8 Basic Duties of all Boards
How Boards and members should be striving to support each other
The Boards Role
Hiring a CEO
Assessment and Evaluation
Risk Planning and Management
The Business Judgement Rule
The Boards Role
Clients and team members increasingly expect more from corporate directors, saddling them with greater responsibility, expectations and risks. In tandem with this shift, government standards of Board oversight have grown increasingly strict over the past two decades.
What role do Board directors serve in business leadership, and why is this role so necessary? Boards, at their core, exist to guide their company through strategy and long-range vision, helping the organisation reach its goals and protecting shareholders' interests. Part of working to achieve these goals means stepping up as a Board member and assuming the responsibilities of a director. In general, Boards should work to fulfil these eight basic duties
1. Impart strategic guidance
Board members must act as the embodiment of the vision, mission and goals of their organisation. They should work to make the "big picture" real for everyone else in the company, helping to guide its direction and goals: what are the next steps? And from there?
2. Determine and reward senior management
The Board is responsible for finding, hiring and compensating a great CEO for their company. Finding the perfect match can be tough, and this honour comes with the challenge of knowing when to remove a CEO deemed ineffective, at odds with the company or incapable as a leader.
3. Keep an eye on performance
Whilst it can be tough to strike a balance between nit-picking and to become too detached, Board members should strive to keep an eye on team performance, including that of the CEO and other internal executives. They help to provide support and guidance, keeping everyone on the right track for success.
4. Establish policies
The Board must keep abreast of the constantly shifting legal requirements of running a company, reviewing and updating current policies to maintain compliance and fit the organisation's present needs.
5. Protect resources
Boards must work to safeguard the current resources of the company, including financial resources, whilst at the same time developing new resources and opportunities. They must responsibly monitor resources to ensure that the company is maintaining and (hopefully) flourishing towards its goals.
6. Self-assess and regulate
At the end of the day, Boards are self-governing bodies. This means that it is more important than ever for them to engage in regular self and group assessments to gauge their performance and effectiveness in achieving their goals on the timescale they have established. Board members must also select leadership and form committees in accordance with governmental and company policies, laws and pre-existing structures.
7. Take calculated risks
A company that is not taking risks is stagnating. Boards should be counted on to harness their experience as a team in the business world to anticipate and prepare for potential risks, navigate the organisation towards opportunities and ensure smooth passage through hard times.
8. Honour fiduciary duties
Board directors and members are expected to serve their Boards without any conflicts of interest. Decisions must always be made in view of what best benefits the shareholders of the company, regardless of personal leanings.
In the wise words of Warren Bennis, American scholar and pioneer of Leadership Studies, "Leadership is the capacity to translate vision into reality." Bennis encapsulated the meaning of strategic guidance for Boards in his succinct style. Directors should seek not only to imagine the future of their company but to lead the company in the best way possible towards the achievement of that future. Strategic guidance can be understood as the combination of:
A key function of a Board of directors is strategising. Board members should work to combine their individual and various backgrounds and perspectives in order to determine the best way to achieve their goals. The strategy should take into account goal setting, priorities of the company, financial planning and the (realistic) current financial situation, as well as anything else with bearing on the company achieving its goal. Board members should have eagle eyes, both for seeing the far-reaching vision of their organisation and for spotting the minute details necessary to get there.
Guidance is a different beast. Boards should strive to find a balance between micromanaging and not being involved. Companies must be allowed to operate with the C-suite at their helm, but the Board should equally be offering efficient and effective oversight. While this pairing may seem paradoxical at first, the only way for a company to achieve positive long-term growth is for both halves to work together. The strategy will be worth very little if it is not delivered through effective guidance.
These two words make up the beating heart of the Board. Whether you are hiring a CEO, onboarding new technology or evaluating risks, Board members should bear these in mind and steer according to their strategic values with clear, considerate guidance allowing the company to effectuate strong decision-making and implement their values on a business level
Hiring a CEO
One of the most important responsibilities of Boards is hiring a CEO. This involves selecting from a candidate pool and succession planning with an eye to company dynamics and development. Some business writers believe that "No other decision has such a profound impact on a firm's strategy and performance." But finding the right person for the job can be tough, even with a committed and cohesive Board on the hunt. Good Board directors and members are aware that a CEO will have a lasting impact on the company, even years after their subsequent departure, with their legacy establishing the tone and direction of the business. Making sure that this impact is a positive rather than a negative one is one key goal of the Board when looking for a new CEO hire. A reliable selection process can help with this, providing a constant in the ever-shifting corporate world.
