What type of board are you on?

Governance educators tend to talk about boards as though all companies were governed in precisely the same manner and that is usually the board type that is currently considered good practice for large listed companies. In real life, there are different board types that directors may encounter.

Boards rarely talk about this and directors may not be able to accurately name their board type (indeed, on the board of Crown Resorts, a large, listed company, some directors appeared to have little understanding of their role or duties let alone what their governance model was and why they had chosen it over other options).

So how can you avoid joining a board only to discover that you don’t like the way that board operates?

Quick answer: by reading the company constitution (or enabling legislation for government sector boards).

Here are some types of boards that you may encounter. Hybrids are also very common. Different types of boards may suit different people for different reasons at different points in their careers.

Operating boards

These boards are most frequently found in companies that have evolved out of a partnership, such as large accounting, legal, and engineering firms. They are also abundant across the small not-for-profit sector where they allow companies to operate with few (and sometimes no) staff members. They are occasionally referred to as 'boards of management'.

On these boards, each director has responsibility for a part of the operations. For example, the heads of each division in a consulting firm are responsible for managing those divisions to achieve profitable performance, or in a small sailing club the treasurer might take responsibility for preparing the financial reports while the sports director manages the teams and competitions, a social director runs the additional activities, and the equipment director makes sure that the boats are well maintained and safe to operate.

These boards are strong because they give directors autonomy and authority. Board meetings are where the work is coordinated and planned.

These boards are weak because each director is ‘their own boss’ and if one director fails to perform as expected, the others can find their own area’s performance is compromised and yet they lack authority to compel their colleague to perform or the ability to step in and do the job themselves.

They are excellent boards for people who like personal accountability for doing things.

Supervising Boards

These boards are most frequently found in the government sector and in international subsidiary companies. They focus almost exclusively on oversight of operations, compliance with applicable standards, and reporting to stakeholders. They are occasionally referred to as boards of oversight.

On these boards, the directors are usually able to practice ‘noses in fingers off’ governance. Indeed, to get involved in doing things would create conflicts when then reviewing accountability for outcomes. They are not boards with a great deal of power to direct management actions and may have little input to strategic planning.

These boards are weak because they often can’t direct management to do what needs to be done as their constitutions often prohibit direction giving. For example, during an inquiry into unfunded Workcover liabilities in a government entity a board member commented “I’m an observer, appointed there on behalf of the Minister, and my role is to report back to him my own perspective of what is happening”

These boards are strong because they are rigorously independent and have clear accountability for reporting rather than doing.

They are excellent boards for directors with a preference for monitoring and reporting rather than strategising or implementing.

Advisory Boards

These boards are frequently found in start-ups, in large companies where they can advise within a clearly defined area of expertise, and in some government sector organisations. They focus exclusively on providing expert advice and opinion to the statutory board or to a defined part of the management team.

On these boards, directors will focus on external events and translating these into implications for the company to consider in its strategising, planning, and/or implementation.

Two examples:

• a retail water company had a customer advisory board that considered plans and initiatives and provided feedback to management on how these might be perceived by different segments of the customer base
  
  
• a start-up company that was expanding overseas had an advisory board in each prospective market that assisted the governing board and management team by alerting them to prevailing business norms as well as introducing the company to relevant decision-makers.

These boards are strong because they are usually composed of members who each have a specific expert contribution.

Like the supervising boards, these boards are weak because they often cannot direct management. They run the risk of being considered to be shadow directors if they start to fulfill many of the duties of a normal governing board.

These boards are excellent for people who want to stick to their area of expertise rather than venture into a broader remit.

Embedded/Subsidiary Boards

These boards are commonly found within the corporate structures of large companies. They are legal entities but are often treated as an administrative convenience.

Although, on the one hand, they are easy because all the work is done by the various corporate functions, they are difficult because the responsibility is real, and the control is often lacking. If a company is large enough that it requires a board, even a minimal three-person board, it is likely to have some that directors could be held to account for.

These boards are excellent for people who are happy with ambiguity and who are able to rapidly assimilate large amounts of detail. They are not an excuse for directors to follow orders, unless the constitution allows for the board to be directed to pursue the parent company interests.

Joint Venture/Shareholding Boards

A joint venture or shareholding board can have a governance model that shows the characteristics of governing, supervising, or operating boards. The key point of difference with these boards is that they are governed under an agreement that sets out the rights of the shareholders and the way in which the board is to consider and deliver these.

