Good corporate governance and the right behaviour on company boards are always evolving. Boardrooms used to make changes after problems arose, but now the focus is on continuous improvement, which shows how society has changed. However, rules shouldn't restrict a board's creativity or the company's innovative drive.
Boardrooms have a responsibility to act in the organization's and stakeholders' best interests. Creating a culture where people are held accountable protects the company's reputation and builds trust, openness, and long-term success. They have a lot of freedom, and they should be assessed based on how they use it.
What Makes a Good Boardroom?
For boardrooms to work well, each member needs to be fully committed and involved. Being on a board means supporting the organization even outside of official meetings. Every board member has a role in guiding the organization, so they should be enthusiastic and dedicated to their responsibilities.
A well-functioning boardroom does not allow any one member to exert undue influence. They need to collaborate in a way that promotes open dialogue and mutual respect. Members of the board should be honest without being rude, brave without coming off as arrogant, and always remember that they are speaking for everyone, from new employees to top management.
Board members should be well-versed in the company's culture in order to fully grasp the business. The impact of company culture on success or failure is becoming increasingly apparent to boards of directors. Unexpected actions caused by a lack of cultural awareness might irreparably harm a company's brand.
What Are the Roles and Responsibilities of the Board of Directors?
Assuming numerous important roles and responsibilities that affect the entire organisation is one of the biggest challenges that the board of directors faces. To begin, the board oversees and directs the organization's unique leadership issues. The board is in charge of selecting and assessing the chief executive officer. They are also in charge of determining the pay for this position.
The CEO's salary and remuneration package are frequently made public, so choosing an amount that is too high or too low can harm the company's image. The board determines the purpose, goals, and trajectory of the organisation. From on high, this position dictates the course that the company takes and shapes the company culture. The board is also accountable for overseeing the organization's fiscal well-being.
The next problem the board of directors has to deal with is its role in corporate governance. Creating a system of governance through policies is one of them. When you are a leader, you are responsible for controlling and keeping an eye on things. The board members hire an outside audit firm to do yearly work on finances and other things. The board also keeps an eye on what the internal audit team is doing.
Challenges Faced by the Boardrooms Today
The boardrooms face many tough decisions today. While we hear about CEOs stepping down, like Martin Winterkorn from Volkswagen, because of issues like the emissions scandal, we don't often hear about the board's discussions behind the scenes. In fancy board rooms, certain topics really influence their choices.
Lets have a look at the new challenges the boardrooms are facing:
1. Cyber Attacks
People give companies their private details, trusting them to keep it safe. Companies also have secret information that helps them compete. If this information, like credit card numbers or financial secrets, gets out, it can be really bad. The government and organisations are now very focused on fighting cybercrimes. And even big companies aren't safe from these online threats.
2. Regulatory Compliance Risk
According to Reuters' annual Cost of Compliance survey, regulatory fatigue, resource challenges, and personal liability are all expected to rise. These findings reflect the sheer volume of regulatory change that is still expected, as firms navigate both international and domestic rules that have a global impact, resulting in overlaps. Because of the increasing global operations and the ever-changing regulatory landscape, board members have good reason to be concerned about regulatory compliance.
3. Reputational Danger
"It takes 20 years to build a reputation and five minutes to ruin it," Warren Buffett once quipped. You'll do things differently if you think about it." According to a World Economics research from 2012, around 25% of a company's market worth is directly tied to its reputation. This reputational risk is high on the board's priority list. Not surprisingly, Forbes Insights discovered that 90 percent of executives say reputation risk is their most significant company concern.
4. Crisis Intervention
A crisis is an incident that causes an organisation to become unstable and dangerous. You cannot ignore a crisis as a board member, regardless of whether you openly embrace or dispute the reality.
5. Subsidiary Corporate Governance Risks
The Enron incident, one of the most well-known challenges to corporate governance, demonstrated how a lack of sufficient compliance inspections in subsidiaries may spell doom for a massive corporation and a highly regarded audit firm. Today's corporate governance issues include strong corporate governance processes and policies governing subsidiaries. The operations of subsidiaries can have a direct impact on the reputation of the parent firm, which does not have as much visibility into the activities of its subsidiaries as it would want.
