There are five main reasons why boards do not perform as they should:
- A dominant CEO who intimidates the directors.
- A weak Chair who is unable to fulfil the role properly.
- Dysfunctional board dynamics (usually a consequence of the first two).
- Dysfunctional processes.
- Inadequate understanding of risk dynamics.
We will now look at how to avoid failure and deal with this in three parts: adopting John Carver’s Policy Governance® approach; having the appropriate information; and using the Audit, Remuneration and Nomination Committees correctly.
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The Policy Governance® Approach
John Carver set out to simplify board decisions by defining the role of the board as consisting of four separate but related responsibilities:
- To define the “Ends” of the organisation: what it exists to do; how it will make a difference to its beneficiaries; and the returns it will achieve as a result.
- To set the boundaries or “Executive limitations” on the CEO’s freedom to manoeuver.
- To determine how the board itself would be governed through agreed “Governance Process issues.”
- To delegate the authority of the board to the CEO through the “Board–CEO linkage.”
Part of the problem is that what directors are expected to do by regulators does not translate readily into what they should do on a day-to-day basis. So how should boards go about doing what is required of them by regulators? Information presented to the board is normally in the form of a management report distributed to directors for them to read and digest before the meeting. Often directors complain that they are overloaded with information, making it more difficult for them to do their job properly.
John Carver argues that there are only two questions a director needs to ask: “Will what is being proposed deliver the agreed Ends of the organisation?” and “Is the CEO staying within the Executive Limitations that have also been agreed?” If the answer to both questions is “Yes,” then the proposal can be approved, provided it does not also cut out other preferable options.
Learn about this on LBTC’s corporate governance training course.
Having the appropriate information
Appropriate information can be categorised in three ways:
- Stakeholder needs-analysis-based information – Stakeholder needs analysis helps define what information is needed to align the company behind the agreed direction. Such an analysis will identify who the key stakeholders are; the business risks and opportunities arising from their needs and strategies for addressing them; and managing potential conflicting interests that may arise. It will also identify the KPIs used by the company to ensure that progress is being made and that the objectives, goals and milestones of the strategies are being met.
- Appropriate KPIs – KPIs are high-level strategic performance indicators that show the links between the strategic drivers of the business with day-to-day operations. They should be designed to help the top management team and the board to keep their fingers on the pulse of the business. To be effective, KPIs of any kind must be: reliable; balanced; decision-driven; actionable; simple; and dynamic.
- Good-quality information – The characteristics of good-quality information are that it is: relevant; integrated; in perspective; timely; frequent; reliable; comparable; and clear.
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Getting the Best from Board Committees
Committees should only be formed if they are essential. They must not come between the board and management, and so must never judge management performance on the basis of their own criteria; they must use those of the board as a whole. (In most instances, committees do not go further than making recommendations to the board.) The existence of committees must not mislead directors who are on those committees that they are more equal than others who are not. Nor should directors fall into the trap of believing they are not accountable because they do not sit on a particular committee.
Typically, codes of Corporate Governance focus on the three most important committees:
- The audit committee – should comprise at least three members, a majority of whom are independent. All members of the audit committee should be non-executive directors. All members of the audit committee should also be financially literate and at least one should be a member of an accounting association or body.
- The nomination committee – should be composed exclusively of non-executive directors, a majority of whom are independent, with the responsibility for proposing new nominees to the board and for assessing directors on an ongoing basis.
- The remuneration committee – should consist wholly or mainly of non-executive directors, to recommend to the board the remuneration of the executive directors in all its forms, drawing from outside advice as necessary.
All this and more on LBTC’s board of directors training course.