What do Boards really do?
There are some common misconceptions about the role of the Board of Directors. Some people think the Board is a mysterious group of people who waltz into head office and shut themselves in the Boardroom every quarter with stern faces, attending long and boring meetings where they criticize and lambast Management. Another group believes the Board is just a motley bunch that meet once in a while to discuss company matters a little, drink tea and go home with fat cheques! There is also the school of thought who believes that directors are individuals who sit at the top floor of the corporation issuing directives on how the business should run without taking part in the execution. While bits of the foregoing are true, it does not entirely give an accurate picture of what the Board does. So, what does the Board really do?
The word “Board” in the 16th century originally referred to a table around which people met to discuss important issues. The meaning soon changed from referring to a piece of furniture to mean the important people seated around the table. In a business context the word “Board” is a collective reference to the directors of a company. According to Section 244 of the Companies and Allied Matters Act, Directors are persons appointed by the shareholders to direct and manage (where they are executives) the affairs of the company on behalf of the shareholders. (Lord Cranworth in in Aberdeen Rly Co. v blackie (1854) defined the directors as “a body to whom is delegated the duty of managing the general affairs of the company”. Directors have a fiduciary relationship with the company, from which flows their duties, responsibilities and liability.
The Board is expected to define the reason why the Company exists – the vision and mission. Or as Ram Charan, Dennis Carley and Michael Useem put it in their book “Boards that Lead”, the Board defines “the central idea”. It therefore follows that the Board must agree on the strategic direction of the business. To enable it deliver effectively on this responsibility, the Board will rely on the depth and diversity of the experience and skills set of its members. The first principle of the Nigerian Code of corporate governance provides that “A successful Company is headed by an effective Board which is responsible for providing entrepreneurial and strategic leadership as well as promoting an ethical culture and responsible corporate citizenship….”. It is no accident that the Code requires the Board to provide “entrepreneurial” leadership as a major responsibility of the Board is to support Management to deliver sustainable corporate success.
This responsibility also requires the Board to periodically review the mission in line with the changes in the business and political environment. It also entails putting structures and processes in place to achieve set goals and periodically evaluating these.
The Board is also responsible for the selection and appointment of its members and to that extent must ensure that it emplaces a robust and transparent process that includes defining selection criteria that takes account of required skills. The Board is responsible for its own effectiveness and it is in its best interest to ensure that all directors equally contribute to the effectiveness. Where they do not, appropriate steps should be taken to bring them up to speed or replace them.
A major responsibility of the Board is selecting the CEO who will have the Board’s mandate to execute the strategic goals set by the Board. To ensure the CEO remains on track, the Board will set Key Performance Indicators against which performance will be measured periodically. In pursuit of taking the lead road in achieving corporate success, the Board shall emplace appropriate policies including succession planning, business continuity, whistleblowing, internal control, internal audit, etc. The Board will necessarily delegate the performance of these responsibilities to Management and Board Committees.
Maintaining oversight and monitoring the financial performance of the enterprise are key responsibilities of the Board. The Board periodically considers financial reports and approves revenue and expenditure budgets. To effectively carry out this responsibility, it is expected that Board members are financially literate, whilst not being finance experts. However, it is preferable that the Board should have at least one member who is a financial expert.
Ultimate power lies with the Shareholders who appoint and necessarily can remove Directors. The Board is accountable to the shareholders and should ensure it periodically communicates the company’s performance to shareholders.
Bringing it all together and quoting Charan, Carey and Useem, the Board should “define the central idea of the company, ensure the right CEO is in place and potential successors identified, recruit directors that add value, root out board dysfunction, select a leader who deftly bridges the divide between management and the board and set a high bar on ethics and risk. A Board’s leadership can create value, and the absence an destroy value”.
Bisi Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comments and reactions to firstname.lastname@example.org.