The Role of the Board of Directors in Corporate Governance

It takes some combination of people, rules, processes and procedures to manage a company’s business. This is how we define corporate governance. Corporate governance forms the basis for corporations to make decisions considering many environments, including economic, social, regulatory and market environments. Corporate governance has its roots in ethical behaviour and business principles to create long-term value and sustainability for all stakeholders.

Corporate board directors face the continual challenge of aligning the interests of the board, management, investors, shareholders and stakeholders. They respond to their duties and responsibilities with full regard to transparency and accountability.

It’s often said that corporate boards are responsible for providing oversight, insight and foresight. That’s a tall order in today’s marketplace, which is complex and volatile. Sound governance principles are fundamental to the work that board directors do.

Here, we discuss the board of director’s role, board composition, stewardship and how board management technology can aid efficiency and better decision-making.

Board director smiling after reading about corporate governance.

The Role of the Board of Directors in Corporate Governance

Corporate boards have many duties and responsibilities. In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders.

Good corporate governance relies on distinct differences in the roles between board directors and managers. It was never intended for board directors to be directly involved in the daily operations of a corporation, and they certainly shouldn’t engage in micromanaging the management. The primary role of board directors is oversight and planning. Despite the differences, board directors may delegate certain powers to the CEO or CFO under certain circumstances.

Boards also regularly delegate some of their duties to board committees. Corporate board committees act as a subset of the entire board. Committees devote the necessary time and resources to issues board as the whole doesn’t have time for. Committees delve deep into issues, often calling in experts to assist them. Committees provide regular reports to the board on the matters they handle.

What Is the Appropriate Board Composition?

Boards tend to look differently in the early stages of development. Early-stage boards usually include one or more founders. Boards are typically smaller in the early stages, with five to seven board directors having various areas of expertise. Odd numbers prevent tie votes. Each board director gets one vote.

The size of boards typically increases with growth and is often related to the corporation’s needs and the industry’s standard practices. As boards acquire investors, they usually offer the CEO a board seat. Some investors also insist they get a board seat to oversee their investments. Investors also often influence recruiting independent board directors, who have increasing influence on the board and the corporation as the company grows.

Best practices for corporate governance encourage boards to offer the majority of board seats to independent directors. A diverse approach to board composition is essential, bringing expertise, perspectives and knowledge that adequately reflect the broader concerns of various stakeholders, shareholders and local communities. Regulators, investors and others are also making a big push for boards to consider diversity in many realms, including age, gender, experience, ethnicity, race, religion, skills and experiences.

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Articulating Long-Term Plans to Shareholders and Stakeholders

The role of the board is to plan and strategise goals and objectives for the short- and long-term good of the company and to put mechanisms in place to monitor progress against the objectives. In this regard, board directors must review, understand and discuss the company’s goals. In particular, the board relies on independent directors to challenge the board’s perspectives to ensure sound decision-making.

The board must be confident in how they plan to address uncertainties and how they can capitalise on opportunities for the future while identifying and managing actual and potential risks. To inspire trust from investors, board directors must be able to articulate their plans for the future so that investors have a clear picture of the long-term outlook.

The Corporate Board’s Role in Stewardship

In essence, board directors act as stewards of the company that govern for the present times and provide guidance and direction for the future. In their role as overseers, boards must continually assess a variety of risks in the following categories:

  • Financial reporting
  • Reputation
  • Litigation
  • Ethics
  • Technology
  • Health
  • Safety
  • Environment

Effective corporate governance entails that boards develop written, clear descriptions of the roles of the board directors, the board chair, the CEO and the primary board committees. Boards should also develop and write policies for codes of business conduct, codes of ethics, environmental, social and governance (ESG), conflicts of interest and whistleblowing.

Good corporate governance promotes equity and deters fraud and other deceptive practices.

The Board’s Relationship with Management

Developing good working relationships with managers is in the board’s best interest. Corporations run best when the board and senior management hold the same perspectives on strategy, priorities and risk management.

Communication is a vital component of good corporate governance. Boards must communicate clearly and promptly to develop confidence and trust with their managers. It’s essential for board directors to be having regular conversations with managers about risk mitigation and prevention. Managers must understand risks to put processes in place to protect the company. Risk conversations between boards and managers should cover a span of risk areas, including:

  • Economic risks
  • Market risks
  • Operational risks
  • Acquisitional risks
  • Dispositional risks
  • Infrastructure risks
  • Technology risks
  • Reputational risks
  • Disclosure risks
  • Compliance risks

Diligent’s Modern Governance Solution Responds to Evolving Board Demands

Corporate governance is in a constant state. Boards must adapt and respond quickly to various opportunities and risks.

Tools like Diligent’s Board & Leadership Collaboration solution transform how boards and leaders work together, saving time, enhancing security and driving better decision-making – allowing you to govern confidently for the present while providing the best possible direction for the future. You can contact our team for a demo here.

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