The Power of the Governing Body Composition- Part 1

Last week we took a break on the topic “Enhancing Governance Transformation by discussing the participation of Ben & Jerry’s in climate change. We noted Ben & Jerry’s as an ice cream brand that has taken a resolute decision to participate in climate change and climate justice in recent years.

It has also taken the initiative to promote the amelioration of the impact of climate change by encouraging other stakeholders and pressure groups. Ben & Jerry’s embarked on this initiative by, partly facilitating training and encouraging the businesses’ material stakeholders to develop interest to the extent of studying the brands of the other organisations sharing similar plight on climate change.

In this article, we will be discussing the most challenging topic called the Governing Body Composition. Usually, to facilitate its whole mandate Board Composition does not leave away the Diversity, Equity, and Inclusion ( DEI) of the Board. The Board composition is the way the Board is composed with a view to facilitating it to achieve its strategic goals through its strategy. In most geographical jurisdictions, the composition of the Board is determined by the legal instruments establishing the companies/ organizations, say the Companies Acts, or the Acts establishing State- Owned Entities ( SOEs) other than those that are not companies. Based on this, these instruments cause limitations to meeting the organisation’s Board Composition and DEI.

However, the advent of corporate governance through its codes came to the corporate rescue by creating flexibility for achieving Composition and DEI in addition to the legal instruments. Board Composition and DEI influence the size, balance of power, independence & conflict of interests, diversity, skills, and attributes, terms of tenure, and rotation. These main features will each be discussed in turn as follows: the size of the Board- this serves to meet the strategic, operational/ functional aspects of the organization.

What is required from members of the Board will be a mix of knowledge, skills, experience, business, commerce, and industry experience.

The appointment of members may be increased by the need of these components in addition to what is required by the Act establishing the organization. The appointment of members of the Board may comprise, executive, non- executive, independent, and non- independent non- executive members. King IV Report requires that, in addition to the Chief Executive Officer who may have been appointed as an executive director, there could be at least one of the executives who can also be appointed to the Board, says Chief Financial Officer or Chief Operations Officer. These are also some considerations that are likely to increase members of the Board.

Usually, members of various committees of the Board are appointed from among members of the Board. It should be borne in mind that as stated in this article, committees are formed to facilitate the balance of power and sharing their skills and experiences with the Board. As a result, this increases the size of the Board, especially, as the appointment of some committees is compulsory, such as Audit Committees which though depending upon the size of the organization. Another example can be given from the South African Companies Act which has made it compulsory for all the listed companies and public interest companies meeting a certain public interest score to appoint Audit Committees and Social and Ethics Committees.

The appointment of these committees will, further compound the situation of a bloated Governing Body in terms of its size. The issue of a quorum at meetings may be determined by the Act establishing the organization and/ or the Board Charter. The legal instrument might have been influenced by the requirements to appoint some representative directors which have been influenced by strategic collaborations or other financial interests also having a potential conflict of interests. The composition of the board can also be caused by a regulatory requirement of a certain skill in the Board in addition to the other requirements, say, the requirement of an Accountant and/ or the Attorney in the Board.

The composition of the Board can also be influenced by the diversity of the Board which may include gender, racial, ethnic composition, age, etc. According to the General Note on Board composition of the Institute of Directors in South Africa, most companies in the Johannesburg Stock Exchange have a minimum and maximum of 3 and 11- member Boards respectively. It states that there are a few companies that have Boards comprising 14 members. Increasingly, most of the global Boards have shifted to smaller but diverse Boards. According to governance researchers, GMI Rating in the Wall Street Journal, the analysis of nearly 400 companies with a market capitalization of at least 10 billion Dollars which have the smallest Board produced substantially better results for a period of 3 years than their counterparts with larger Boards. It should also be borne in mind that the effectiveness of the Board is influenced by the size of the Board of any organization. In the next article, we will be continuing this topic. We thank our readers for their continual feedback.