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We continue in this issue the discussion of the proper role of outside directors in determining the strategy of a company and in evaluating capital investments in its future. William Wommack recommends that corporate objectives or a strategy committee should become the usual structural means for reviewing management’s recommendation for investments. The author argues that management must organize well to relate to such a committee and that someone should be clearly designated the chief strategic officer (if not the CEO, then not the chief operating officer). He outlines the processes leading to management-board involvement in funding strategies (not projects) and in determining direction. The board of directors’ most important function is to approve or send back for amendment management’s recommendations about the future direction of the corporation. This function usually receives minimal attention. Two reasons explain this irony. First, management is often not organized or required to deal with strategic choices within its own ranks—and even less under the questioning of a board of directors. Second, the board of directors is not usually organized or able to shoulder its responsibility. A version of this article appeared in the September 1979 issue of Harvard Business Review.
A board is:
There are two types of boards:
Benefits of having a boardA board can help grow and develop at a pace that suits the owner, staying inside the speed limits, or accelerating to full throttle. Governance applies to all companies, but not all in the same way. There is no set route to follow, but most companies face similar issues, such as:
Both advisory boards and boards of directors should have a similar structure – a chair to facilitate, and formal procedures for conducting meetings.
Positioning for growthSince the late 1990s, management and IT consulting business Maven has grown to 37 consultants across New Zealand – and now they're setting their sights on new opportunities offshore. Maven used good governance to get ahead. Find out more about their story Board vs managementAn effective company must ensure the relationship between the board and management is complimentary rather than adversarial. This is one of the most important relationships within a company, so make sure it is well managed. Separating ownership from controlIt's easy to get confused with the difference between governance and management. The board is in charge of governance of a company which seeks to ensure the smooth running of a business by making accountability and oversight the core of their workings. Governance also ensures that the business has a future-facing strategic plan. This is where management comes in. They take the strategic plan and work to implement it into the day-to-day operations of the company. Both roles are vital and complementaryThe difference can get blurred with start-ups and high growth businesses when:
Which hat to wear?Executive directors need to think about the hat they have on:
This is where an independent director can help guide your board discussion, and make this delineation clearer. Advisory boardsAn advisory board is a committee of people selected by a business (or a board in the case of larger companies) to provide defined advice and information in an informal and flexible manner. Advisory board members are not directors, have no powers and owe no duties as directors of the company. The key differentiator is that an advisory board advises only. It has no power of decision making and cannot instruct the company to act. Effective advisory boards provide strategic and compliance guidance and know-how that is contextualised to the needs of a business in a range of business settings. Why have an advisory board?There are a number of reasons why you might have an advisory board.
Start-ups and businesses in the high growth sector can particularly benefit from the guidance of an advisory board which can be used as a business development tool and adjunct to strategic planning. Larger companies that already have a board of directors may also set up advisory boards for a number of reasons – whether it’s to work on a particular project or deal, bring a fresh perspective to an issue, or provide particular expertise in a specific field relevant to the company. An advisory board is different because it:
To take the next step towards setting up an advisory board, see the Advisory board toolkit. Formal boardsA formal board of directors has major responsibilities and legal obligations. They are:
A board of directors (B of D) is the governing body of a company, elected by shareholders in the case of public companies to set strategy and oversee management. The board typically meets at regular intervals. Every public company must have a board of directors. Some private companies and nonprofit organizations also a board of directors.
In general, the board makes decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include the hiring and firing of senior executives and their compensation, dividends, major investments, and mergers and acquisitions. In addition, a board of directors is responsible for helping a corporation set broad goals, supporting senior management in pursuit of those goals, and ensuring the company has adequate, well-managed resources at its disposal. The board of directors typically includes the chief executive officer and sometimes other senior managers, alongside board members not otherwise affiliated with the company. An inside director is most commonly defined as a company employee, though the category sometimes also covers significant shareholders. Independent, or outside, directors are only involved with the company through their board membership. Independent directors face fewer conflicts of interest than company insiders in discharging their fiduciary obligations. The New York Stock Exchange and the Nasdaq require listed companies to have boards with a majority of independent directors, and to include independent directors on key board committees such as the audit committee. The structure and powers of a board are determined by a company's articles of incorporation and its corporate bylaws. Bylaws can set the number of board members, how the board is elected (e.g., by a shareholder vote at an annual meeting), and how often the board meets. While there is no set number of members for a corporate board, many pursuing diversity as well as cohesion settle on a range of 8 to 12 directors.
Every public company listed on the New York Stock Exchange and the Nasdaq is required to have a majority of independent directors on its board. For publicly listed companies in the U.S., members of the board of directors are elected by shareholders. Board candidates can be nominated by the board's nomination committee, or by investors seeking to change a board's membership and policies.
Directors may be removed in elections or otherwise in instances of fiduciary duty violations. In addition, some corporate boards have fitness-to-serve protocols. Corporate governance can differ in international settings. In some countries powers are split between an executive board and a supervisory board. The executive board is composed of insiders elected by employees and shareholders, is headed by the CEO or managing officer, and is in charge of daily business operations. The supervisory board is chaired by someone other than the chief executive officer and fills a role similar to that of a board of directors in the United States.
In general, the board sets broad policies and makes important decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include mergers and acquisitions, dividends and major investments, as well as the hiring and firing of senior executives and their compensation.
Usually, the board of directors includes at least one company insider such as a chief executive officer, along with a majority of outside, or independent, directors with relevant expertise. Outside directors don't face the same conflicts of interest as the company insiders on a board.
Insider directors are not typically compensated for board duties since they're most often company employees. Outside directors are paid. |