If the exiting CEO is leaving on good terms, it makes sense to involve them in the hiring process. After all, they have lived the role and will provide valuable insight into just what the position requires. If the CEO is leaving on less than ideal measures, however, the lead director should take charge of the process instead to avoid conflict.
No matter who is leading the search, the process should begin with taking a long, critical look at the current direction of the company and how this aligns with its future goals. Directors should seek candidates that complement these goals to avoid being at odds over basic objectives. Plus, this way, they will align on topics such as strategy and how to tackle future challenges, as well as drive to serve the organisation as best they can. You should make sure that your new hire is also capable of handling any upcoming changes or challenges, such as your company's transition to being public, for example. Finding a candidate with experience navigating these upcoming events will aid in their integration, strengthen the team and bolster your confidence in each other.
The task of finding the right candidate usually falls to the Board's nominating committee, although the selection process may involve the input of outside consultants or executive search advisors, depending on the size and type of your business. No matter what, you should always be as transparent as possible about the process with all members of the Board. Once you have collected a suitable pool of candidates, the Board should rely on their internal evaluation procedures to determine whether said candidates are a good fit for the company. Cultural fit and alignment are an important parts of long-term happiness and productivity for both members of a business relationship.
Once you have decided on a successor, a salary should be offered for consideration to the candidate. Many companies are being increasingly criticised for high CEO pay rates; this decision rests solely on the Board, and directors should bear this in mind to find a balance between attracting the best of the best and not overspending at the expense of their shareholders.
When all is said and done, the CEO acts as a figurehead for the organisation, setting its tone both internally within the company and externally in the community. It is crucial that the Board determines the right kind of leader to represent the business, smoothing otherwise rough transitions between leadership and maintaining company integrity and growth.
1. Establish a scorecard system
One effective tactic for evaluating CEO performance in an unbiased way is that of Forbes' Joel Trammell, who suggests that Board members "grade" their CEO's performance across several categories. The key is spreading the evaluation across several aspects of leadership, as good CEO performance can easily be pigeonholed by equating it with the fulfilment of financial goals—to the neglect of all else. If a CEO scores well in the majority of categories, then you can reasonably assume that the organisation is doing well, too. This is particularly important to the shareholders whom the Board represents. The CEO should complete a self-evaluation on the same categories, as well. That way, any discrepancies can be addressed, and no one is left feeling unfairly graded.
2. Glean input from employees
A key resource when you are figuring out just how to grade the CEO in their work is the employees who interact with them every day. Their input is particularly valuable if you do not often work with the CEO directly. Board members can start by reaching out to other executives, conducting interviews or linking surveys (for anonymous feedback). This all helps build a comprehensive picture of the CEO's leadership style. One example of such a system is the "360 Feedback" style of evaluation, which has been gaining in popularity amongst industry leaders due to its success in pointing out leadership blind spots. 360 lets the CEOs' colleagues from all different levels of the company evaluate them, including those who work directly with them in the c-suite and those who serve as Board members.
3. Discuss with the CEO
After you have completed your evaluation of the CEO, it is equally, if not more important, to discuss the position with them regarding the results. Even if they are overwhelmingly positive, a conversation concerning the evaluation process and outcome helps establish trends in leadership style and company direction, as well as building trust between the CEO and the team. If there is an area that needs work, lay out how the Board envisions this happening, as well as the timescale for progress to be seen by the Board. Be specific so that the CEOs are clear on how to react to the process, and be sure to give them a chance to respond and explain, as you may gain valuable insight into their perspective and the reasons guiding their actions.