6. Secure tried-and-true skill sets and construct a diverse team
The mix of skills and experiences necessary to meet their firms' long-term strategic needs determines the composition of the best boards. Shareholders appreciate a track record of success. We must ensure that we have the correct mix of people thinking about the five-year strategy with a five-year vision in place. Traditional board profiles should be supplemented with new skill sets such as digital, cybersecurity, consumer behaviour, and, at times, even negotiating, coaching, and mentoring, as well as the recent demand for restructuring knowledge.
Finding such people will almost certainly include looking in less typical candidate pools, such as consultancy, the public sector, academic institutions, and legal and trading bodies—with the caveat that potential directors must understand and have experience running a firm.
Before we move forward and talk about improving the boardrooms, there are more broad concepts that need to be addressed. Starting with shareholder activism.
Shareholder activism is when shareholders use their ownership rights to push for changes in a company. They want the company's board to listen to their concerns and make positive changes. This helps ensure the company looks out for shareholders' interests and holds its leaders accountable. Shareholders might ask for small changes, like improving community relations or environmental efforts, or bigger changes, like cutting costs to increase profits. Sometimes, they might even suggest replacing the company's board of directors.
There are many forms of shareholder activism, such as lawsuits, social media campaigns and mudslinging, negotiations and lobbying with the board and management, shareholder resolutions, proxy fights, and more. Activism is a vigorous exercise and boardrooms have to be ready to handle the matter quickly. Shareholder activism can be very expensive for the organisation.
Poor reputation, rumours of mismanagement, underperformance compared to competitors, and a poorly constituted board lacking up-to-date information are common reasons for shareholder activism. There are times when activists are correct and times when they are incorrect.
Here are some tips for the Boardrooms to prevent issues from getting worse:
1. The board should carefully look into why shareholders are speaking out and try to prevent the same problems in the future.
2. The board should do research to fully understand what the shareholders are asking for.
3. It's crucial to quickly talk to all important people involved, like investors, suppliers, and staff, before they hear about it from unofficial sources like social media.
4. Make the decision! When dealing with the concerns brought up, the board must use proper and accurate judgement. Based on the nature of the activism, there are a few possible solutions: engaging in negotiations with the shareholders, making the suggested changes, or, in the case of a financial issue, paying them out. According to McKinsey & Co. Collaborative settlement between corporations and activists saw the best shareholder returns. Avoid conflict with the activists. Embrace constructive dialogue.
Shareholders activism has a great impact on the boardroom agenda and should therefore be part of the agenda even when there is ‘temporary calm’.
After understanding the concepts and challenges of the boardrooms, lets have a look at the
What are the key factors in good boardrooms:
Good company governance and the way boards should act are evolving concepts. Continuous improvement has replaced crisis management as the primary driver of governance improvements, reflecting societal shifts that firms want to address.
Codes and regulations should not, however, serve as a straitjacket that prevents boards from having vision and discourages businesses from becoming entrepreneurial. Boards are constantly evaluated based on the extent to which they utilise their substantial discretion.
Consequently, while the characteristics of an effective and successful boardroom cannot be defined with a single, all-encompassing term, we may identify them as follows:
Mutual support and respect among board members:
Many long-serving board members remember with regret the times when the chairperson, upper management, or outside consultants were unhelpfully slow to respond to their queries or the questions of a colleague. Therefore, developing a culture of mutual support and respect among board members is essential for building an effective board. To achieve this goal, boardrooms should practise non-confrontational contentiousness, which entails standing firm in their beliefs while respectfully rejecting management's suggestions (instead of attempting to "score points" with their fellow board members).
In order to question and potentially alter management's proposed actions, they must offer helpful and constructive guidance, without micromanaging or commands. Members of the board should be willing to stand up for their colleagues when called upon, for example, by restating a colleague's question so that it can be addressed more thoroughly. Not only does it damage a colleague's credibility, but it also weakens the board as a whole if not addressed.
Fluid Portfolio of Roles.
Directors risk becoming stereotypically one-dimensional (the merciless budget cutter, the damn-the-details big-picture guy, the split-the-differences peacemaker) if they do not challenge one another on the board. Board members need to be able to switch gears and do everything from diving headfirst into a company's details to playing devil's advocate or even managing the project themselves if the board is to be effective. Directors gain a broader perspective of the company and its options when they take on multiple roles.
The concept of individual accountability within board governance has become increasingly critical in modern corporate landscapes. When board members don't fully grasp the complexities of a company, they may not be equipped to make informed decisions or provide effective oversight. This can lead to strategic missteps, missed opportunities, and potentially detrimental outcomes for the organization.
