Governance in focus: Know your requirements before you set up a board
The board of directors is the highest decision-making body in most companies and organisations. With its extensive legal, financial and strategic responsibilities, it is easy to forget that a board is just a group of people. And like any group, changes in the size, composition and powers of a board can have a big impact on how it performs.
That is why when forming a board, recruiting a new director or just taking stock of governance frameworks, companies and their shareholders should keep the following in mind:
First and foremost, you’ll need to be clear about what your board is expected to do. Without this, it is almost impossible to determine the mix of directors your business will need, or the powers they should be entrusted with. Similarly, without a clear mandate prospective members won’t be in a position to properly assess their expected roles and responsibilities.
Most boards primarily exist to scrutinise company strategy and performance and proactively identify potential risks to the business. Others connect the company with potential partners, customers and investors through their personal and professional networks. In certain situations, particularly in the case of not-for-profits, board members may be expected to perform duties that might ordinarily be the responsibility of management, such as representing the organisation at events. In reality, directors are expected to do some or all of the above at different times.
Although the majority of companies across the Gulf region are family-owned or-operated businesses, it is worth noting that the mandates of family business boards are not dramatically different to those of public companies. A global study published by PricewaterhouseCoopers found that among the chief executives and chief financial officers of 147 family-owned or owner-operated companies, the majority of respondents identified that the primary responsibilities of their board was to monitor company performance (85 per cent) and set company strategy (74 per cent).
That is not to say there is no difference. Taking care to codify the responsibilities of directors in a family-owned business can be particularly important given the potential blurring of personal and professional relationships. According to the same PwC study, “Family company boards may face even more challenges than other companies in ensuring they have effective board dynamics” given the potential for “family issues [to] become intertwined with company issues”.
Perhaps more than the ownership structure, the mandate of any board is largely influenced by the actual stage of development. What is required from a board in the start-up phase is very different from what you might expect a little further down the road. That is why term limits (specifying the number of years and terms an individual board member can serve), rotation of directors and regular reviews of board performance can be helpful in ensuring the mandate and membership of your board remain in sync with your needs and aspirations over time.
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It can be tempting to go overboard with recruitment. After all, if two brains are better than one, you could be forgiven for thinking that the more smart people you can get around your boardroom table, the more likely they are to reach the right conclusions.
Unfortunately, it isn’t that simple. A lot of research has been done into the optimal size of groups for decision-making, and bigger is not always better. According to a 2014 study by GMI Ratings for The Wall Street Journal, “companies with fewer board members reap considerably greater rewards for their investors”, with smaller boards demonstrating “deeper debates and more nimble decision-making”. It is worth noting, however, that not-for-profits may choose to have larger boards for other reasons, including ensuring that all stakeholder groups have a voice in deliberations and providing a bigger fundraising network for the organisation.
Ultimately, your goal should be to recruit the number of directors needed to fulfil the specific mandate of your board. No more, and no less, keeping in mind that the magic number may in fact change over time.
Getting the right mix of people together is potentially the most important factor in the success of any board. Once your board has a clear purpose and you have a better idea of its optimal size, you can think more seriously about the combination of skills, expertise, gender, age and personalities that you want.
For some directors, their greatest asset will be a deep knowledge of the company’s industry or business model. Others may bring important legal, financial or commercial expertise, or access to valuable contacts and business networks. Regardless of what they contribute inside the boardroom, your directors will be among the most influential ambassadors of your company to the outside world, so it is imperative that you choose them wisely.
Two groups often under-represented at the board level are women and youth. In 2014, women represented only 19 per cent of board members among Fortune 500 companies. According to a study by the Pearl Initiative, women recently held only 1.2 per cent of the board seats at listed companies in the UAE. Thankfully, this is set to change, with the UAE Cabinet approving a decision in 2012 to make it compulsory for women to be represented on the boards of all corporations and government agencies.
I strongly recommend that all companies should also have at least one member from our youth, who make up more than 30 per cent of the population of the Mena region, represented on their boards. While they may bring less industry experience than other directors (though not always), they will often have a much better understanding of emerging technologies and trends that are relevant to all businesses today. They also belong to the generation that could be most affected by the decisions being made, and therefore have an undeniable stake in the outcome of board deliberations. At Crescent Enterprises, for example, I have recently instituted the concept of a Youth Advisory Group, to ensure our activities and business plans are relevant to the current and future needs of our strong and influential youth population.
Even the most committed, engaged and carefully assembled boards need safeguards. It is in nobody’s interests for there to be ambiguity in the expectations from board directors, the rules that apply to them and the mechanisms that will govern their performance.
As is often the case in matters of governance, transparency is paramount. All board candidates should be issued with the company’s board guidelines before they accept any appointment so that everybody is on the same page. It is imperative that incoming board directors understand in advance any term limits that apply and the company’s rotation policy. Once a new director agrees to join, they should be expected to allocate a full day or two for a thorough induction process to the board and the company. Mechanisms for board self-reviews each year also bring greater accountability to the work of the board and often result in improvements in performance.
A board of directors is an extremely important aspect of any company or organisation. The board of directors’ key purpose is to protect and increase value by collectively directing the company’s affairs, while meeting the appropriate interests of its shareholders and stakeholders. In addition to business and financial issues, boards of directors must deal with challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics. Failing to think through some of the key aspects of the formation and functioning of the board itself can easily result in all round frustration. Ultimately, the long-term value of any board will be heavily influenced by the goals set for it, the mix of people that are appointed to it and the quality of engagement that occurs with its members.
Badr Jafar is the founder of the Pearl Initiative and chief executive of Crescent Enterprises.
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