Board composition is, after the choice of chief executive, the decision with the greatest long-term impact on a company's governance. The board that is composed well — with the right balance of skills, experience, independence, and diversity — will govern well even if some of the procedures are imperfect. The board that is composed badly will struggle even if the governance manual is flawless.
What independence actually means
The codes define independence in terms of relationships. A director is independent if they have no significant financial, familial, or professional ties to the company, its executives, or its major shareholders beyond the directorship itself. The definitions are broadly consistent across jurisdictions, though the details differ.
What the codes cannot define is independence of mind. A director can meet every formal criterion of independence and still be incapable of challenging the chief executive, because the director was recruited by the chief executive, socialises with the chief executive, and has internalised the chief executive's view of the world. Formal independence is necessary but not sufficient.
The composition matrix
The modern approach to board composition uses a skills matrix — a grid that maps the skills and experience needed by the board against the skills and experience of the current directors. The matrix reveals gaps and guides the search for new directors.
The skills a board typically needs include:
The matrix is a tool, not a formula. The best boards are not assembled by matching categories; they are assembled by finding directors whose judgement is sound and whose perspectives complement each other.
Diversity as governance, not as decoration
The argument for board diversity is, at its most serious, a governance argument. A board composed entirely of people with the same background, the same networks, and the same instincts is a board that is less likely to see the risk, less likely to challenge the strategy, and less likely to catch the failure. Diversity of thought, which requires diversity of background, is a governance asset.
The evidence supports this. McKinsey's Diversity Wins studies have consistently found correlations between board diversity and financial outperformance. The studies have methodological limits, but the direction is consistent: homogeneous boards underperform.
This article is adapted from The Director's Craft by Peter Burchardt. Read the full chapter in the book →