They are excellent because they allow the company to be run on the explicit instructions of the shareholders. They are fraught because the boards are typically nominees or employees of the shareholders and may be tempted (or even encouraged) to make decisions in the interests of their nominator, rather than the best interests of the company.

Governing boards

These are the most common ‘ideal’ board. The directors are elected by shareholders to further (in most Australian cases the best interests of the company. In this model the board is responsible for hiring (and managing) the CEO, setting strategy, ensuring risk is managed, providing accountability, and oversight of operations.

In the government sector these boards are often required to deliver or support the policy aims of the government of the day and are limited in their scope of activity to aims and functions outlined in their enabling legislation. In the private sector boards can change their activities, usually with the requirement for major changes to be endorsed by the shareholders.

These boards are typically more diverse than other governance model boards to better provide expertise in each of their roles. They are excellent for people who want personal accountability, robust debate, and a multi-faceted set of activities.

They are weak because the scope of duty is large and boards, if they are not to become full time, must choose where to focus their time and energy. They are powerful because the board is highly leveraged to drive success.

Other Governing Structures

You may encounter structures within governance that appear, superficially, to function like boards. These can be useful for developing your skills and networks, or they can be stultifying dead ends. It is important to read the constitution and consider the membership and scope of action before accepting a role on one of these structures.

Panels

Some companies use a panel of expert advisors from which to consult the most appropriate. Effectively they treat the board as they would treat a car. Each part has one function and, if you engage the parts in the right way you may strike upon a winning combination.

This is different to a board. A board is a ‘synthetic person’ or a ‘deciding mind’. A legal chimera. It has a personality, and it learns and grows. It is far more than the sum of the individual skills of each director.

A good board shares knowledge to create new insights and increase the collective wisdom of the directors; it is multiplicative, rather than additional. Treating the board as a panel, potentially deferring to the most expert member without synthesising the ideas of all the other directors, misses the point of boards. Boards make better nuanced decisions quickly, efficiently, and sustainably. They tend to outperform panels by an order of magnitude.

Committees

There are important differences between boards and committees:

• A board acts as a team; the key aim is to maximise performance. A good board will be willing to upset certain stakeholders if the long-term value created by a course of action is greater than that of other potential courses. A board has a statutory duty to further only the interests of the shareholders as a whole and no such duty to further the interests of any other stakeholder. Where a board member has been nominated by a shareholder or stakeholder, that board member still owes his or her duty to the shareholders as a whole and never to their nominator(s). When the interests of a shareholder conflict with those of other shareholders, the directors must do their best to impartially assess the best course of action for the company as a whole and not for any one group.
  
  
• A committee is a decision-making body that looks and, to some extent acts, like a board but it is made up of representatives. The key aim of a committee is to ensure that no outcomes will be unacceptable for any one of the stakeholder groups represented. This is very different from the aim of a board, which is to maximise performance. A committee is more focused on minimising the chance of an unacceptable outcome. For the public sector the use of committees made up of representative members is crucial for good governance in difficult areas where free markets would not provide good governance outcomes.

Another important difference is that board members carry a personal liability for the actions of the organisation that the board governs. This liability extends beyond the decisions made by the board members in board meetings to myriad events including, but not limited to, workplace health and safety, trade practices, solvency, bullying and harassment. Committee members are usually held to account by their nominators but rarely have responsibility for actions outside their sphere of direct control. It is, perhaps, this liability that underlies the general practices of remunerating committee members using sitting fees and remunerating board members using an annual fee similar to a salary.

Board Committees

Boards are frequently supported by a number of subcommittees that may include external (non-director) members. Some common ones are:

• An audit committee that oversees the control framework, assists in complying with legal and other obligations and checks the content and reliability of published and internal information.
• A remuneration committee that reviews and recommends remuneration levels and possibly other terms and conditions of employment.
• An occupational health and safety committee that may focus on strategic safety and health issues, developing and implementing safety guidelines, disseminating information and training and monitoring of performance.
• A risk committee that can either be part of the audit committee or a separate organisation and that will investigate all areas of risk, including especially the risk of fraud.
• An ethics committee that is a forum for discussing and resolving ethical issues that arise from time to time in the department.
• Steering committees for special projects, such as an information technology upgrade or the rollout of training programs.

Service on a board committee can be a good way to get to know the company and people before deciding to join the board or can be an excellent way to increase your network and apply your skills.

There will always be a type of board (or governing group) that appeals to you more than other types. Choose wisely and enjoy your time in the boardroom.

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