Most entrepreneurs dislike the rigidity of corporate governance. It’s a hindrance to building a successful business. However, the really successful entrepreneurs know that corporate governance is the key to packaging a business for sale because it can limit the exposure to risks.
Corporate governance is the structure and processes for the direction and control of a company. Good corporate governance is an audit trail of the rationale for and the making of decisions through to the implementation and monitoring of those decisions. It demonstrates the process of protecting the company’s assets for its shareholders, investors and creditors.
Board of Directors and Good Corporate Governance
Good corporate governance starts with the decisions of the board of directors and the recording of them. The board’s main responsibility is to undertake the objectives of the company for the benefit of the shareholders. The decisions of the board need to consider commercial, legal, accounting and tax issues. In certain situations, the board may need to defend its decisions and that is where the importance of accurate recording of the thought process and rationale for decisions is important.
Consider a small company that is getting by when the directors decide to employ the son or daughter of the predominant shareholder. They pay them a healthy salary along with benefits. If the company can’t meet its other liabilities, would the board’s decision be scrutinised in the event of creditor claims? Could the directors be personally exposed?
Had the directors met and recorded the decision to employ the shareholder’s son or daughter and that decision was seen to benefit the shareholders as a whole, they would have a potentially defensible position.
As a company grows, it is essential that the board members have different responsibilities for overseeing the functions of the company. This could be as simple as a managing director, finance director or operations director roles. However, continued growth, external investors and volume of responsibilities will require a different board structure.
An established successful company will have both ‘executive’ and ‘non-executive’ members. The executive board are in the business day to day and normally comprise a chief executive, chief operating officer, finance director, human resource director, sales director and business development director. The non-executive directors are external persons with specialised skills or experience brought onto the board to offer independence, direction and expertise dependent on the businesses’ needs.
Board of Director’s Strategy
The board is responsible for the formulation and adoption of a strategy. A board would therefore prepare a business plan tied into financial forecast. This would be its proposition to the shareholders and their performance measured against it.
In reality a board’s business plan may be an overview and its respective goals delegated to the director responsible for a particular function who in turn would develop their own plan (in conjunction with the rest of the board).
The board have a responsibility to set and monitor performance. Proactive monitoring permits the identification of problems and quicker rectification of those problems. Monitoring will include the consideration of legal issues and compliance. It also ensures that board decisions continue to be in line with the strategy.
Chief Executive Officer
One of the board’s responsibility is to appoint, review, and, if necessary, dismiss the CEO. The CEO is the link between the board, its decisions and the management role in implementing those decisions.
Other Responsibilities of the Board of Directors
- To recognise that the governance of risk is a board responsibility
Establishing a sound system of risk oversight and management and internal control is another fundamental role of the board. Effective risk management supports better decision making because it develops a deeper insight into the risk-reward trade-offs that all organisations face.
- Ensure the directors have the information they need
Better information means better decisions. Regular board papers will provide directors with information that the CEO or management team has decided they need. But directors do not all have the same informational requirements, since they differ in their knowledge, skills and experience. Briefings, presentations, site visits, individual director development programs and so on can all provide directors with additional information. Above all, directors need to be able to find answers to the questions they have so access to independent professional advice policy is recommended.
- Build and maintain an effective governance infrastructure
Since the board is ultimately responsible for all the actions and decisions of an organisation it will need to have specific policies in place to guide organisational behaviour. To ensure that the line of responsibility between board and management is clearly delineated it is particularly important for the board to develop policies in relation to delegations. Also, under this topic are processes and procedures. Poor internal processes and procedures can lead to inadequate access to information, poor communication and uninformed decision making resulting in a high level of dissatisfaction among directors. Enhancements to board meeting processes, meeting agendas, board papers and the board’s committee structure can often make the difference between a mediocre board and a high performing board.
- Appoint a competent chairperson
Research has shown that board structure and formal governance regulations are less important in preventing governance breaches and corporate wrongdoing than the culture and trust created by the chairperson. As the “leader” of the board, the chairperson should demonstrate strong and acknowledged leadership ability, the ability to establish a sound relationship with the CEO and have the capacity to conduct meetings and lead group decision-making processes.
- Build a skills-based board
What is important for a board is that it has a good understanding of what skills it has and the skills it requires. Where possible, a board should seek to ensure that its members represent an appropriate balance between directors with experience and knowledge of the organisation and directors with specialist expertise or fresh perspective. Directors should also be considered on the additional qualities they possess like their “behavioural competencies” as these qualities will influence the relationships around the boardroom table, between the board and management and between directors and key stakeholders.
- Evaluate board and director performance and pursue opportunities for improvement
Boards must be aware of their own strengths and weaknesses if they are to govern effectively. Board effectiveness can only be gauged if the board regularly assesses its own performance and that of individual directors. Improvements to come from a board and director evaluation can include areas as diverse as board processes, director skills, competencies and motivation or even boardroom relationships. It is critical that any agreed actions that come out of an evaluation are implemented and monitored. Boards should consider addressing weaknesses uncovered in board evaluations through director development programs and enhancing their governance processes.