In some organisations, entry-level workers are evaluated more frequently than CEOs. These young workers are often required to complete self-evaluation forms, meet with supervisors regularly and discuss team dynamics. CEOs are often exempt from these types of evaluation, as though they are above making errors or learning from their mistakes, but they too can benefit from the perspective and space allowed by evaluation. Whereas entry-level employees are regularly watched at all levels of their job by other employees, Board members (the go-to evaluators of CEOs) are often given fewer opportunities to observe the CEO on a daily basis. This means that they are left with blind spots regarding the CEO's leadership style and performance, leading to future surprises when company culture turns sour, or businesses flounder under shaky leadership. If Boards are only seeing one side of their CEO, they are not truly engaged nor prepared when it comes to the aims of their company.
Policy-making is a vital part of the duties of the corporate director. Company policies impact every decision made within the organisation, as well as their style and quality of governance. Expectations of Board members continue to grow, so it is more important than ever to practice risk-reductive policy making.
Steven Bowman, CEO and governance consultant, advises that Boards focus on strong policy. "Clear, concise and current policies improve the overall management of the organisation…By having these documented, …[the Board] speaks with one voice—avoiding a problem that many
organisations have with multiple sources of policy guidance." Maintaining focus can be tough but is vital in terms of speaking with the authority of one Board-based voice. Bowman shares that "When [he] was still a chief executive officer, [he] led an effort to get [his] Board to establish and document the policies that were needed to govern the organisation…When [he] talked to the Board about creating a policy focus, there was some confusion about what policies are and what they are not."
So what exactly is a corporate policy? And why are they so important? Differing from processes and procedures (which denote detailed, measured forms of admin oversight and regulation), policies act as overarching protocol for their organisation. BusinessDictionary.com defines the slippery term as "a documented set of broad guidelines, formulated after an analysis of all internal and external factors that can affect an organisation's objectives, operations, and plans," meaning that policies parallel Boards in purpose: both work to guide the company into future success through effective strategy.
1. Evolve with the times
Even if a policy is popular with your Board, do not let it be the be-all-end-all of policies for the rest of the organisation's history. The most beneficial policies are vetted and restructured every year to suit contemporary Board and organisation needs. Boards should be monitoring changes in the corporate landscape and adapting their policies to suit the said landscape.
2. Good governance equals good business
Good policies make their Boards stronger. Directors should view good policy-making as directly contributing to good governance. Well-written policies can help guide directors towards smart decision-making, streamlining the leadership process.
Whilst the Board ranks highest in terms of policy-making bodies within organisations, they should be working collaboratively with other teams during policy creation. Board members should consult with the CEO and other c-suite leaders to gain insight into everyday company experiences and day-to-day operational needs. Often, leaders on the inside of the company have the most pertinent insight to offer when it comes to constructing effective policy
Being a Board member has long been associated in the public eye with working in finance. Boards are often framed as the "make it or break it" play callers for corporations, determining their failures and their success. Although being a Board member involves so much more beyond finance, financial oversight is a key part of the role. This means that Board members must be meticulous when it comes to the financial standing of the organisation, able to fully comprehend its current financial position and assets, as well as how to harness these to move forward. When it comes down to it, every decision that a Board makes has a financial repercussions for the company.
Three ways to practice effective financial oversight as a Board member is to:
1. Be aware and ask questions
Board members should make sure they are aware of and understand all financial reports. Since Boards often contain specialised committees for areas such as budgeting and auditing, it can be easy for financial information to slip under the radar of other members not on these committees. However, it is vital that every Board member has a deep understanding of their company's financial position, regardless if they specialise in finance or no. They should feel empowered to ask questions as well, not waiting for others to question documents or accounting that seems odd. Board members should always be able to turn to management for a satisfactory explanation in the event of questionable financial practices.
2. Use policy to your advantagePolicies provide financial protection, and establishing good policies is vital for your organisation's longevity. Policies that can make a big difference include:
- An interest register (conflict of interest) policy: This helps guard against self-serving transactions and ensures first loyalty to the company
- A document retention policy: This protects against loss or inadvertent destruction of company history and files (cloud sharing software such as Board portal software can provide an additional line of defence on a practical level, too!)
- A code of ethics: This helps hold your Board members, management, and additional staff to the same standards and sets precedents for conflict resolution further down the line
- A whistle-blower policy: This protects staff who report unethical or unlawful practices within the company from repercussions and promotes best practices
3. Train, train, train
"Less than 10% of all U.S. companies provide training programs for audit committee members. Only 25% of the U.S.'s largest publicly listed companies have at least one audit committee member who has financial expertise AND recent experience in a finance-intensive job," says Forbes. This means that Board members responsible for financial oversight may not have the expertise to safely navigate the role. Bringing in an outside expert for training purposes can greatly increase the capabilities of your staff.
