There are five main reasons why boards do not
perform as they should:
1. A dominant CEO who intimidates the directors.
2. A weak Chair who is unable to fulfil the role properly.
3. Dysfunctional board dynamics (usually a consequence of the first two).
4. Dysfunctional processes.
5. 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.
Check out LBTC’s CEO courses.
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.
Check out LBTC’s company
directors course.
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.
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