Enron, WorldCom and HIH all spring to mind when the words “Corporate Governance” are mentioned. Negative stories of corporate governance are easy to find and are well remembered for the misery corporate governance failure often causes ordinary people who may be shareholders, employees or suppliers.
Understanding what boards do wrong when they perform so badly is easy to comprehend with the supernatural gift of twenty-twenty hindsight. It is slightly more difficult, but only slightly more difficult, to understand what boards should be doing and to monitor their performance before problems occur.
Existing members of a board and any incoming directors need to have available corporate governance guidelines so that all directors are aware of their responsibilities and duties and the competency they are expected to demonstrate during their tenure on the board.
Three elements need to be covered by any set of corporate governance guidelines; the quality and effectiveness of individual directors, the clarity of roles and responsibilities and the measurement of and improvement in, board performance.
It is not necessarily axiomatic that a board comprising high quality directors will be a high performing board, but it is surely the place to start trying to build a high performing board.
What makes a quality director?
There are some common competencies which all directors of all boards should possess.
Directors should have a proven track record of sound business judgement and good business decisions coupled with a good degree of financial literacy. Specific knowledge and experience to support the development and/or implementation of business strategy should be complemented by appropriate wider knowledge of business and industry issues. Demonstrated integrity, high ethical standards, good communication and influencing skills are also required.
As well as possessing the appropriate competencies, directors must be available for board and committee work to enable the board to be effective.
How can the roles and responsibilities be made clear?
A charter of expectations for a board of directors is good start. The charter should specify the roles and responsibilities to be discharged by the directors and specify how the board delegates authority to manage the business of the organisation to management.
The components of a charter will include an overall statement of the Board of Directors’ responsibilities for supervising the management of the business. Of particular importance is to have clarity surrounding the availability of access between individual directors and the executive management team and provision of direction to the executive without involvement of the Chief Executive Officer.
The level of involvement in the strategic planning process, the approval of strategy and the monitoring of progress against strategic and business goals are musts for the charter.
The selection, goal setting and evaluation of senior management need to be included as does the review of board operations and the evaluation of the board and individual director effectiveness. Management of risk, capital and internal controls are mandatory as an adjunct to the usual financial reporting and regulatory compliance obligations.
In addition, the charter should specify the duties of directors or at least the general principles which govern the director’s duties. The principles should cover acting in good faith, conflict of interest, duty of care, delegation, use of company property or information, gaining advantage through position and keeping proper books of account.
How can board performance be measured?
Measurement should cover the performance of the board itself and its committees, individual board members and the CEO. Additionally, the board’s performance should be reviewed in terms of its effectiveness in providing oversight to strategic planning, management evaluation and compensation and reporting of governance policies and initiatives to shareholders.
Performance evaluation should include four mandatory elements. First is succession planning for directors to keep the board appropriately balanced in terms of skills and experience. The second element is director attendance and performance review, preferably through a confidential peer-review survey.
The third element is the effective promulgation of a compensation philosophy and the linkage of the compensation programme to meaningful and measurable performance targets. Fourth is the effective reporting to shareholders the definition of terms such as independence and conflict of interest and the compensation levels of all directors. Fifth is the monitoring and evaluation, in depth, of the organisation’s strategy and the human technological and capital resources required to implement the strategy.
Board members and boards as a whole have duties to employees, governments, the community and shareholders. History has taught us that boards need strong corporate governance guidelines which are tested and monitored for their effective implementation. It is important for boards to review regularly whether they do measure up or need to improve or even create their guidelines.
The alternative for individual directors is confusion and potential ineffectiveness as board members. The alternative for the board and its stakeholders is chronic underperformance or, in the worst case, acute failure.