ISSUES RELATED TO BOARDS, GOVERNANCE, AND BEST PRACTICES.
Part 1: Definition and Role of the Board
“A CEO is a board of directors personified.”
Author: Mokokoma Mokhonoana
In this series of articles, we discuss the relationship between the Board and the Chief Executive Officer (CEO) as a means of providing some guidance to those who have to make decisions about such matters. We try to avoid dogmatism and instead present pros and cons. Where appropriate, we present what we believe to be best practices.
The nature of the relationship between the Board of Directors (Board of Governors, or Board of Commissioners, or Board of Trustees) has changed over the years, and the relationship differs from company to company and from one organization to the other. In this series, we discuss, among other things, the issue of the relationship between the Board of Directors and the Chief Executive Officer (CEO). Specifically, we attempt to answer the question: Should the CEO be a member of the Board of Directors? We begin the series with a definition and role of the Board.
Definition of the Board
Simply stated, a Board of Directors is an elected or appointed group of individuals who are responsible for overseeing a company’s activities to the benefit of its stockholders or shareholders. A Board of Directors is mandatory for all corporations whether they are private, nonprofit, or governmental (statutory bodies) because it is held accountable for the company’s policies and actions. For instance, if a company acts in an irresponsible manner that harms consumers, the board members are held responsible for the consequences of the company’s actions.
Role of the Board
The major roles and responsibilities of a Board of Directors are outlined below. The Board is expected to:
- Recruit, supervise, retain, evaluate and compensate the Chief Executive Officer (CEO)
These are doubtlessly among the most important functions of the Board of Directors. Boards need to search aggressively for the best possible candidate for this position. Actively searching within your industry can lead to the identification of very capable people to manage the company.
- Provide direction for the company
The Board has a strategic function in providing the vision, mission and goals of the company. These are often determined in conjunction with the CEO or general manager of the company.
- Establish a policy-based governance system
The board has the responsibility for developing a governance system for the company. The articles of governance provide a framework but the Board develops a series of policies. The rules that the Board establishes for the company should be policy-based. In other words, the Board develops policies to guide its own actions and the actions of the CEO.
- Govern the company and the relationship with the CEO
The governance system involves how the Board interacts with the general manager or CEO. Periodically the Board interacts with the CEO during meetings of the Board of Directors. Typically that is done with a monthly board meeting, although some boards have more or fewer meetings.
- Carry out a fiduciary duty to protect the company’s assets and investors’ interest
The Board has a fiduciary responsibility to represent and protect investors’ interest in the company. Therefore, the Board has to make sure the assets of the company are kept in good order. This includes the company’s plant, equipment and facilities, including the human capital (people who work for the company.)
- Execute a monitoring and control function
The Board of Directors has a monitoring and control function. The Board is in charge of the auditing process and hires the auditor. It is in charge of making sure the audit is done in a timely manner each year.
It is well worth noting that not all Boards perform all of the functions and carry out all the responsibilities listed above. Some Boards give some of these responsibilities to the CEO while others assume some of the duties of the CEO. In Part 2 of this series on Board Matters, we will address the issue of the Role of the CEO. Look out for further interesting facts about the role of the CEO.