The Role of the Board of Directors in Corporate Governance

Board Governance

Running a company’s business requires a combination of people, rules, processes, and procedures. This is how we define corporate governance. Corporate governance provides the foundation for a company to make many environmentally friendly decisions, including economic, social, regulatory and market environments. Corporate governance has its roots in ethical behavior and business principles aimed at creating long-term value and sustainability for all stakeholders.

Board members face the constant challenge of balancing the interests of the board, management, investors, shareholders, and stakeholders. They fulfill their obligations and responsibilities with full respect for transparency and accountability.

Corporate boards are often said to be responsible for providing oversight, insight, and foresight. This is a major challenge in today’s complex and volatile market. Good governance principles are the basis of the work of board members.

Defining the Role

The corporate director has many obligations and responsibilities. In every decision made by the board, they must consider how it affects their employees, customers, suppliers, communities and shareholders.

Good corporate governance relies on a clear difference between the roles of directors and managers. Board members are not intended to be directly involved in the day-to-day operations of the company and should not be involved in management micromanagement. The main responsibilities of board members are oversight and planning. Although there are differences, board members can delegate certain authority to the CEO or CFO in certain circumstances.

The Board of Directors also regularly delegates some of its duties to the Board of Directors Committee. The Board of Directors Committee serves as a subgroup of the entire Board of Directors. The committee spends the time and resources needed for issues where the entire board does not have time. The committee digs deeper into the issue and often invites experts to assist. The Committee regularly reports to the Executive Committee on the issues they are responsible for addressing.

What Is the Appropriate Board Composition?

Boards tend to look different in the early stages of development. Early-stage boards usually contain one or more founders. Boards are usually small in the early stages and have 5-7 board members from different disciplines. Odd numbers prevent tying. Each CEO receives one vote.

The size of the the board usually increases with growth and is often associated with organizational needs and standard industry practices. When the board acquires investors, they usually provide the CEO with a board seat. Some investors will also insist that they take a seat on the board so that they can visibly supervise their investment. Investors also often influence the recruitment of independent board members who are increasingly influential on the board and the company as the company grows.

Corporate Governance Best Practices encourages the Board to provide Independent Directors with a majority of the Board’s seats. A diverse approach to board composition is essential and provides a wide range of expertise, perspectives and knowledge that adequately reflects the broad concerns of diverse stakeholders, shareholders and communities. Regulators, investors and others are also asking the Board to consider diversity in a variety of areas, including age, gender, experience, ethnicity, race, religion, skills and experience.

Articulating Long-Term Plans to Shareholders and Stakeholders

The role of the board is to plan and strategically set goals for the company’s short-term and long-term well-being, and to establish a mechanism to monitor progress against the goals. In this regard, board members need to consider, understand and discuss the company’s goals. In particular, the Board relies on Independent Directors to challenge the Board’s perspective to ensure sound decision-making.

The board needs to be confident in how to address uncertainty and seize future opportunities while identifying and managing real and potential risks. To increase investor confidence, board members must be able to articulate their future plans so that investors have a clear view of the long-term outlook.

The Corporate Board's Role in Stewardship

Basically, the members of the board act as the steward of the company, governing the present and providing guidance and direction for the future. In its role as a regulatory agency, the board needs to continually assess various risks in the following categories:

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

Effective corporate governance means that the board must provide a clear written account of the roles of board members, chairman, CEO, and key board committees. The board must also develop and develop policies on business codes of conduct, ethical codes, environment, society, governance (ESG) codes, conflicts of interest, and whistleblowers.
Good corporate governance promotes equity and prevents fraud and other deceptive practices.

The Board's Relationship with Management

It’s in the board’s best interest to develop good working relationships with managers. 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 in a timely manner to develop a sense of mutual confidence and trust with their managers. It’s important for board directors to be having regular conversations with managers about risk mitigation and prevention. Managers need to understand risks so that they can 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 always in place. The board must be able to adapt and respond quickly to a variety of opportunities and threats.

Tools, such as BoardEffect, transform the way boards and executives work together, saving time, enhancing security and facilitating better decision making. This allows us to confidently govern the present and provide the best direction for the future.

Contact our team here for a demo.