Subject 4. Board Member Qualifications
Board Members who have appropriate experience and expertise relevant to the Company's business are best able to evaluate what is in the best interest of Shareowners. They must be able to contribute business judgment to board deliberations and decisions, based on their experience in relevant business, management disciplines, or other professional life endeavors. Depending on the nature of the business, this may require specialized expertise by at least some Board Members.
If Board Members lack the skills, knowledge, and expertise to conduct a meaningful review of the Company's activities, and are unable to conduct in-depth evaluations of the issues affecting the Company's business, they are more likely to defer to management when making decisions.
The following attributes should be considered desirable for Board Members:
- Experience. Board Members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the Company's future. Do they have the background, expertise, and knowledge in specific subjects needed by the Board? Board Members should be able to act with care and competence as a result of relevant expertise and understanding of:
- the principal technologies, products, or services offered in the Company's business,
- financial operations,
- legal matters,
- strategic planning, and
- the risks the Company assumes as part of its business operations.
- Personal. The Board Member should be of the highest moral and ethical character. Have they made public statements that can provide an indication of their ethical perspectives?
- Relevant Board experience. Do they have experience serving on other Boards, particularly with Companies known for having good corporate governance practices? Have they had any legal or regulatory problems as a result of working for, or serving on, the Board of another company?
- Availability. The Board Member must be willing to commit as well as have, sufficient time to discharge the duties of Board membership. Do they serve on a number of Boards for other Companies, constraining the time available to serve effectively? Do they regularly attend Board and committee meetings?
- Term limits. Does the Board have term limits? Term limits can help insure that there are fresh ideas and viewpoints available to the Board. They can prevent a Board Member from developing a cooperative relationship with management that could impair his or her willingness to act in the best interest of Shareowners. However, term limits have the disadvantage of losing the contribution of Board Members who have developed, over a period of time, valuable insight into the Company and its operations and, therefore, provide an increased contribution to the Board as a whole.
Practice Question 1Which of the following most likely would be a reason for concern when evaluating an independent board member's qualifications? The board member ______
A. has served on the board for 15 years.
B. owns 2,000 shares of the corporation's equity.
C. has formerly served on the boards of several successful companies.Correct Answer: A
Such long-term participation may enhance the individual board member's knowledge of the company, but it also may cause the board member to develop a cooperative relationship with management that could impair his/her willingness to act in the best interests of shareowners.
Study notes from a previous year's CFA exam:
d. identify factors that an analyst should consider when evaluating the qualifications of board members;