In successful and well run companies, the board of directors, upon considering the nature and requirements of its stakeholders, do many things to keep up with the success. For example, they formulate the purpose, mission, and ethical values of the company, create a suitable business and risk strategy, assign duties to management, ensure that proper controls are in place, monitor management through use of various mechanisms (e.g., audits, risk limits, compensation, financial performance, and ethical standards), and etc. Each component of the process has an integral role to play in the progress of the organisation and must be performed with due care.
The legal framework and system of a jurisdiction holds the board of directors and senior executives to certain standards in order to impose proper accountability. These standards revolve around attention to business, commitment to corporate interests, and exercise of reasonable business judgment.
Theoretically, if these standards are duly maintained, shareholders and other stakeholders should be protected. In a perfect environment, the internal governance process operates efficiently and utilises diverse expertise in order to keep the company running smoothly and securely.
The board of directors are responsible for ensuring that the organisation has independent functions in place that constitute an efficient system of internal control. These functions usually fall within larger categories such as risk control, compliance, and internal audit.
The risk control function looks after if the risk policies are followed. The compliance function identifies and assesses compliance risks. The internal audit function is an instrument for the board to ensure that the quality of the risk control function and the compliance function is appropriate.
Internal control also includes accounting and financial framework, handling of information, risk assessment and measurement approaches. Now the question arises as to what constitutes an effective and capable board of directors in a company? What are the best practices?
Clear distinction between the roles of the board and executive management
When it comes to the running of the day-to-day operations of a company, there should be a clear and straightforward understanding that this is the job of the executive branch of the company unless there is a specific crisis. There should be minimal interference from the board in this regard.
However, from an overall strategy perspective the executive management and the board are also a team. For example, it is the board that hires the CEO and therefore there must be a very good synergy between the two parties.
The board of directors provides oversight and input on the company's progress while it is the CEO who must move the company forward from an operational standpoint.
Keeping this in mind, the board must give the CEO an adequate amount of liberty and independence while at the same time keeping a keen monitoring eye on the company's trajectory.
Subsequently the CEO also must make themselves available to respond to questions from the board whenever required. The same would be expected of other upper-level management.
Strong Connection between the board and external stakeholders
All business enterprises are supported by and rely on external stakeholders such as investors, customers, suppliers, partners, and various vendors. In current times it is widely expected that businesses should be transparent about their operations, dealing, values and duty to their external stakeholders.
It would be beneficial to include such vital external stakeholders in the company's meetings, communications, and activities as much as possible because they also have an ongoing interest in the company's success. Allowing them to do so makes the organisation stronger and better aligned. Hence it is highly recommended that the board members stay very well connected to important outside stakeholders and always try to consider their views whenever strategizing on the company's future. Very high value external stakeholders may even be considered for admittance in the board itself.
The board should be diverse and multi-talented, and their talents should be well utilised
The board of a business enterprise should fully embrace diversity because a diverse pool of talent on a board would very likely lead to specialised insight into many different varieties of issues. As such the board should be built by admitting members from varied professions, backgrounds and of course gender.
And also, the leadership should understand the talents of the board members should constantly be evaluated and re-evaluated to ensure that the make-up of the board meets and fits the needs of the organisation at that specific point in time.
None of the board members should be underutilised because there is a very specific reason why a person has been given such a precious seat. Therefore, each member of the board must be given clear and objective duties so that they are always well utilised according to their talents and always in favor of the company.
The board must be objective and impartial, and outsiders should be welcomed
The board's primary role is to be a source of objectivity and impartiality. There should be no partiality or nepotism as far as board membership is concerned. Including those people who are too closely linked to the company would only create more possibilities for conflicts of interest and partiality and preferential ways of thinking. This would not be beneficial to the company or its stakeholders in any circumstance.
A board is the strongest when it has no biases or predisposed opinions but rather, it has the capability to make independent and objective decisions purely for the benefit of the organisation. This can most effectively be achieved if outsiders, based on their talents, are always strongly considered for board membership rather than filling the seats with insiders and family members, more importantly allowed to add value to the process.
Risk management should be the greatest priority for the board
In the old days of decades past, it was mostly the role of a company's management to oversee and manage risk, but those days are gone today, especially after the global financial crises during the late 2000s decade. When an organisation is at risk, those ripple effects can go high up the ladder because the consequences of failing to manage risk can go far beyond just the employees or the direct members of the company.
The 2008 global financial crisis was a huge wake up call for the board of directors of companies because adverse economic times directly hit board members, and many were thrust into complex legal issues and failing business models. This fallout forced board members to become involved in a company's risk management matters.
Nowadays, risk management is the one of the most crucial duties of the board and it is their role to account for potential risks and be well prepared with contingencies to manage those risks. It is the duty of the board to strike a balance between taking risks in order to keep moving forward progressively but at the same time keeping strategic defenses ready to protect the company. Since it is the role of the board to come up with and manage the strategy of a company, risk management has also become a key attribute of a company's overall strategy.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
Mamun Rashid is a partner at PwC Bangladesh.