CHAPTER 4

BOARD COMPOSITION
 LEARNING OUTCOMES
At the end of the chapter, students should be able to
• Understand the components of governance structures, including: board size committee structure director independence
diversity/gender diversity, meeting frequency, incentive schemes equity involvement, board talent management
• Understand the best practice when creating and implementing governance structures:
• Understand why effective governance structures are important for governance best practice
• Understand the impact of ineffective structures on organisational performance
• Understand the various methods of evaluating board structure eg questionnaires, observation, interviews
• Understand the purpose of evaluating governance structures
• Identify and explain the role of the company secretary/governance professional in evaluating governance
• Explain how evaluation can inform creation of best practice
• Identify the impact of governance structure on board effectiveness – reasons why making changes to governance
structures does not always mean the board will be effective
• Identify the reasons why organisations need to look beyond compliance with code requirements to ensure sustainability of
the business
• Identify and explain how organisations can move beyond and box ticking and begin to predict performance, e.g. by
focusing on: culture talent engagement
 BOARD COMPOSITION

An effective board should have

• the right group of people
• appropriate mix of skills, knowledge, experience.
• sufficient diversity and independence to avert ‘groupthink’ or ‘blind spots’ in
the decision-making process.
• At least half of the board comprises independent directors. For Large
Companies, the board comprises a majority independent directors
 INDEPENDENCY

• A Chairman of the board who is responsible for instilling good corporate

governance practices, leadership and effectiveness of the board is
appointed.
• The positions of Chairman and CEO are held by different individuals.
• Why is this important?
 COMMITTEE STRUCTURE

• Half the board should be independent Directors

• Large Companies majority should be independent directors.
• Tenure of independent directors should not exceed 9 years
• If directors are to be appointed from 9-12 years there must be approval from
annual shareholders
• If the director should be appointed after 12 years approval must be done
from annual shareholders through 2 tier voting
 CRITERIA FOR APPOINTMENT OF
DIRECTORS
Based on
• merit
• due regard for diversity in skills, experience, age, cultural background and
gender.
• Independent thinking
• Background of the director
 DIVERSITY

• Diversity is acknowledging that various types of people should be employed

• The importance of diversity is to enhance creativity and productivity and
encourage diverse thinking and better decision making
• Diversity allows people from any background ie gender, race to be in the Board
• large companies are required to have 30% women directors
• Other companies should try to follow the same.
• Women’s participation should also be in senior management team.
 SELECTING DIRECTORS

• a directors’ registry
• open advertisements
• independent search firms
• Disclose in annual report on how the directors were selected including non –
executive directors
• If selection was done solely based on recommendation of existing directors,
explanation on why other methods were not used should be indicated
 MEETING FREQUENCY

• The Board should meet as often as possible

• Quarterly should be a good timeline
 INCENTIVE SCHEME

• Directors’ remuneration, which is well structured, clearly linked to the

strategic objectives of a company, and which rewards contribution to the
long-term success of the company is important in promoting business stability
and growth.
• Purpose attract and retain the right talent to achieve the goals of the
organization
• directors includes fees, salary, bonus, benefits in-kind and other emoluments.
 TALENT MANAGEMENT

• Talent as a “creative, enterprising person with high development potential,

being the lever of growth in shareholder value” (Borkowska, 2005).
• The term “talent” can also be defined by enumerating its characteristics.
These include (Pocztowski, 2008) strategic thinking, leadership traits, an
entrepreneurial attitude, a performance-oriented approach, the ability to
persuade, teamwork, emotional intelligence, flexibility, a high tolerance to
change, and highly developed specialist technical skills
 TALENT MANAGEMENT

• Talent management is the processes of ensuring that talented people are

attracted, retained, motivated and developed in line with the needs of the
organization
• In terms of TM the criteria will involve
-recruitment and selection of directors
-rewarding
-ongoing development
 BEST PRACTICE IN GOVERNANCE
STRUCTURES

• Malaysian Corporate Governance 2021

• Case studies
• Companies Act
 EFFECTIVE GOVERNANCE STRUCTURES

• Skills
• Knowledge
• Experience
• Independence
• Critical thinking
• diversity
 INEFFECTIVE STRUCTURES

• directors’ long tenure

• long or close relationship with board and management,
• Director may be too sympathetic to their interests
• too accepting of their work
• Staying longer due to material benefits and remuneration
 METHODS OF EVALUATING GOVERNANCE
STRUCTURES
• Evaluation is a process of analyzing the performance of the directors on their effectiveness
• It can be done in several methods
- questionnaire
- interview
- observation
-self assessment
- peer review
- facilitated by Company Secretary or Consultant
 EXTERNAL EVALUATORS

• professional, experienced and independent party

• Board should disclose the identity of the third party
• Factors of evaluation
• Will and ability to critically challenge and ask the right questions;
• Character and integrity in dealing with potential conflict of interest
situations;
• Commitment to serve the company, due diligence and integrity;
• Confidence to stand up for a point of view.
 REPORT ON EVALUATION

There must be disclosure in the annual report of large companies on the following:-
1) How the evaluation was conducted
2) the criteria used such as the assessment of fit and properness, contribution and performance
3) caliber and personality of directors
4) Whether an independent expert was engaged, or was it internally facilitated
5) Key strengths and/or weaknesses that were identified from the evaluation;
6) Steps or enhancements proposed to be undertaken to mitigate or address the weaknesses
identified.
 PURPOSE OF EVALUATING GOVERNANCE
STRUCTURES

• determine the effectiveness of the board as a whole

• Effectiveness of its committees
• Effectiveness of individual director
 ROLE OF CS IN EVALUATING GOVERNANCE

• Assisting to look out for independent evaluators

• If CS are to do the evaluation identify the criteria for evaluation
• Preparation of documentation
 CHANGING BOARD GOVERNANCE

May not be effective

-the same mindset might be reproduced
-directors may still not play the role
-ethical values of directors may still be a question
LOOKING BEYOND COMPLIANCE OF THE CODE
AND BEYOND THE BOX TICKING CULTURE

• Culture of the board

• Involvement and participation within the board and externally
• Communication
• Ongoing search for talented directors
ANY QUESTIONS???