A board is a group of people that is set up to manage an institution or company. These members primarily oversee the operations of the organization and give input into strategic decision-making, but they are not involved in day-to-day operations. Boards are usually quite large, with members sitting on more than one board and often being part of several boards at once. In order to make sure all aspects of a business stay organized, boards can create lots of smaller agencies that try different things out before figuring out what works best for the whole organization.
Boards of directors are created in different ways. Some companies have a board of directors that makes all the decisions for the company and is completely separate from management. Others have a board of directors that is inside management, with members representing different aspects of the business and reporting to them.
Fintalent’s board governance consultants have however observed that some companies have chosen to remove boards altogether, instead giving shareholders the right to vote for managers to run the business. This is called a “codetermination system” or “co-determination” in German-speaking countries or “employee representation on corporate boards” in Anglo-Saxon countries.
In public sector organizations and agencies, such as a government department or public agency, the board will be established by legislation or other regulatory authority to oversee the activities of the organization. Government boards are often established as committees whose members are appointed by a head of state or other chief executive. However, some boards have been given statutory authority (by various Acts of Parliament) to oversee their own activities and have acquired the status of a corporate entity in their own right and with specific rights and responsibilities. For example, Supreme Court judges in many countries are required by law to sit on courts. This means that the board needs to be able to set its own agenda. However, they are strictly prohibited from interfering with the justice or administrative activities of the court.
Board members serve on the board as a “duty” and not as a “role”. Duty here refers to the fact that directors have responsibilities to the corporation itself, not to the shareholders. It is illegal for directors to use their position for their personal benefit. This does not mean that directors cannot own stocks in their own corporation, but it does say that they cannot make decisions about stocks just because they own them.
Most public companies have a single class of shares, allowing regular investors to buy and sell them at any time. This is comparable to a closed share structure, where the public shares are not traded. However, it is possible for some companies to hold shares in both classes and use company profits for dividends for holders of the higher class at different times. This is called dual share or an American dual class structure.
A key difference between these two structures is that dual share companies do not allow shareholders to make a proposal for change to the basic structure of the corporation. Instead, the board of directors takes these decisions about changes; however, there are usually exceptions for certain types of changes. In general, it is a good idea to make sure your board has ample time to consider any major proposals.
Some states have laws which require that certain levels of employee representation on the corporate board be achieved. Many of these laws state that a certain percentage (often over 40%) on any given corporation’s board should be made up by employees working at the company. These laws also require that these employees be given the right to regular meetings with management and the board.
In Germany for example, the Public Law on Corporate Governance and Corporate Law, dated 11 May 2008, provides for a minimum of one employee representative to every seven members of the board. Once the law was passed it required that all companies with more than 1000 employees should appoint an employee representative to the board. The other three members of the board have to be either employees or independent. Further laws have since been enacted to give employees even greater influence through increased voting rights and in some cases more seats on the board.
Board members are different from directors in that directors are primarily concerned with what their individual company does, whereas a board is concerned with the company as a whole so that it can do its job well enough to provide value for its shareholders.
Board member representation is set by specific thresholds in corporate bylaws that are set by shareholders. Board members are elected by shareholders at a general meeting and classified in groups based on their status, usually full-time or retired, with a limit set on the number of terms allowed for each. The size of any given grouping is also dependent on the number of employees in said position.
As an organization’s leadership changes or as new opportunities arise, effective governance shifts from theory and practice create an increased likelihood of sustainable shareholder value.
The “poster child” for board governance is a board that is comprised of a CEO, the top four executive officers, and with two independent board members. This has been the modus operandi for most company boards for some time now and it can be very effective in guiding the management team. However, this model does not support all of the key areas necessary to increase shareholder value.
It is important that boards understand their role in ensuring shareholder value creation.
A critical aspect of effective board governance is to be aware of the board’s role in aligning and focusing the skills, talents and commitment of the management team to drive sustainable shareholder value creation. A well-functioning team has a clear understanding of the vision, values and strategy to achieve that successful outcome.
The Concept Of Effective Board Governance
As an organization’s leadership changes or as new opportunities arise, effective governance shifts from theory and practice create an increased likelihood of sustainable shareholder value. Shareholder value creation is the ultimate goal of effective board governance.
In general, there are two main models in which firms should operate:
1) a centralized model where the managing authority sits in one location with all decision making responsibility;
2) a decentralized model where each department has their own local decision maker.
The four main roles of a board are:
1) Nominating and selecting members;
2) Assessing their qualifications and appropriateness;
3) Overseeing financial and legal issues;
4) Providing advice on strategic planning issues.
The major issue that arises is how to balance these various responsibilities without overly limiting the working environment for members or creating a “showy” board structure which would create undue suspicion in peers or subordinates.
The board of directors should be composed of the executive team, which includes the:
1) President (or CEO) and
2) Co-President (or COO),
3) Vice Presidents
4) Assistant Vice Presidents,
5) Financial Managers,
6) Human Resources Manager and
7) General Counsel.
The remaining members are advisors to the committee or representatives from various departments. Some of these may have created conflict that could impact on the decision making process.
The board of directors is responsible for ensuring that its members are qualified under a set of guidelines created by the U.S. Securities and Exchange Commission (or the relevant body with oversight responsibilities) “for all audit committees in public companies. Any board that deviates from this guideline is putting itself and the firm at risk”.
The board must have a broad mix of backgrounds and experience. A diversity of opinion among the directors is critical. Therefore, the board needs to be composed of individuals in their different fields of expertise. The chairperson should not come from a legal background but rather should be picked based on his or her business savvy. All members should have some financial sophistication, but they should not all have to be accountants to qualify for membership on the board. This would lead to a homogenous group with similar views that could create blind spots in decision making and conflict of interests. The board should ideally have a mix of genders, age groups and ethnic backgrounds.
The board should be knowledgeable in all aspects of the firm’s operations. The need to be knowledgeable is critical because it provides insight into the firm’s core competencies, its market share, and its historical goals. Some members may not have been aware of certain practices that had been in place or even asked what they were. The board needs to know the score so that they are not taken by surprise by some new development
The main responsibility of a board is governance, which is managing the firm based on well-defined goals and objectives that were established at the beginning of the business venture.
The board should have a spring cleaning cleaning process. The board should have an organized and thorough process in which they will decide what the best course of action is to take. This involves identifying, understanding and evaluating various opportunities that may arise during the course of business operations, as well as executing on these opportunities with success.
Lastly, in order to be successful and operate at the highest level possible, firm’s boards need to be committed to their firms’ mission. Their boards should not let their business interfere with the mission statement that was created by their founders or other executives at the beginning of the firm’s formation. The board’s responsibility is to make sure the mission does not become subservient to the market share of their firm.