COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors is the focal point and custodian of corporate governance (King III). Therefore, it is important to make sure that the Board comprises the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively (King IV).
Independent Non-Executive Directors
King III recommends that the Board should comprise a balance of power with a majority of the Board comprising Non-Executive Directors and the majority of Non-Executive Directors should be independent. The same recommendation is followed up in King IV. Australia’s Corporate Governance Principles and Recommendations (ACG) requires that, in addition to skills and knowledge, the Board should be of an appropriate size, have commitment and knowledge of the entity and the industry in which the entity operates to enable it to discharge its duties effectively and to add value. The goal of the recommendations are clearly enunciated in the UK Corporate Governance Code (UKCG) which states that no one individual or small group of individuals should be in a position to dominate the Board’s decision making.
In terms of executive representation on the Board, at a minimum, two Executive Directors should be members of the Board, being the Chief Executive Officer (CEO) and at least one other executive according to King IV. King III specifically recommends the other director to be the Chief Finance Officer.
What is an Independent Non-Executive Director?
Having stated the requirement to have Independent Non-Executive Directors, the big question is what makes a Non-Executive Director independent? The King IV code summaries conditions which are likely to impair or could appear to impair a Non-Executive Director’s independence, being whether a director:
- is a significant provider of financial capital or ongoing funding to the organization; or is an officer, employee or representative of such provider of financial capital or funding;
- if the organization is a company, participates in a share based incentive scheme offered by the company;
- if the organization is a company, owns securities in the company, the value of which is material to the personal wealth of the director;
- has been in the employ of the organization as an executive manager during the preceding three financial years or is a related party to such executive manager;
- has been the designated external auditor responsible for performing the statutory audit for the organization, or a key member of the audit team of the external audit firm during the preceding three financial years;
- is a significant or ongoing professional adviser to the organization other than as a member of the Board;
- is a member of the Board or executive management of a significant customer of or supplier to the organization;
- is a member of the Board or executive management of another organization which is a related party to the organization; or
- is entitled to remuneration contingent on the performance of the organization.
The UKCG and ACG have a very similar list of conditions that may impair or appear to impair the independence of a Director. While the list in non-exhaustive, it gives a good idea of what to consider in defining directors’ independence.
Most of the codes have a nine year time limit for Director’s term of office beyond which the independence of a Director is considered to be impaired.
Role of Non- Executive Directors
The primary role of the Non-Executive Directors is to appoint and remove Executive Directors including assessing their performance against set targets (King III, UKCG) especially the CEO. Situations where the CEO is appointed by the shareholder and not the Board present serious challenges with respect to the accountability of the CEO to the Board. If the CEO does not perform according to the Board’s satisfaction, the two will be stuck in a relationship of convenience with the company being the biggest loser as the Board cannot remove the CEO-as the saying goes, he that appoints can also disappoint; in this instance, he that did not appoint, cannot disappoint.
The Chair of the Board
All the leading corporate governance codes agree on one key principle; that the Chair of the Board to be independent and non-executive. King IV and the UKCG emphasize that the CEO should not be the Chair of the Board. Furthermore, the Chair of the Board should be elected by the Board itself and not by the shareholder.
Conclusion
Board selection is critical and organizations need to pay attention to director independence, skills, experience and knowledge of the entity and industry in which the entity operates. The Chair of the Board, who should be an independent non-executive director should be appointed by fellow Board members and the CEO should be appointed by Non-Executive Directors. Generally, the majority of Board members should be non-executive of which the majority should also be independent non-executive members.
Innocent Munjanja is Technical Director at Botswana Accountancy Oversight Authority
