Board decision-making best practices
For better or worse, the decisions that boards make help to shape the company's future. While many of the board's decisions are either visible or public, many of the decisions that boards make are confidential and never leave the boardroom. It's right and fair for shareholders and regulators to have some idea of what the board is doing; however, they're not privy to everything. When they can be assured that the leaders adhere to board decision-making best practices, they have greater confidence in the board.
While, in other types of industries and positions, managers and leaders have multiple opportunities to find mentors and examples of good leadership, boards have fewer options for how to improve their craft. Other board directors, certain investors and researchers on governance best practices are a few of the best resources for good board decision-making for their companies. In addition to looking for human resources, boards can also rely on some formal processes and informal principles to improve the quality of their decision-making.
Setting Up the Right Structure for Decision-Making Authority
Certain decisions require boards to be the decision-makers. For other decisions, they just need to be informed. The agenda should always indicate which agenda items require the board to make a decision. A particular board meeting strategy that some boards use is to put major items for decision early on the agenda when the board is fresh and not weary after a long meeting. Even where agenda items that require decisions appear early in the agenda, the board still requires ample time to ask questions, request additional information and get answers. Board directors shouldn't be expected to vote on any issue before they're ready. Where boards aren't sure if they're ready to take a formal vote on something, they have the option of taking a straw poll.
Setting Up the Agenda Around the Annual Calendar
Your company's annual calendar is a good place to start when setting up the structure for a board's decision-making. Among the many matters that boards must consider throughout the year include:
- Company strategy
- Business plan
- Capital budget
- Board evaluations
- Annual general meetings
- All committee meetings
- Board leadership structure
- D&O insurance
- Evaluating board leadership structure
- Self-evaluations
- Election of officers
- Board orientation
- Review succession plans
- Set compensation policies
- Review other policies
Boards should have some sort of a system by which they can explicitly identify which decisions will typically be made by board directors and which decisions will be made by the management team. Boards can set up the division authority according to their liking. Typically, the policy for decisions that the board makes, as well as those that the management team makes, are confidential. In recent years, in the interest of transparency, some boards are making their decision-making structures available publicly. A statement of formal delegation of authority lists the decisions that must be brought to the board for final resolution.
How to Address the Gray Areas
It's good to have formal practices and protocols in writing for everyday situations. Unfortunately, the nature of business is that unusual situations can and do arise unexpectedly that don't fit squarely into one area of responsibility or another. These are the times that it's a good idea to have some basic rules of thumb. Communication between boards and executives are also very important during these times. In most cases, the CEO will make these calls based on informal norms that they've established over time.
Certain types of issues may signal that it's time to involve the board. Major decisions that will impact or change the future and those that may impact the strategic plan should be given to the board's attention. Major decisions include things like acquiring a new operation, divesting an underperforming division or entering a new market are all board decisions. As new issues arise, they force the board to review how they think about dividing areas for decisions.
Board Decision-Making Best Practices for Taking a Decision to the Board
There are some other important reasons to take certain decisions to the board for input and consideration. The board's collective wisdom can prove to be invaluable. These are the types of situations that support the emphasis on composing a diverse board. When many perspectives get added to a board discussion, it can open up new ideas and ways of understanding things.
Some decisions should come to the board because they touch on the company's core values. During times of major decisions, boards should have every opportunity to request and receive additional information so they can try to explore every possible alternative.
Modern Governance and Board Decision-Making Best Practices
Today's leaders lack the tools to communicate, collaborate and share sensitive data securely. The modern governance approach strongly supports board decision-making best practices. The May 2019 report by the Diligent Institute measured governance practices related to shareholder rights, board composition, independence and compensation.
Companies with good governance, as identified by the top 20%, outpaced the S&P 500 index. They also outperformed the bottom 20% by 17 points, or 15%. The lack of good data, good visibility and good security can create governance gaps. These issues leave corporate leaders without the right information at the right time so they can ask the right questions. Good governance also offers boards visibility from multiple vantage points ' into the company, across the company and into the future.
Diligent recognizes that we live and work in ways that make it easier to get information than in the past. That's why Diligent offers board management software products that integrate seamlessly within a single product suite. With Diligent, you can rest assured that every tool that you need is available within a highly secure platform.
Diligent Corporation designed a board portal and other digital solutions with the modern board in mind. Digitization improves the way that modern boards work, which enables them to be more intentional about board decision-making and the other crucial responsibilities that boards have. Modern governance puts the necessary tools and intelligence at your board directors' fingertips, allowing them to respond in real time.
