New Directors – Board 101
For new directors, the fundamental question is the same as for anyone in a new job looking to do that job well: what is my role? Or, to put it more casually, what exactly am I getting into?
The list of things a new director needs to know and understand is long, from the board’s basic function and responsibilities, to managing corporate governance, to entrepreneurship and promoting company success, and so on…
Just to take the first bit, the following is what an effective director needs to know about the board itself.
A typical corporate board might contain four separate roles:
- Chair – Appointed by the directors to run board meetings and members’ general meetings. Consequently, has a degree of control over the board’s agenda and influence over the board’s decisions.
- Managing director/CEO – Focused on running the company; implementing corporate decisions and acting as the link between the board and the rest of the organisation and management. Depending on the company, the MD role may be equivalent or interchangeable with the title of CEO; in others they will be separate roles, with the CEO having more of a strategic and outward-facing (public relations) role.
- Executive directors – If you like, the board’s ‘team members’; salaried decision-makers and direction-setters; individual directors may manage key areas of the business (finance, sales, etc.)
- Non-executive directors (NEDs) – Directors appointed in an advisory capacity, with no day-to-day operational responsibilities; often described as a ‘critical friends’ to the organisation. The UK Corporate Governance Code states that at least half the board should be independent non-executive directors.
The Chair-CEO relationship
How these two roles interact and work together is key to the effective functioning of the board. Between them they combine the daily management of the company’s operations with a longer-term, more strategic ‘stewardship’ function.
In board meetings, the Chair manages the agenda and process, and the CEO/MD represents management actions, looking for decisions and guidance from the board. In the process, the Chair can ensure that all views are considered and that discussions remain constructive.
NEDs are there to provide a more neutral perspective on matters; to hold the board to account by questioning and challenging. Individual NEDs may have (and be appointed for) a specific expertise, such as performance, resources, sustainability, diversity, strategy, etc.
Given the independence and neutrality factor, CEOs/MDs and Chairs are rarely NEDs.
Executive directors usually work full-time for the company and occupy senior roles in the organisation’s management. Basic duties (under the Companies Act 2006) are: act in accordance with the company constitution; promote the company’s success; offer independent input; fulfil the role with reasonable care, skill and diligence; avoid conflicts of interest; likewise third-party benefits; and declare any personal interests to the board.
Effectiveness of the board
The board’s effectiveness depends on how well it fulfils its three essential legal duties:
- Duty of care – appropriate use of company assets (financial, human, property, reputation…)
- Duty of loyalty – ensure company activities further its purpose/goal (also, see the items above around conflict of interest and third-party benefits).
- Duty of obedience – ensure the company operates in line with relevant legislation and regulation; including its own bylaws.
Effectiveness is greatly influenced by the board’s maturity.
There are a number of maturity models available. The basic premise is that a more mature board will result in better organisational performance and better governance of that performance. The least mature kind of board is there simply because the law requires it to be, directors in name (and possibly salary) only. The next level might see more active fulfilment of the board’s responsibilities, but only the bare minimum (What does the legislation say we have to do?) The next level sees a different mindset, an active desire to function well, and a more enthusiastic addressing of issues such as policy formulation, strategic thinking, management supervision, and accountability. Ideally, a mature (and high-performing) board embraces ‘softer’ issues, such as learning and culture, to the wider benefit of the company. The work of a truly mature board influences and impacts the whole organisation.
Governance – the Wates principles
Aiming to improve the overall UK corporate governance framework, the Companies (Miscellaneous Reporting) Regulations 2018 require (among other things) that companies of a significant size state which formal governance code they follow. One common option is to adopt the Wates Corporate Governance Principles for Large Private Companies.
- Purpose and leadership – Develop and promote the company’s purpose and ensures that the values, strategy and culture align with that purpose.
- Board composition – An effective Chair and directors with a balance of backgrounds, experience and knowledge; numbers are according to the size of the company.
- Director responsibilities – All board members clearly understand their responsibilities and accountabilities. Board policies and procedures support effective decision making.
- Opportunity and risk – Promote the company’s sustainable success; identify opportunities to create and preserve value; identify and mitigate risk.
- Remuneration – Executive remuneration is aligned to long-term company success (and is consistent with wider company pay and conditions).
- Stakeholder relationships and engagement – Meaningful engagement with stakeholders, taking views into account as part of the decision-making process (here, ‘stakeholders’ includes the company’s workforce).
Of course, the above is essentially a light skim definition what a board is – more of a set of indicators directing you to the information directors need to have. One of The Boardroom Effectiveness Company’s well-received events is our ‘The Effective Director’ workshop which covers the above and more in much greater detail. Often this event is for whole boards and the content tailored to the specific company but we do offer open events. The next is on 4 May (feel free to add your own Star Wars joke) and you can find the details here. Or you can just give us a call on 01582 463465; we’re here to help.