If you are an entrepreneur – you will usually become a director of your company and the first director of your board. Also, if you are a manager and you stick around long enough – you tend to get to the director level within your organisation. Building a board is complex and the question is how to build a better board that matters?
Why do organisations have boards? The basic idea is that the owners or shareholders are basically investors seeing a return and they appoint directors to act on their behalf. Boards also have a role to add value without meddling and to play a role in making CEO’s more effective but not all powerful. In the non-profit context, a board is a mechanism that ensures that the public trust that is put in a specific mission is protected.
Boards must ensure that the shareholders achieve their objectives. To achieve this requires a well-designed board with clear intentions and goals. With an increased set of regulation around boards the fiduciary duties alone often require a lot of focus and effort by directors. Boards are also only as good as the information that they receive from management.
To build a better board must, we must answer how can have a board that provides effective oversight of the company’s strategic direction and progress within the limits of time and knowledge.
The board is also there to provide advice, industry insight and experience and to promote the objectives of the company.
Advisory boards are also becoming more popular as there is a growing distinction between people that give advice and people that are responsible for the day-to-day operation of the business. As governance is sometimes very specialists – the legal liability is less palatable for people and organisations.
So now that we know what Boards are for – the question is what does the Board of Directors do?
The laundry list of key responsibilities for the Board is outlined below:
- Providing oversight on the general and specific actions in relation to the mission and vision of the business;
- Being effective through establishing relevant structures, processes and membership criteria for the board;
- Planning the functioning of the board;
- Planning for key areas in the business;
- Establishing relevant working groups or committees for dealing with areas related to the mission of the organisation;
- Living effective culture and behaviours both as a board and monitoring the same in the organisation;
- Succession planning for the board, CEO and where applicable senior management;
- Providing strategic advice and direction as well as set and get involved in the execution of strategy;
- Approval and agreement on general compensation practice as well as specifically executive compensation of the CEO, board and senior management;
- Ensuring the production of accurate management information including audited financial statements including agreement on specific application of financial policies;
- Delineating the matters of strategy that is to be addressed by the board and by management;
- Addressing the matters of strategy that is within the ambit of the board.
Some jurisdictions and countries as well as specific companies have different expectations from boards – so always please check these requirements.
David Nadler (Nadler, 2004) outlines that the role of the board is critical and that is likely that you board is either one of the following:
Passive Board: The Board’s activity is minimal and at the CEO’s discretion. The main job is ratifying management’s decisions.
Certifying Board: This type of board focuses on credibility to shareholders and typically has a significant outside director presence. The board certifies that the business is managed properly and the CEO meets the Board’s requirements.
Engaged Board: The board serve’s as the partner of the CEO and provides insight, advice and support on key decisions. It effectively oversees the CEO and company performance. The board conducts substantive discussions of key issues and actively defines it roles and boundaries.
Intervening Board: This model is common in crisis. The board is deeply involved in key decisions about the company and holds frequent intense meetings.
Operating Board: The board makes key decisions and management implements them.
A Management Board: This is a board in which there is no distinction between senior management and directors. This is typical of growth companies where board and management roles have not been crystalized.
So to become more effective it is important to ask what kind of board you are putting together and what roles and expertise is required to make this work. This is the role of the board.
Once the board has the right role, the next task is to ensure that they do the right work. Through clear definition of the tasks of the board this should be relatively easy. Active discussions need to clarify the roles and duties of the board as opposed to management and this must be captured in action plans and authority matrices.
Moving on it should go without saying that no board will be functional without the right people. The real issue is competence and maturity in the industry that you are in. The correct way is to analyse the business and recruit the best directors to fulfil those requirements that will unlock value in the business. Industry knowledge, understanding of key aspects thereof, independence, business credibility, education, financial expertise, confidence and teamwork are key criteria in assembling most boards. On-going board development is a critical aspect of making such a team effective.
The next aspect of an effective board is an effective agenda. The agenda must focus on serious questions, troublesome concerns and authentic debate. Too many times the board meeting is “stage managed” to achieve specific outcomes. The hallmark of an effective board is one in which the board requests management to prepare specific items and where the agenda is influenced or set by the board.
The last, and arguably the most important, is to ensure effective follow-through and delivery of agreements. When the board agrees this is binding on the organisation and building this sense of authenticity and delivery is critical for a board to be effective.
So why do you want to become a board member?
As a director you will find yourself loved, hated, admired, scorned, accused of all kinds of things and even sometimes ignored. It’s part of the job. You will need to set aside personal interest and priorities to make decisions that are best for the organisation. You will learn how fiduciary duties can weigh heavily on you and how seemingly small problems can be the indicators of much larger problems and how action is more important that words.
The benefit is that you will guide and strengthen an organisation and ensure that the full potential of a meaningful goal is achieved.
Taking on a board responsibility is not a light task – but one that can be very fulfilling. In order to do it right it is important to design the board to function well and to encourage and develop a cadre of people that can tackle the most complex business issues and guide the organisation to unlock value.
Nadler, D.A (2004) Building Better Boards, Harvard Business Review, May 2004, p102-p111