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The Appropriate Board of Directors’ Composition Report

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Updated: Jul 21st, 2021

Executive Summary

The paper analyzes the role of the board of directors for the company’s success and tries to determine the right composition of the given body. Specific attention is drawn to board size, the presence of independent directors, and diversity because these phenomena can directly influence the performance of the firm. The presence of outside experts and board size can have either a positive or negative impact, while diversity, both racial and gender, lead to useful outcomes. Finally, personal recommendations have been produced, and they stipulate that the board of directors should consist of 8-12 members, including a few independent specialists, women, and representatives of various minorities.

Introduction

The board of directors is an essential component of every business. It is so because this body is responsible for developing and meeting the company’s strategic goals, supervising top managers, establishing the company’s culture, and others. It is believed that the successful performance of a firm is inseparably associated with the efficient board of directors. That is why this board should have the appropriate composition to cope with the tasks above.

Problem Statement

Every firm or company does its best to achieve the best performance results. Drawing specific attention to the composition of the board of directors is a useful strategy to prosper with the issue above. It is possible to mention that the structure refers to various components that can either positively or negatively influence a business. Consequently, these phenomena, including board size, the presence of independent directors, and diversity, are said to be of significance when it comes to the efficiency of the board of directors.

Discussion

To begin with, one should state that there are two different approaches as to what an appropriate size of the board of directors is. On the one hand, Ahmadi and Bouri stipulate that more extensive boards lead to better performance of a firm (247). On the other hand, there exists an opinion that bodies with fewer members are more effective when it comes to representatives of small markets (Ahmadi and Bouri 247). Even though the information above shows the difference, larger boards of directors are considered more useful because they imply educational, cultural, and managerial diversity, which often leads to better performance.

The same dual approach is found when it comes to the presence of independent directors in the body. Outside experts seem to influence the firm’s performance positively because of a few reasons. Firstly, the higher independence of the board of directors “reduces the conflict of interests between different stakeholders” (Birindelli et al. 4). Secondly, outside experts are more likely to evaluate management performance more objectively.

It is so because these directors do not have close relationships with other managers, which allows them to make unbiased judgments (Birindelli et al. 4). At the same time, a high number of independent directors is often associated with “a negative impact on social and environmental disclosure” (Birindelli et al. 4). Thus, it is possible to suppose that outside experts should be members of the board of directors, but their number is subject to discussion.

When it comes to the diversity of the board of directors, however, this phenomenon unanimously implies positive outcomes. It is impossible to deny that gender diversity on board leads to the better performance of a firm. For example, Ahmadi and Bouri argue that there exists a positive correlation between gender diversity and the level of financial outcomes for large US firms (248). In addition to that, Price emphasizes that diversity, both gender and racial, contributes to better decision-making within the board of directors (par. 12). This information demonstrates that this body can achieve the best results when it comprises representatives from different backgrounds.

Recommendations

The data stated above make it possible to comment on the appropriate board of directors’ composition. Firstly, it is necessary to determine the size of the given body. It has been indicated that larger boards are more productive, and 8-12 members seem to be a suitable number. Secondly, the issue of whether to include outside experts on the board of directors is also challenging. However, it is reasonable to have a few independent directors on board because they contribute to impartial and objective management practices. Finally, it is also useful to draw attention to the diversity of the board of directors. It has been demonstrated that the presence of women and minorities in the given body contributes to its efficiency, which implies positive results for the whole company.

Conclusion

It is impossible to overestimate the role of the board of directors for any business because this body deals with essential phenomena that relate to business development and sustainability. That is why it is necessary to consider the issue of board composition. Now, there exist various points of view as to how many members should comprise the body and what they should be. However, it has been found that the 8-12-member board of directors that includes outside experts, women, and representatives of minority groups can reckon on decent results.

Works Cited

Ahmadi, Ali and Abdelfettah Bouri. “Board of Directors’ Composition and Performance in French CAC 40 Listed Firms.” Accounting, vol. 3, no. 4, 2017, pp. 245-256.

Birindelli, Giuliana, et al. “Composition and Activity of the Board of Directors: Impact on ESG Performance in the Banking System.” Sustainability, vol. 10, no. 12, 2018, pp. 1-20.

Price, Nicholas J. “Board Composition Best Practices.” Diligent Insights, 2019. Web.

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IvyPanda. (2021, July 21). The Appropriate Board of Directors’ Composition. Retrieved from https://ivypanda.com/essays/the-appropriate-board-of-directors-composition/

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"The Appropriate Board of Directors’ Composition." IvyPanda, 21 July 2021, ivypanda.com/essays/the-appropriate-board-of-directors-composition/.

1. IvyPanda. "The Appropriate Board of Directors’ Composition." July 21, 2021. https://ivypanda.com/essays/the-appropriate-board-of-directors-composition/.


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IvyPanda. "The Appropriate Board of Directors’ Composition." July 21, 2021. https://ivypanda.com/essays/the-appropriate-board-of-directors-composition/.

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IvyPanda. 2021. "The Appropriate Board of Directors’ Composition." July 21, 2021. https://ivypanda.com/essays/the-appropriate-board-of-directors-composition/.

References

IvyPanda. (2021) 'The Appropriate Board of Directors’ Composition'. 21 July.

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