Working Effectively As a Member of the Board of Directors
Every incorporated business has a board of directors. The board's role is to define the goals of the enterprise and adopt broad strategies to achieve them. The board appoints, supports, and counsels a chief executive officer (C.E.O.) whose job is to implement that strategy. Board members must understand that they provide overall leadership, and refrain from involving themselves in day-to-day management.
The board consists of individual members who should represent a balanced variety of viewpoints, yet be able to form an effective team. The board chairman is responsible for providing good leadership to the group and ensuring that the board fulfills it duties. Board members may form committees to explore particular issues and bring back recommendations to the entire board. The C.E.O. may or may not also be a board member or even board chairman.
Some commentators recommend a maximum board size of ten members and favor eight or nine. The argument for smaller boards is that they enable all the directors to contribute effectively in board discussions, arriving at true consensus. More important than number of members is that the board membership is balanced among viewpoints and that members always come together to operate as a cooperative team.
The chairman is responsible for the effectiveness of the board. More specifically, he or she should:
- ensure that the make-up of the board is appropriate for the challenges ahead.
- mold directors into an effective team. Effective boards are not brought into being simply by seating competent individuals around a board table. Creating effective boards requires effort by their members, but above all coaching and leadership by the chairman, which is an argument for the chairman not also being chief executive.
- carry out responsibilities that include setting the agenda, providing adequate and timely information to all directors, and conducting board meetings.
- put in place a means by which the board members can evaluate their own performance individually and as a team.
When the chairman is also C.E.O., his or her duties in relation to the board remain the same, but a deputy would be responsible for the appraisal of the C.E.O. and for the review of the board's performance.
Directors should be appointed for the value they can add to the board and their ability to fill gaps in the experience and backgrounds of existing directors. Directors should serve a set term of office, to ensure that the board is renewed periodically with fresh perspectives. While the entire board should be involved in the selection of new directors, the chairman has a particular responsibility for the selection because he or she will need to incorporate new directors into an effective team.
With the high-profile corporate scandals of recent years, both companies and lawmakers have undertaken initiatives aimed at beefing up their ranks of so-called "independent" or "outside" (as opposed to "inside") board members. Outside directors are those whose relationship to the company is only that of a shareholder, and in particular is not an employee (or, in many cases, not a contractor or supplier).
Outside directors should be selected to do more than prevent misdeeds by top company executives. They should also be able to provide fresh perspectives from other sectors of the economy, and also by representing very different life and work experiences—for example, coming from a variety of racial and ethnic groups, regions or nationalities, and types of organizations (such as nonprofit, charitable, military, and educational institutions).
The most significant development concerning corporate board members in recent years is passage in the U.S. of the Sarbanes-Oxley Act (also called SOX or Sarbox). The act introduced new standards of accountability, such that board members risk large fines and prison sentences in the case of accounting crimes. Internal controls are now the direct responsibility of directors.
Directors continue to bear other, more traditional responsibilities, the most important of which are to:
- focus on corporate purpose and broad strategies and ensure that executive actions support this vision
- review the performance of the C.E.O. and executive team. Board members are suited to this by their position, slightly removed from the business, and thus able to perform this task objectively.
Director pay, dividend versus re-investment, executive appointments—these are just a few areas of potential conflict. Keeping the best interests of the company foremost, board members must make decisions on such matters.
As the responsibilities of directors have become more demanding, boards have increasingly formed committees to deal with some of their more detailed work. The board appoints the committee members, gives each committee a specific focus or objective, and then receives and acts on committee recommendations. Committee assignments give individual board members an opportunity for greater responsibility and influence. Committee members are in turn responsible for giving the board their best effort and judgment.
Many boards fail to function adequately because their members have differing views, not only about the main challenges faced by the business, but even about more fundamental issues, such as the role of the board. One of the first priorities must be to arrive at consensus about what the board needs to achieve and how to approach its goals and objectives.
The Sarbanes-Oxley Act makes internal auditors responsible for ensuring that company executives follow appropriate procedures and reporting compliance with or violation of procedures to the board's audit committee. The chairman and board members are at risk in making sure compliance by executives is complete and comprehensive.
Carver, John, and Miriam Carver.
Conger, Jay, Edward Lawler, and David Finegold.
Demb, Ada, F. Friedrich Neubauer, and Adrian Cadbury.
Shultz, Susan.
Corporate Board Member: www.boardmember.com
Policy Governance: www.carvergovernance.com