Role of Boards
. The Board members need to recognise their correct role, ie performance and conformance. Directors' jobs are to ensure the long term success of the organisation by focusing on
- formulating the organisation's policy
- doing the strategic thinking for the organisation
- supervising management rather than trying to manage from the boardroom
- ensuring full accountability
(the first 2 are about performance and the last 2 about conformance)
Another way of saying this is the main functions of the Board of an organisation are to oversee
- governance challenges
- general strategic direction
- ongoing financial sustainability
- select senior staff & evaluate their performance to carry out the above functions
NB Not to interfere in the daily operations, ie not to micromanage
Furthermore,
"...it is generally accepted that boards have principal responsibility for the appointment and removal of chief executives, approving the strategy, plans and budgets of corporations, for approving expenditure above designated limits and remuneration of senior executives and for a range of documents that a corporation is required to produce. Recent legislative changes have seen some boards focus their attention on new and non-traditional areas. For example, the exposure of directors in some states to personal criminal prosecution and liability (including possible jail sentences), in some cases involving breaches by corporations of occupational health and safety legislation, has seen boards adopt a much more hands-on approach in an area that......was viewed by many......as being an operational issue......they represent a defensive reaction to new regulatory requirements......good corporate governance, so we are encouraged to believe, is a proxy for a well-run corporation. This argument assumes that if all the processes are in place and working well, the corporation is in good shape..."
John Fast 2008
"...Boards...... are working overtime to comply with new reporting requirements. To keep pace, they're overemphasizing committee work instead of harnessing the intellectual power of the whole board to deal with complex matters. Instead of working collaboratively with management, they're creating or perpetuating dysfunctional relationships that cast directors as corporate police who enforce rules and trace managers' missteps, rather than guides who help managers choose the right path. Further, boards' long-standing focus on short-term results has intensified..."
Jay W Lorsch et al, 2008
On the other hand, with corporate governance there is
- no one best corporate governance index or benchmark
- compliance with some corporate governance metrics are expensive and do not necessarily add value
- there is no consistent relationship between governance indices and measures of corporate performance
. For Boards there is an almost unresolvable tension between driving a business forward (performance) and keeping it under prudent control (conformance). Furthermore, it has been suggested that the organisation's culture in a responsibility of the Board, ie
"...boards have a primary role in setting and maintaining the ethical standards governing interactions between corporations and their stakeholders..."
John Fast 2008
. Many directors need to learn the difference between directing and managing. Most directors confuse management with directions
"...most Boards aren't interested in the future, they do not have any systems of measuring the risks and probabilities of the future, so they tend to over-manage the business because that is where directors are normally promoted from, so they know a lot about that
......people who become directors......have as their preferred style of thinking what we call "soft facts"‐ an immediate sensing of what's happening right now. So when they are sitting around the board table, they are hyper political about what they do. Unfortunately, their second preferred higher-thinking style is logic and rationality. So they are absolutely brilliant at post-rationalising what they have just done to another..."
Bob Garrett as quoted by Helen Trinca, 2003
. Getting the right mix of personalities, skills, ability, expertise, etc on a Board is important, ie
"...in putting together a board you're assembling a team, so when you look to appoint the directors you look to see where the gaps in the skills, not just what we have now but we think we're going to need...... board renewal is not just about putting new faces around the table, it's keeping the skills set around the table relevant to the company's needs..."
Linda Nicholls as quoted by Patrick Durkin, 2015b
"...how directors relate to one another depends on the boardroom dynamics. Good chemistry requires a high degree of trust, candour and quality dialogue, both informal and formal. Board dinners, for example, provide offline interaction and are a good way to unearth governance problems. Independence can be overrated......the chairman's role as a leader can make or break the boardroom, but there's no need to split the role up from that of CEO......It doesn't necessarily lead to better financial returns......there is no link between board performance and whether or not the chairman and chief executive's role are split......performance-based boards will help curb bad decisions......A lot of energy should be put into the selection of board members, with attention paid to how they interact, skills and competencies, and a person's ability to have their noses in, but fingers out of, daily affairs. Competency-based assessment of boards might also assist more women to crack the boy's club mentality of boardrooms. The model boardroom......is drawn from a global talent pool and directors are employed on performance-based contracts..."
Richard Leblanc as quoted by Brad Hatch, 2006
Furthermore,
"...the pre-requisites for board membership should be business savvy, interest in the job, and owner-orientation..."
Warren Buffett as quoted by Tony Boyd 2018
Owner-orientation is best shown by a person owning a significant parcel of the company's shares. For example,
" ...directors are all major shareholders of Berkshire Hathaway. In the case of at least four of the five, over 50% of family net worth is represented by holdings of Berkshire..."
Warren Buffett as quoted by Tony Boyd 2018
On the other hand, some directors are selected simply because they are prominent and/or add diversity.
"...In Australia there are basically 2 ways that directors get appointed - either through networks of existing directors who then invite the person into the network or through the use of the same handful of headhunters..."
Tony Boyd 2018
It is interesting to note that many self-made entrepreneurs tend to avoid becoming directors of public companies.