The fundamentals of how boards work
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:
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.
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:
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 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 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.
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.