Making Boards of Directors Effective: Some Modern Trends
Be it the pre-eminent Anglo-American type, the German 2 tier system (co-determination), or the kinds that are dominated by families and/or banks around the world, the board of directors (the Board) is instrumental to the performance of companies.
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In general terms, the Board is made up of directors who are appointed by shareholders to represent the interests of the latter. The shareholders may also remove the directors. The Board normally appoints the Chief Executive Officer (CEO) and has the power to sack her.
The Board sits at the top of the governance structure of the company, monitors its performance and that of management, makes major decisions and guides the CEO.
Committee system
To be effective, the Board must utilize the committee system. A Board, which sits in plenary all the time, would lose the benefits of specialization and the division of labour. Committees must report their findings to the full Board for general deliberations. It is beneficial to reshuffle committee memberships at appropriate intervals to spread the expertise around.
The Board must determine for itself, based on the nature of its line of business, which committees to set up. It may also create ad hoc committees to deal with time-bound issues. These days, the audit, governance/nominating and the compensation committees are the three most vital committees particularly for listed companies. In the US, the Sarbanes-Oxley Act (SOX) requires that the audit committee of a listed company must be composed entirely of independent directors and must have at least one “financial expert” on it.
It is considered useful for the Board to hold occasional meetings without the CEO, in the belief that this would allow executive directors to be forthcoming with their thoughts. Independent directors may also hold occasional meetings to craft their contribution to the Board. The utility of independent directors to the modern Board casts doubts on the relevance, if any, of an executive committee (EXCO) of the Board.
Keep it small
The size of the Board is critical. The well-considered view is to keep it “small”. The ideal number may be hard to find but the catch is to keep it at the smallest number that enables the Board to function effectively.
The issue of whether or not to separate the roles of Chairman and CEO is yet to find consensus. In the end, the choice that would lead to the optimization of the talents on the board must be made. If a combined role is preferred it is advisable to also appoint a lead director from among the independent directors.
The Board must also be clear on whether to be a “pilot” or a “watchdog”. A pilot board calls the shots whilst a watchdog board steps back, allows management a free hand and provides useful non-imperious oversight. Watchdog boards may be preferable in the sense that being overly intrusive may lead to clashes with management, which may withhold information and render the Board virtually sterile. However, in momentous times, the Board must be more engaged in administering the affairs of a company.
It may be more practical to have a watchdog board because management sees to the day-to-day running of the company while the Board meets on the average only about 4 to 8 times a year. Whatever type of Board is put in place, it must counsel as well as challenge management tactfully.
Strategy document
Every Board must design a written Strategy Document for the company. This must include the growth and succession plans. Board meetings must devote time to the appraisal of the targets and benchmarks in the Strategy Document. The Board must also fine-tune the Strategy Document as and when necessary.
A Board, which meets merely to hear presentations by executive members and staff of the company, is not likely to do great things for the business. That approach is as pedestrian as it is a waste of everyone’s time.
Presentations by executive members and staff must address specific targets rather than recount the performance of everyday duties. This ensures that meetings of the board are not reduced to pre-fabricated power point and other forms of presentations but become elucidating for the Board and make the road to business success clearer.
The quality of Board members must be of the highest possible kind. The tendency to appoint ‘the usual suspects’ who have spread themselves too thin must be jettisoned. Directors must not be appointed merely on the grounds of friendship and the type of prominence that is of no correlative value to the business.
Background of board members
The Board must have a good mix of relevant educational backgrounds, industry experience, diversity, valuable network, professional expertise, cultural meld and attractive reputation. Only Board members who are committed to regular and punctual attendance are worth having. A Board with as many independent directors as practicable must be wrought to bring a refreshing outside view to the firm.
The Board may also invite persons with relevant knowledge and experience on special issues to a meeting or two to help it to deal with some matters that it may not have turnkey competence in.
The Board must not limit its activities to the boardroom. Its members must familiarize themselves with the operations of the business. They may pay unannounced visits to the firm and interview workers to acquaint themselves with how things run on a regular day. The benefits of such an approach to understanding the business is invaluable.
A Board must do periodic evaluation of the performance of its members. This is critical to addressing the free-rider problem. The results of these evaluations, which ought to be anonymously gathered, must be discussed openly to keep directors on their toes. The Board must also evaluate the performance of the CEO.
In Ghana, the greatest impediment to the construction of the recommended board structure lies with those state-owned enterprises (SOEs) whose members are usually appointed by the government of the day. These appointments tend to be made based on considerations other than the ones enumerated in this article. Sadly, the problem is not unknown to the private and public firms as well, owing in part to the failure or refusal to embrace up-to-date corporate governance expertise and practices.
• The writer is a co-founder of the Law & Business Advocates and the Managing Partner at Clegg & Everett. He holds a Master of Laws (LL.M.) degree in Corporate Law, Finance & Governance Concentration from Harvard Law School with cross-registration in Boards of Directors & Corporate Governance at Harvard Business School. His email address is [email protected]
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