Moreover, the erosion of personal accountability in large board gatherings is a cause for concern. In such settings, it becomes easier for individual responsibilities to become diluted or overlooked. When everyone is accountable, no one is accountable. This can create a culture where accountability is diffuse, making it challenging to pinpoint responsibility when issues arise.
To address these challenges, boards must prioritize continuous education and training for their members. By ensuring that each board member has a comprehensive understanding of the company's operations, challenges, and strategic goals, boards can enhance their effectiveness and promote a culture of individual accountability. Additionally, fostering open communication, encouraging candid discussions, and establishing clear roles and responsibilities can further strengthen board governance and uphold the principles of individual accountability.
Many people think that board members who own a lot of the company's stock will make better decisions for the company. They believe that having a personal stake in the company makes them more invested and careful. However, research from the Corporate Library suggests that just owning a lot of company stock doesn't always make a board effective.
For example, in 2001, when General Electric (GE) was considered one of the most admired companies, some of its board members owned relatively small amounts of the company's stock, less than $100,000 worth. This shows that while owning company stock can be a good thing, it's not the only factor that determines how well a board does its job. Other qualities and factors play a role in a board's effectiveness.
Pre-meeting director research and preparation:
There are times when the opinions of senior management and the board will be different, which is understandable, given the various demands and interests each are facing. There is also the on-going issue of directors and managers each simply trying to understand what the other is saying or meaning. It is generally understood that senior management will always present the board with only that information – reams of it, in fact, – which supports their preferred outcomes in order to influence their decision-making. Directors are required by law to conduct thorough investigations into all material facts and management recommendations in order to ascertain, with a reasonable degree of certainty, that such proposals are sound. Consequently, it is critical that directors do their own research and preparation for board meetings, going above and beyond what management provides.
Openness to change:
Having a pre-meeting opinion on an issue shows that you have done your research and are ready for the meeting, but being open to changing your mind shows that you are committed to improving the board's performance. This is why directors encourage their colleagues to be flexible in their mindset, considerate of alternative perspectives on the issues, and be willing to be swayed by rational arguments away from their initial favored point of view.
It is true that directors sometimes need to be more flexible than they usually would be. Directors who refuse to budge from their deeply held beliefs, even when confronted with compelling evidence to the contrary, send a disturbing message. If a board member continues to be unmovable at multiple meetings, the chair may want to consider asking them to reconsider their term on the board.
Determine the structure of the board
For a board to be effective, its structure must be carefully considered, which is no easy feat. Your unique situation dictates the optimal board size; hence, there is no universally applicable formula.
Just consider the responsibilities you've laid down. Overlapping pieces indicate that your board may be too large. You may have to bring on more board members to fill any remaining vacancies or to handle tasks that are beyond the directors' expertise.
The committees you currently have should also be evaluated. Is everyone doing their job well and contributing to the bigger picture?
Check for gaps and overlaps once more. You shouldn't have committees simply because you've always had them if they aren't helping the company achieve its goals.
Engage board members
By actively seeking out board member engagement, the chair or CEO can enhance the board's efficacy. Examples of this kind of activity include taking the time to celebrate successes, reaching out to coworkers outside of scheduled meetings to foster personal connections, and planning casual get-togethers to promote team building.
Participation in these events strengthens bonds among board members, which in turn motivates them to offer their all to their board responsibilities and ultimately boosts the board's efficiency.
Acceptance of board members diversity.
Management teams must recognise that diversity is not a threat, but rather a blessing. Board members with diverse skills and backgrounds provide more options and creative governance methods. So it is essential to have "difficult" conversations with them.
Management may repress individual views if they are not prepared to have these tough talks. On the other hand, you need to check that your organization's goals are actually being advanced by the "difference of opinion" and innovative governance suggestions.
In today's evolving corporate landscape, effective boardrooms are characterized by mutual respect among members, fluidity in roles, individual accountability, thoughtful equity involvement, rigorous pre-meeting preparations, openness to change, and a well-structured board composition. Engaging board members actively and embracing diversity further amplifies a board's effectiveness. Recognizing and valuing these principles not only fosters a culture of trust and collaboration but also ensures that boards remain adaptive, innovative, and aligned with the organization's goals and challenges.
Herein lies the key to productive boardrooms. The best boardrooms are constantly adapting to new circumstances, welcoming new ideas, tackling problems head-on, and keeping an open mind while following the latest trends in business.
Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.