The role of the board of directors in corporate governance
It takes some combination of people, rules, processes and procedures to manage the business of a company. This is how we define corporate governance. Corporate governance forms the basis for corporations to make decisions that consider many environments, including economic, social, regulatory and the market environment. Corporate governance gets its roots in ethical behavior and business principles, with the goal of creating long-term value and sustainability for all stakeholders.
Corporate board directors face the continual challenge of aligning the interests of the board, management, investors, shareholders and stakeholders. They respond to their duties and responsibilities with full regard to transparency and accountability.
It's often said that corporate boards are responsible for providing oversight, insight and foresight. That's a tall order in today's marketplace, which is complex and volatile. Good governance principles are fundamental to the work that board directors do.
Here, we discuss the board of director's role, board composition, stewardship and how board management technology can aid efficiency and better decision making.
The Role of the Board of Directors in Corporate Governance
Corporate boards have many duties and responsibilities. In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders.
Good corporate governance relies on distinct differences in the roles between board directors and managers. It was never intended for board directors to be directly involved in the daily operations of a corporation, and they certainly shouldn't engage in micromanaging the management. The main role of board directors is oversight and planning. Despite the differences, board directors may delegate certain powers to the CEO or CFO under certain circumstances.
Boards also regularly delegate some of their duties to board committees. Corporate board committees act as a subset of the full board. Committees devote the necessary time and resources to issues for which the full board doesn't have time. Committees delve deep into issues, often calling in experts to assist them. Committees provide regular reports to the board on the matters they're charged with handling.
What Is the Appropriate Board Composition?
Boards tend to look differently in the early stages of development. Early-stage boards usually include one or more founders. Boards are typically smaller in the early stages, with five to seven board directors having various areas of expertise. Odd numbers prevent tie votes. Each board director gets one vote.
The size of boards typically increases with growth and is often related to the needs of the corporation and the normal practices for the industry. As boards acquire investors, they usually offer the CEO a board seat. Some investors will also insist that they get a board seat, so they can visibly oversee their investments. Investors also often have influence on recruiting independent board directors, who have increasing influence on the board and the corporation as the company grows.
Best practices for corporate governance encourage boards to offer the majority of board seats to independent directors. A diverse approach to board composition is essential, bringing with it a range of expertise, perspectives and knowledge that adequately reflect the broader concerns of various stakeholders, shareholders and local communities. Regulators, investors and others are also making a big push for boards to consider diversity in a multitude of realms, including age, gender, experience, ethnicity, race, religion, skills and experiences.
Articulating Long-Term Plans to Shareholders and Stakeholders
The role of the board is to plan and strategize goals and objectives for the short- and long-term good of the company and to put mechanisms in place to monitor progress against the objectives. To this regard, board directors must review, understand and discuss the company's goals. In particular, the board relies on independent directors to challenge the board's perspectives to ensure sound decision-making.
The board must be confident in how they plan to address uncertainties and how they can capitalize on opportunities for the future, while identifying and managing real and potential risks. To inspire trust from investors, it's necessary for board directors to be able to articulate their plans for the future so that investors have a clear picture of the long-term outlook.
The Corporate Board's Role in Stewardship
In essence, board directors act as stewards of the company that govern for the present times and provide guidance and direction for the future. In their role as overseers, boards must continually assess a variety of risks in the following categories:
- Financial reporting
Effective corporate governance entails that boards must develop written, clear descriptions of the roles for the board directors, the board chair, the CEO and the primary board committees. Boards should also develop and write policies for codes of business conduct, codes of ethics, environmental, social and governance (ESG), conflicts of interest and whistleblowing.
Good corporate governance promotes equity and deters fraud and other deceptive practices.
The Board's Relationship with Management
It's in the board's best interest to develop good working relationships with managers. Corporations run best when the board and senior management hold the same perspectives on strategy, priorities and risk management.
Communication is a vital component of good corporate governance. Boards must communicate clearly and in a timely manner to develop a sense of mutual confidence and trust with their managers. It's important for board directors to be having regular conversations with managers about risk mitigation and prevention. Managers need to understand risks so that they can put processes in place to protect the company. Risk conversations between boards and managers should cover a span of risk areas, including:
- Economic risks
- Market risks
- Operational risks
- Acquisitional risks
- Dispositional risks
- Infrastructure risks
- Technology risks
- Reputational risks
- Disclosure risks
- Compliance risks
Diligent’s Modern Governance Solution Responds to Evolving Board Demands
Corporate governance is in a constant state of. Boards must be able to adapt and respond quickly to a variety of opportunities and risks.
Tools like Diligent’s Board & Leadership Collaboration solution, transform how boards and leaders work together, saving time, enhancing security and driving better decision-making – allowing you to govern confidently for the present while also providing the best possible direction for the future. You can contact our team for a demo here.