This post describes Corporate Boards –
- What do they do?
- How do I join one? and
- What are my responsibilities as a Director?
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization, which can include a non-profit organization or a government agency or corporation. In a stock corporation, the board is elected by the shareholders and is the highest authority in the management of the corporation. The board of directors appoints the Chief Executive Officer (CEO) of the corporation and sets out the overall direction for the company.
What does the Board do?
Professor Herman Daems is teaching today on the IESE Advanced Management Program. His course is “The role of the Board of Directors in Evaluating and Selecting the Strategy”. Dr Herman Daems is professor at University of Leuven and visiting professor at Harvard Business School, and currently he is the Chairman of the Board at BNP Paribas Fortis SA/NV. He has been part of many public, private and charitable boards over his career.
I wrote a few notes as I sat at the back of the classroom. What does the board actually do?
- Develop an Ambition for the Company – an ambition is not a strategy. An ambition might be to “Climb Everest”. A strategy would be the specific path to gather the necessary resources and execute the climb of the mountain.
- Find the Leadership to develop a Strategy to realise the ambition – management must develop strategy.
- Approve a strategy – Important to be clear that a board does not make the strategy, only approve that the leadership’s strategy supports the Company Ambition.
- Provide Resources (Financial and Human) – importantly the board establishes the dividend policy
- Balance the Power of Differing Interests (shareholders, management, employees, government, public) – board members must have general business experience. Specialist members do not make good board members. Board must make collective general business decisions, not just good specific decisions. Individual members must have credibility and be willing to raise their hand and make an impact.
- Monitor and Control Strategy – the board plays a much greater role on controlling strategy than on deciding the strategy. Management will rarely say that their strategy is not working. This is where the board is really necessary.
- Control the use of Resources, control the risks involved – see next item…
- Assume responsibility for the actions and risks of the company – The Board of Directors have “collective responsibility” for the actions and risks of the company. Members are not personally responsible. Some legal attempts to hold a finance expert or an audit committee member personally responsible have always been pushed back by courts on the basis that board is collective responsibility. In banking crisis, some executives have been held personally responsible, but in no cases have board members been found personally responsible.
How do you get onto a Board?
“People often ask me ‘I’d like to make a change in my career and play a role as a board member.’ I first ask how much money they are making now. I don’t want your role as a board director to be the significant source of income for your life. If you are dependent on this income, you are not going to be a good director.” Herman Daems
In most countries, board members can be fired at will. You do not want to depend on this income.
There are 5 specific reasons why you might be appointed to the board of a company:
- You represent a shareholder or stakeholder of the company – you represent a reference shareholder, a private equity company, a venture capitalist, a strategic owner
- You bring specific knowhow or capabilities to the board – technological, financial, market knowledge, legal
- You bring a specific experience – you are a former CEO or a director in other companies
- You have a reputation for reliability, independence; you bring reputation to the company – …also you are always contactable (crisis happens on Sundays, board is like fire service… emergencies happen)
- You have access to a relevant network for the company
What is your role on the Board?
- It is important to find an equilibrium between the interest you represent and the company interests. A board member is responsible to all stakeholders. Take into account the specific traditions, structures, culture of this board.
- Come well prepared
- Ask questions, be critical… but solution oriented. Directors who are always critical start to lose engagement with management.
- Do not get stuck into details (do not become a shadow executive) – do not try to prove how smart, wise you are
- Be aware of your legal and societal responsibilities
- Speak your mind
- Be courageous, remain friendly