The fundamentals of how boards work

By William J. Farrell

During my career, be it searching for board directors or CEOs with a board as the primary client, or discussing career development with executives keen to serve on a board, or conducting training sessions for boards, I have learned there is a wide range in the depth of understanding of what boards do and how boards work. Imagine an AI startup led by brilliant people with great ideas but limited corporate experience. They might understand that a board is needed to help raise funds and to put a leadership structure in place. But with little, if any, practical knowledge, it can be hard to know where to start. Or imagine a family-owned business that that has moved to the 3rd generation of leaders. The typical top-down, patriarchal leadership style is not working. Passion for the business as well as the intimate know-how of how the company is run has faded. Upgrading the leadership and governance model may be required to allow the company to not only survive, but to thrive. But without any practical governance training or experience, making this shift is very difficult. Or imagine a successful executive looking to expand her career horizons or perhaps contribute experience to another company or organization and is considering a seat on a board. But again, with little practical exposure to board operations, this executive may be not sure of what she or he is getting into. This article aims to cover these basics – The role of the board, board members, and the key leadership positions.

In my introductory piece I noted the key board functions. The board exists to:

  1. Define the mission and purpose of the company
  2. Select the chief executive
  3. Ensure effective planning
  4. Monitor the relative strength of the company’s products and services
  5. Ensure the financial health of the company
  6. Build a strong, competent board
  7. Ensure the legal and ethical integrity of the company
  8. Enhance the public standing of the company (or ensure that the company’s public standing does not decline)

So, the board of directors is the guardian of the organization or the company. When it meets, its purpose is to protect the interests and viability of the company, minimize risk, and guide it towards a successful future.

Since a board of directors is a group of individuals that really only exists when it meets, the action of a board is determined by the collective action of the board members. With this in mind, for a board to fulfill its task of being the guardian of the company, the directors have some basic responsibilities. Much of this is common sense.

  1. Directors need to participate in the meetings. This goes beyond attending the meetings, which is of course, essential. Good, effective directors attend as many meetings as possible and serve, when available, on standing or ad hoc committees. Effective directors are prepared for the meetings. They read the agenda and supporting materials prior to board meetings and are prepared to engage on the issues at hand.
  2. Directors should be aware of what the board is doing, understand the company or organization, including understanding the mission, products/services, and policies of the company. Being up to date on trends in the industry is also important.  In order to assist the board in carrying out its fiduciary responsibilities, effective directors review the organization’s financial statements.
  3. Directors advocate for the company or the organization. This takes different forms depending upon the nature of the company. It means one thing when advocating for a business association or human rights NGO or a shipping/transportation company or AI startup. But most directors inform others of the organization and promote its mission and keep an eye out for future board members.
  4. It is also important for directors to maintain a proper distance from management. Bear in mind: The board does not manage the company. The board advises and the CEO manages. Directors are not selected to run marketing programs or establish IT protocol as these are the tasks of management. The theme of maintaining proper distance also includes strict avoidance of conflict-of-interest issues and the importance of directors not getting too close to corporate management and certainly not asking special favors of the management team. When we look at some of the important functions of the board leadership and its relationship with the CEO, the reasons for this will become more apparent.

To meet these responsibilities, good and effective board directors display a common set of behaviors. When seeking candidates for independent director roles, I seek candidates that display these behaviors. My top 3 list includes the following:

  1. Ability to listen, analyze and think clearly and creatively. These executives are able to draw on their experience to help think through problems, advise management, and help mitigate risk.
  2. Board directors need to be able to work with each other. The ability to listen, ask, assess, clarify and respond clearly is a must. Many boards strive to achieve a unanimous decision or at least a very strong consensus on most matters. This is only achieved through engaged, thoughtful interaction and discourse that is marked by openness, a willingness and ability to tolerate and perhaps accept opposing views.
  3. Effective directors display a combination of confidence and humility. Since this is in large part an advisory role good quality advice is expected, but not all advice is going to be accepted. Directors have to keep in mind that they are not running the company.​

​Effective boards require effective leadership. Part of effective leadership is having well-defined leadership roles. The most common positions are the chairperson, Vice chairperson, Treasurer and Secretary. This by no means exhaustive nor does in touch upon committee roles. But for the purposes of this overview, I will focus on these four roles.

The Chair

The chair leads the board. The chairperson oversees and runs the board meetings. The chairperson leads the executive committee if there is one. The chairperson sets the agenda. This board director is the primary interface with the chief executive. Most often the chair communicates the agreed-upon performance objectives of the CEO and delivers the performance review. When the replacement of the CEO is merited, the chairperson takes a lead role in this selection process. Depending upon the size and complexity of the company or organization, the chairperson is one of the few authorized spokespersons for the company or organization. Of course, the chairperson sets the agenda, leads the board discussions, and determines when votes are called. This all goes a long way towards setting the demeanor and the overall effectiveness of the board.

The Vice Chair

The vice chair also serves on the executive committee if there is one. He or she is likely to be called on to participate in if not lead ad hoc committees or special assignments. Most importantly, the vice chair must be prepared to step in for the chair in that person’s absence. This includes chairing board meetings and interface with the CEO. A close and supportive working relationship between the chair and vice chair is a great advantage to having an effective board.

The Treasurer

The role of the treasurer is a more specialized function and is best served by someone with a strong financial management background. The Treasurer has regular contact with the CEO and CFO. This is in large part to ensure that the required financial reports are provided to the board on a timely basis. She or he can flag questions and seek to clarify points with the CEO or CFO prior to the board meetings. If there is a financial committee, the Treasurer serves as the committee chair. The Treasurer takes the lead in identifying potential financial risks. If there is an Audit Committee the Treasurer sits on this committee, perhaps chairs it.

Board Secretary

The board secretary also serves on the executive committee if there is one. The board secretary is the keeper of the board records. He or she is responsible for ensuring the security and accuracy of the board’s records. The secretary serves on the executive committee if one exists. The board secretary takes board meeting minutes or reviews the minutes if someone else is assigned to this task.

So that’s the basic overview purpose of the board, responsibilities of the directors and expected behaviors and the makeup of the leadership team. Coming up, I’ll take a look at the very important relationship between the board chair and the CEO. Other topics include the conduct of board meetings and the avoidance of conflict of interest.

More Blog Posts by William J. Farrell

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