Board Composition

Board composition: Key trends and developments

Directors are under pressure from investors, regulators and other stakeholders to demonstrate a thoughtful approach to board composition. Many investors and other stakeholders want more information about a company’s director nominees, especially information boards and their nominating and governance committees are considering regarding director tenure, board diversity and the results of board self- evaluations. Here we discuss how directors and investors might think about board composition and identify some of the key issues related to board refreshment.

Assessing what you have and what you need

In Uganda’s rapidly changing business climate, a high performing board needs agile directors. They must be able to grasp concepts quickly and understand how the company’s strategy is impacted by emerging economic and technological trends. This requires challenging management and avoiding groupthink while still contributing to a collegial boardroom. A strong board also includes directors with different backgrounds. This includes individuals with diversity of experience and viewpoints.

Evaluating board composition means thinking about what the board has, and what it needs. What skills and attributes are critical to provide effective oversight of the company? As companies’ strategies change and their business models evolve, board composition needs to be evaluated on an ongoing basis. This ensures that the right mix of skills are present to meet the company’s needs. Many boards conduct a gap analysis that compares the attributes its directors have with those the board thinks are critical for effective oversight. Gaps can be filled either by recruiting new directors, or by consulting external advisors.

Board diversity is a hot-button issue

Diversity is a key element of any discussion of board composition. It covers not only gender, age, race and ethnicity, but also the range of skills, backgrounds, personalities and experiences on the board. But the pace of adding more diversity on company boards has been slow. One main roadblock to adding diversity is the director candidate pool. Many boards look to current or former CEOs as potential director candidates.

One area that is often overlooked is age diversity. The proportion of company board seats that are held by directors aged 50 or younger is still marginal. The drive to make diversity a priority really has to come from board leadership: CEOs, lead directors, board chairs, and nominating and governance committee chairs. These leaders need to be proactive and commit to making diversity part of the company and board culture. In order to find more diverse candidates, boards will have to look in different places. There are often many untapped, highly qualified and diverse candidates just steps below the C-suite people who drive strategies, run large segments of the business and function like CEOs.

How long is too long?

The debate over board tenure centers on the impact lengthy board service may have. How does it affect director independence, objectivity and performance? Some investors believe long serving directors can become complacent over time making it less likely that they will challenge management. Another concern is that long-tenured directors could develop close relationships with fellow directors, leading to groupthink. But others question forced board turnover. They argue that longer tenure means deep knowledge of the company and experience with changes in business cycles. And they question why directors who are otherwise very effective should be asked to leave just because of their longevity. One approach to this issue is to strive for diversity of board tenure consciously balancing the board’s composition to include new directors, those with medium tenures and those with long term service. Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.

Three ways to drive board refreshment

1. Take action on board assessments: Boards should use their annual self-assessment to help spark discussions about board refreshment. Having a robust board assessment process can offer insights into how the board is functioning and how individual directors are performing. Use this process to identify directors who may be underperforming or whose skills may no longer match the company’s needs. It’s the job of the board chair or lead director and the chair of the nominating and governance committee to address the matters that arise out of the assessment process.
2. Take a strategic approach to board succession planning: Board succession planning is essential to promoting board refreshment. In this process, it’s important to think about the current state of the board, the tenure of current directors and the company’s future needs. Boards should identify possible director candidates based on anticipated turnover and director retirements.
3. Broaden the definition of diversity and the pool of potential director candidates: Often, boards recruit directors by asking other sitting directors for recommendations. This can create a small and insular pool. Forward-looking boards expand the universe of potential qualified candidates by looking outside of the C- suite, and considering investor recommendations. This will provide a broader pool of individuals with more diverse backgrounds.

Evaluating board composition and refreshment may be challenging at times, but increasingly, boards are relying on the objectivity and expertise of external evaluation specialists to help them maximize their performance at a time when the stakeholder expectations are greater than ever. An evaluation conducted by external advisors brings objectivity to the process and is recognized by stakeholders as a sign of commitment to excellence in corporate governance from the board.

By Adam Sengooba Associate Director in Risk Assurance at PwC Uganda