This memo provides an insight on why a board’s composition plays a crucial role to perform and function effectively and why board diversity has become increasingly necessary in order to add more value to the firm. The board’s composition is likely to impact how the board functions, how it makes its investment and financial decisions and how authority and influence are allocated and manifested within the board. Each organisation has its own regulations and guidelines for the formation, roles and compensation of the management board as there is “no one size fits all” rule, they are largely governed by governmental regulations and other international regulatory bodies such as the Organization for Economic Co-operation and Development
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In addition to the Chairman, most boards consist of more than one type of director: Executive (or internal) directors that have full time executive responsibilities and Non Executive independent directors (non affiliated outsiders). The quality, experience and independence of a board’s members directly affect board performance. The board of directors have six generally accepted primary functions:
• Select, evaluate and replace the CEO if necessary.
• Determine management compensation and review succession planning.
• Review and approve the corporation’s financial objectives, strategies and plans.
• Provide advice and counsel top management.
• Evaluate board processes and performance.
• Review the competence of the systems to comply with all pertinent regulations and laws.
Given these vital functions, the composition of the board is extremely important in determining its quality and performance. Monks proposes that eventually it is the Chairman who determines the effectiveness of the board. The Chairman is the main architect of the board and chooses the directors he wants. This prime responsibility translates into him or her getting the right people on the board, facilitating the contribution of non-executive directors and finding the balance between getting information and setting strategy. The company’s strategy helps the Chairman identify the