Board Composition, Roles, Committees and Board Effectiveness
What the exam tests
This domain examines board architecture: who sits on the board, how independence is determined, what the board reserves to itself, how committees work, and how effectiveness is evaluated.
Core rules
- A unitary board typically mixes executive and non-executive directors. The chair should lead the board and the CEO should lead management; combining both roles concentrates power.
- Non-executive is not the same as independent. Independence requires no material relationship with the company, its advisers, major shareholders or management.
- Committees commonly include audit, risk, nomination/governance and remuneration. Each needs written terms of reference, composition rules, quorum and a route to report to the full board.
- Effectiveness depends on a skills matrix, induction, quality board papers, attendance, succession planning and annual evaluation.
Worked example
A nine-member board has a chair, CEO, two executive directors and five non-executive directors. One NED is a former CFO who still receives a consultancy fee from the company. If the applicable code requires at least one independent director, the board must test that NED’s status. The consultancy is a material relationship, so the director is not independent. Reasoning: the label “non-executive” does not cure the continuing financial link; the board must appoint a qualifying independent director or disclose the gap and remediate.
Traps
Equating NED with independent; allowing the chair to chair the audit committee; assuming a large board is automatically effective; treating committee work as a substitute for full-board accountability; and reducing evaluation to a tick-box exercise with no follow-up.