Progress Business Company

In theory, the board is responsible to the shareholders and is supposed to govern a company's management. But in many instances, the board has become a servant of the CHIEF EXECUTIVE OFFICER (CEO), who is typically also the chairman of the board. The role of the board of directors has increasingly come under scrutiny in light of corporate scandals in which the board of directors failed to act in investors' best interests.

At Mc Ford, we have a unique review template to help investors evaluate the objectivity and effectiveness of a board with emphasis on the following crucial governance headings:

1.  Size of the Board

There is no universal agreement on the optimum size of a board of directors. A large number of members represent a challenge in terms of using them effectively and/or having any kind of meaningful individual participation. According to the Nigeria SEC Code on Corporate Governance, the minimum board size is 5 members, and most boards range from 3 to 31 members. Some analysts think the ideal size is seven whilst Corporate Library's study posited the average board size is 9.2 members .

In addition, there are two critical board committees that must be made up of independent members:

The minimum number for each committee is three. This means that a minimum of six board members is needed so that no one is on more than one committee.

2.  The Degree of Independence: Insiders and Outsiders

A key attribute of an effective board is that it is comprised of a majority of independent outsiders. While not necessarily true, a board with a majority of insiders is often viewed as being stacked with sycophants, especially in cases where the CEO is also the chairman of the board.

An outsider/independent director is someone who has never worked at the company, is not related to any of the key employees and has never worked for a major supplier, customer or service provider, such as lawyers, accountants, consultants, investment bankers, etc. While this definition of independent outsiders is clear, you'd be surprised at the number of times it is misapplied. Too often, the "outsider" label is given to the retired CEO or a relative when that person is actually an insider with conflicts of interest.

3.   Committees

There are five important board committees: EXECUTIVE, AUDIT, COMPENSATION, NOMINATING and RISK MANAGEMENT/GOVERNANCE. There may be more committees depending on corporate philosophy, which is determined by an ethics committee and special circumstances relating to a particular company's line of business.

4.   Other Commitments and Time Constraints

The number of boards and committees a board member is on is a key consideration when judging the effectiveness of a member.

5.  Related Transactions

Companies must disclose any transactions with executives and directors in a financial note or notes to the accounts entitled "RELATED TRANSACTIONS." This discloses actions or relationships that cause conflicts of interest, such as doing business with a director's company or having relatives of the CEO or other directors receiving professional fees from the company.