The role of the board of directors in corporate governance
Corporate governance involves a combination of people, rules, processes and procedures to manage a company’s business. It forms the basis for corporations to make decisions that consider many environments, including economic, social, regulatory and environmental markets. The role of the board of directors in corporate governance relates to the business’ ethical behavior and principles, to create 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. According to a recent PwC survey, 40% of executives say they don’t think their boards effectively understand their role of oversight versus that of management. Good governance principles are fundamental to the work that board directors do.
In this post, we’ll explore:
- The board of director’s role
- Board composition
- Stewardship
- How board management technology can improve efficiency and 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. Board directors were never intended to be directly involved in a corporation's daily operations, and they certainly shouldn't engage in micromanaging 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 matters they handle.
Board of directors structure
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, and each director gets one vote.
The size of boards typically increases with growth. It is often related to the corporation’s needs and the industry’s standard practices. As boards acquire investors, they usually offer the CEO a board seat. Some investors will also insist that they get a board seat to oversee their investments visibly. Investors also often influence the recruitment of independent board directors, who have an increasing influence on the board and the corporation as the company grows.
Company bylaws play a large role in establishing the size and structure of a board of directors. Bylaws are the formal rules that govern an organization’s operations, which include a minimum and maximum number of board members. These bylaws are determined by several parameters, including:
- The size of the organization
- Industry
- Governance needs
These bylaws may also determine board term limits and re-election policies to ensure new insights and diverse points of view.
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 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 many realms, including age, gender, experience, ethnicity, race, religion, skills and experiences.
Directors usually retain their positions for two to six years, although this can vary.
There are several positions on the board, including:
- Chair
- Managing director
- Executive director
- Non-executive director
Articulating long-term plans for 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. In 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 governs 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
- Reputation
- Litigation
- Ethics
- Technology
- Health
- Safety
- Environment
Effective corporate governance requires boards to develop written, clear descriptions of the roles of 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 promptly 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
Modern governance that responds to evolving board demands
Corporate governance is in a constant state of change. Download the governance maturity checklist from Diligent to learn the most important steps you can take to propel your progress toward good corporate governance.
