In a recent post, we described board composition and best practices for identifying and adding board members. Here, we examine what decisions boards should be making and the relationship between the board and the management team.
What is the Board’s Purpose?
In many ways, boards of directors guide corporate behavior. Decisions made by boards, particularly public company boards, can affect the lives of the employees, shareholders and consumers whose prosperity depends on the company and its success. An obvious example of a board-level decision that has a substantial impact on many constituencies is a decision to close or relocate a factory or to merge with a company in a different geographic region. Although management teams have a role in defining broad corporate strategy and activities, many key corporate decisions are made by the board. This reality highlights why board composition and board behavior are so critical for healthy corporate behavior.
What are the Big Decisions Boards Make?
- Growth
- Compensation
- Values
- Third Party Relationships
- Strategic Partnerships
- Risk Management
What is the Relationship Between the Board and the Management Team?
Whether the board is made up of outsiders or insiders, one of the board’s key roles is to oversee and evaluate the management team, particularly the president or chief executive officer. Even if there are no outside board members, executive officers who also serve on the company’s board have different roles as board members and managers. The oversight and evaluation process incorporated into board discussions should improve rather than impede the company’s growth and success. For the board to evaluate management most effectively, three things are necessary:
- the board has to have a clear understanding of the organization’s mission and goals;
- the board has to have clear insight into the measurable goals of the company and the current outcomes; and
- the board has to have open communication with the management team and other key partners
Used effectively, the board should be able to give the management team insights and advice that could be less visible to management because of its immersion in the day-to-day operations of the company.
How Can Management Best Use the Board?
Here are some suggestions for getting the most out of a board’s expertise and time.
Deliver Detailed Materials to the Board Ahead of Meetings
Most companies deliver a package of information to board members in advance of meetings, including (a) minutes of the prior meeting, (b) year-to-date financial information and (c) any material new information. In addition to these basic materials, management can better facilitate more robust discussions of company performance by including information the board should review and be prepared to discuss at an upcoming meeting. In short, the board should be prepared to discuss with equal thoroughness both the history and the future of the company. If a board is meeting only four times a year, management can make the most of the board’s time at an actual meeting by helping board members come to the meeting ready to begin discussion immediately.
Use Board Meetings for Complex Decisions Rather Than Quarterly Updates
A quick update of the company’s year-to-date financial position will ground any board discussion, but the board proceedings should go beyond the update. Ideally, each board meeting would include a discussion of progress to year-end budgeted goals or targets, but would also include deeper discussion of some aspect of the strategic plan. Some companies choose a topic for discussion that could have a significant impact on an aspect of the strategic plan, like regulatory changes, equipment needs, personnel changes or customer concerns. A more intense conversation about one topic can generate feedback and commentary that should help management define its goals and get the benefit of the board’s perspective on both the particular topic discussed and the general state of affairs.
Require the Board to Challenge Management on Particularly Important Issues
The relationship between the board and management should be cooperative, but disciplined. The board should hold management strictly accountable for progress toward defined goals. The board also has a responsibility to provide input and expertise where necessary to augment the skills of the management team.
Require Management to Challenge the Board
Just as the board should hold the management team accountable, the management team should ask the same of the board. Open communication, mutual respect and clear expectations about performance will create a dynamic appropriately focused on corporate growth, and not the individual needs of any participant in the process. The way the dynamic develops will depend on the idiosyncrasies of the company, the industry, the people and the goals, but there are best practices that will more likely lead to a successful working board.
Facilitating Good Decisions
The best practices described here create a foundation on which a board will be equipped to make effective, powerful decisions for the company. When a board is asked to make the kinds of decisions listed above, it will be able to do so more constructively with a strong base in both corporate mission and strategic plan. A strong board can be a key asset and should be nurtured to provided the highest value possible.