Assessment and Evaluation
Smaller companies may be tempted not to engage in annual self-evaluation practices. However, these assessments provide a great opportunity to take stock of and improve Board functionality. Regularly assessing and self-evaluating helps in that it:
- Identifies Board strengths and weaknesses
- Establishes a workplace culture that embraces feedback
- Keeps team members improvement-focused and self-aware
- Enables collaboration through awareness of shared goals
- Reveals general and annual trends in company culture and performance
What is the next step?
After engaging in self-assessment, the work is not done! Boards should continue the process to reap its rewards. This involves parlaying what you learned from the evaluation into common practice and effecting change within the company. Changes should be made according to company member feedback, not arbitrarily.
Boards are constantly learning and evolving to best serve their company and member needs. They need to conduct themselves responsibly, as there is often no one directly monitoring their work practices and progress. Their improvement depends on their self-initiative.
Risk-Planning and Management
Risk management should be a top priority for company leadership in its governance practices. CEOs should be aware of risk mitigation strategies and the level of awareness expected by the Board, upholding these in all decision-making.
According to PwC, "A major part of any risk oversight plan is determining a company's risk appetite: the amount of risk an organisation is willing to accept in pursuit of strategic objectives. When done right, it is a robust process that can help management and the Board understand exposures and make appropriate risk-based strategic decisions." Boards and leadership should plan for risks so that they are prepared rather than practising risk avoidance.
3. Run Scenarios
Running scenarios such as the stress test can help Board members and company leaders evaluate where they stand when it comes to being prepared to confront risks. Board members and outside experts should analyse the effects both small- and large-scale events would have on their company, taking into account a wide variety of scenarios. This can help Board members respond quickly in the event of a crisis, as they will have already walked through what steps to take to mitigate the issue. It also, crucially, reveals the weak spots in company preparedness and risk management policies before it is too late.
Fiduciary duties make up the foundation of Board member responsibility to shareholders. Fiduciary denotes trust, which is exactly what directors are required to uphold under corporate governance law.
There are three types of fiduciary duties:
1. The Duty of Care
Investopedia states that the duty of care" "applies to the way the Board makes decisions that affect the future of the business. The Board has the duty to fully investigate all possible decisions and how they may impact the business. Because a company's Board of directors is tasked with making very important decisions, it is necessary that each member takes each issue seriously and adequately considers all options."
Directors and leadership practising the duty of care will act:
- In good faith
- With care and concern towards their comportment and position
- With the informed belief that their decisions are in the company's best interest
2. The Duty of Loyalty
The duty of loyalty works to eradicate outside and conflicting interests and personal affiliations that could be at odds with a company member's loyalty to their organisation and its shareholders. Board members must refrain from personal or professional dealings that put their own self-interest or that of another person or business above the interest of the company."
This duty is considered breached if a director:
- Secretly gains profit belonging to their company
- Competes with the company
- Seizes company opportunities for their own gain
- Self-deals with the company
3. The Duty of Good Faith
According to Cornell Law School, A violation of the duty of good faith may
include an intentional derelict in the usual duties of a director or officer, intentionally acting for a purpose other than the benefit of the corporation, or intentionally violating the law." Upholding this duty means that Board members – after exploring all options for a decision underway – make the one that they reasonably believe best serves the company and its shareholders' interests.
The Business Judgment Rule
Courts apply the business judgment rule when directors are alleged to have violated one (or all) of these duties. This rule acts as a corporate "innocent until proven guilty," assuming that the Board of directors acted in the company's best interest unless proven otherwise. It is understood that risk is an unavoidable part of business decision-making, and plaintiffs who claim that a Board or its members have breached fiduciary duties should be prepared to prove it. They will need to show that the accused was neglectful in their decision-making or purposefully acted against the company's best interests in a breach of loyalty or for personal gain. Directors who truly believe that they are acting in their company's best interests are protected by the law; regardless of the outcome of their actions, they are not deemed liable.
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