; that is looking forward strategically, and scanning the horizon for opportunities and threats.”
Dr Roger Barker is director of corporate governance and professional standards at the Institute of Directors.