Board Composition

Best Practices for Board Composition

What would the ideal board composition be for Australia and New Zealand?

Many board chairs are currently asking, because of inter-generational change – many baby-boomer directors in their ’60s and’ 70s want to retire from boards in the coming decade, creating a need for board-composition change.

First, the ideal board would be small, with no more than 10 members, as the Australian Institute of Company Directors (AICD). Then, it would be younger, with a healthy percentage of directors under the age of 60 (at least). Then, one member would have a significant experience in finance, and another would be a high-tech expert (ideally with some cyber-security experience as well). There would also be some industry specialists who can make good judgment calls for the market in which the organisation operates. And it is desirable to have some international directors as well.

The New Zealand Financial Authority adds several elements of best practice. There should be a good balance between executive and non-executive directors, and the chair should be independent as well.

Board Independence is a key factor

A recent study by the Queensland Institute of Technology / Australian Catholic University shows that the Board of Directors of the University of California

Independent board members should not have any previous ties to the company – it is best to avoid appointing former executives as board members unless they have been away from the company for a long time. Independent directors should not have interlocking directorships.

Directors should not have any or any issues with the organization, and should not be disturbed.

Why smaller boards?

Steven Cole, chairman of the West Perth-based miner Neometals, says: “ A move towards smaller boards is well-established in the region.

“Larger listed companies (and NFP organizations) tend to favor 7-10 directors and smaller companies prefer 4-6 directors.” “This seems to be the currently accepted ‘sweet spot’ for sharing the load and diversity of skills and perspective , yet it is still enough for management of interpersonal dynamics. I believe this sweet spot is as much driven by the human condition as it is by skills and knowledge, and it is moving materially from here. “

Boards need to have enough committees to do the work. Enough board members therefore must serve on committees, so that the committees have enough members to accomplish their purpose.

Why younger boards?

A recent study of board composition in New Zealand shows that diversity among directors is a finite advantage. Younger directors are more likely to be in touch with trends like mobility, digitization, or social media.

Directors of listed companies in Australia and New Zealand have an average age of above 60, although the number dropped below 62 for the first time since 2011 in 2018.

With the number of female board members increasing across the region, boards want to see an influx of younger members, according to the AICD. Women non-executive directors tend to be over six years younger than their male counterparts.

Boards, however, should engage directors on the basis of experience as well as age. That experience may not be on other boards, but may be relevant in terms of market trends and digital transformation.

How to select skill sets and industry experience

Company directors have a wide variety of issues in order to be strong performers. Financial issues, marketing issues, management issues are only a few.

So it is a mistake to engage directors who are great experts in one area, but who can not contribute much to all the others. Such experts should be third-party consultants to the board, but not on the board.

Nonetheless, specific skills sets are essential for today’s complex environment. At least one director with deep technology skills should be present on every board of directors. At least one director must be able to decode tech issues for the remainder of the board. Similarly, for the purposes of accurate financial reporting, at least one director should have a search experience.

Best practice also mandates having at least one industry specialist on the board, according to the AICD. Experience in every aspect of the organisation’s business is invaluable, and this expertise can therefore be used in monitoring the work of the CEO and management overall.

Managing Multiple Directorships

All directors are likely to be on other non-competing boards at some point. Certainly no director should ‘overboard’ by serving on more than five boards at a time.

But Cole proposes a cycle of fewer meetings, so that directors can better manage multiple directorships. Cole propose full-day board meetings annually, plus a strategy day could be divided into quarterly segments.

This is desirable, as more directors could fit into such a schedule and that means more candidates for diversity.

Importance of Evaluation

Board evaluations are essential to ensuring that there is a healthy dynamic in the boardroom. If directors do not feel they can participate in decision-making, then action from the chair is required. Often, board members are not aligned with the corporation’s strategies, and evaluation helps them back on track.

Diligent’s board self-assessment tool, a part of Diligent Governance Cloud,

Diligent Governance Cloud: Analytics for Modern Governance

The self-assessment tool is only one of a suite of modern governance applications in the Diligent Governance Cloud.

Modern governance issues by the fingertips of today’s board members and executives.

Governance Cloud therefore includes the largest global governance database that companies need to address.

Further, within the scope of the Diligent Platform, Diligent’s Nomination & Governance application provides your nominee / gov committee with instant insights into their board’s composition and benchmarks against competitors in order to support board composition evaluation, board refreshment and benchmarking against other company boards.

Organisational to achieve best-in-class governance. It is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. Stringent, the scope of governance evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need.

If you are ready to go to a Governance Expert at Diligent, get in touch .

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