The board of directors is appointed by a company’s shareholders with the expectation that directors will govern according to the shareholders’ and company’s best interest. Their purpose is to discuss strategies and make key decisions on financial affairs that will lead the company towards long-term prosperity and sustainability, while protecting the interests of all shareholders and stakeholders. Ranging from corporate governance, to corporate ethics, to corporate social responsibility, board directors are expected to have individual areas of expertise and impart their knowledge during debates to collaborate with other directors on defining the best course of action. To execute this duty, boards are split into committees that each oversee a specific area of the company’s performance. The structure of these committees depends on the type of company it is and the company’s goals.
Best Practices for Board Structure
Typically, board terms are staggered to prevent hostile takeovers. The candidates are elected during a corporation’s annual general meeting by current board directors and shareholders, and should possess some level of managerial experience. Though today, many companies are changing their criteria for board candidates and reducing the amount of managerial or board experience required, instead focusing on the unique area of expertise a candidate can bring to the table that the company is lacking in. For example, a company may decide to appoint a former IT specialist or software engineer with no prior board experience if the company is trying to strengthen their technological strategies.
Having a certain quota of independent directors is also important regardless of the company type or direction because it minimizes bias and external pressures in the boardroom. The Securities and Exchange Commission (SEC) requires that public companies have a majority of their board be independent directors. The reason independent directors are preferred is because they are more likely to provide an objective opinion on what is best for the company and less prone to hop on bandwagon opinions that mostly serve upper management. Independent directors must also possess a strong level of business expertise in order to accurately translate their opinions into financial decisions and approve transparent financial statements.
While board members are expected to bring at least one area of outside expertise to the table, nowadays, the most successful boards are composed of directors who are experts in multiple topics. It is currently well-encouraged for company boards to recruit recent college graduates with a major in business and minors in related fields such as cybersecurity, data science, or marketing management. This ensures that the board is composed of the most up-to-date, well-rounded intelligence.
Another key topic to board composition is diversity. There has recently been increasing pressure for companies to appoint more women and people of color to their boards to reflect a more independent board selection process. The reasoning behind this is that companies with a predominantly white, male board most likely possesses some level of bias in their selection process and is not guaranteed to deliver a diversified range of opinions that serve public interest. The more diverse the board, the more diverse its range of robust expertise and perspectives.
Finally, boardroom best practices recommend establishing term limits to consistently refresh and evolve board composition. In the past, board members could expect an automatic reappointment at the end of their terms. This is no longer the case because it leads to boardroom stagnancy and a recycling of the same perspectives. With today’s fastly evolving technological and corporate landscape, board directors are expected to serve a maximum of 12 years in tenure. This standard is meant to open up more vacancies for new, forward-thinking members.
With these practices in mind, nominating committees have much to consider in electing the most qualified, highest performing board. The key takeaway to remember is that no matter the service a company provides or the industry it belongs to, all companies need a highly independent, diversified board with expert knowledge in a wide range of fields in order to successfully oversee management and lead the company to success.