What is the Meaning of Board Governance?
Board governance is the framework that structures the board and how it operates. At its core, board governance includes the boards responsibilities and organisational well-being. If you think board governance is just a boring abstraction, here’s a concrete, real-life example of what happens when it doesn’t work.
Why UK Companies Need Board Governance Best Practice
In April 2016, the Slough-based logistics firm DX Group plunge from £86 to £20 in the space of a few days. The company was stuck in a sea of troubles: legal issues, a police investigation, a shortage of qualified drivers and difficulties at one of its sites. Its chief executive and finance director turned tail and fled suddenly in June.
Poor board governance was the main driver of the company’s losses, according to Liad Meidar, managing partner of the London-based Gatemore Capital Management, which held stock in the company at that time.
“We were struck by just how much its chairman had on his plate,” Meidar writes. “As well as DX, he held five other chairmanships and a further three board seats. Meanwhile, the DX board as a whole was rather underpopulated, comprising four members in total, none of whom, when you looked beneath the bonnet, were truly ‘independent.’ With a small ‘country club’ board, and a busy chairman, this did not look like board governance that could deliver success. “Bad governance can kill a company,” Meidar adds.
What is the size and scale of the challenge that companies face in building a balanced board?
Board Governance Goes Right to Performance
Board governance is the framework that structures the board and how it operates. Boards that understand the division of responsibilities among the members and the committees and how to work with management, perform better. There is less contention among board members, and far greater efficiency in developing strategy and in accounting for the board’s results.
This is not theory. A survey published in The McKinsey Quarterly showed that effective board governance not only creates long-term improvements in how the board operates, but also actually leads to increased stock prices and reduced risks.
And that explains why directors are seeking to add value with effective board governance.
Board members are seeking the ‘how,’ and revealing “gaps or shortcomings in board or management committee charters,” writes Deloitte in a recent note. “For example, boards appear to have strengthened their governance frameworks and policies and reasserted their governance roles, established board-level risk committees, clarified the responsibilities of other board committees, and appointed chief risk officers (CROs) or reinforced the independence of existing CROs. Concurrently, senior executive teams have committed resources to enhancing governance frameworks.”
There are a number of theoretical models for board governance, each one prioritising a specific set of objectives. However, practice has shown that a customised hybrid model fits the individual circumstances of different companies better than a prefabricated one that is imposed.
A survey by the highlights this need for diverse thinking. The consultancy took a survey of executives, asking only one question: “What is your definition of a governance model?” There was a massive variety among the answers with very little agreement, except that such a model was badly needed.
Creating coherent policies for board governance also enables boards to maintain a high level of accountability. The board’s scope of authority must be clearly defined for the members, and the board must decide upon a set of parameters to guide all board decisions. The board’s structure gives it the assuredness to make rapid decisions, and when unexpected events arise, the board members know how to take action in the organisation’s best interests.
Board Governance Policies
The first activity for which such a policy is needed is board composition – there can be no effective board governance if the board, like that of DX Group in 2016, cannot do its job. Boards should take a fresh look at their recruitment procedures, and set up a matrix that fixes the objectives. Then, the Nominations Committee can do its job. Clearly, recruiting a diverse board with the necessary skills and enough independent directors is a critical part of that responsibility. The board and the committee should rely on the best modern governance tools to ensure optimum results.
An onboarding policy should complement the recruitment policy to build a healthy boardroom dynamic in which discussion and debate thrive. After onboarding, a policy for board development should guide board members, irrespective of their backgrounds and skills, into learning more about the company and the market it operates in.
Another policy should address relations with management, above all with the CEO. Areas of responsibility should be delineated, so that neither the board nor management have any questions about their roles.
To ensure that the board is performing at its best, a policy regarding evaluations of both directors and managers should be set down. There is ample evidence that board evaluations are a powerful means to determine where boards need improvement and guidance on what steps to take.
Diligent: Board governance software
Diligent, the pioneer in modern governance, has created a suite of integrated SaaS applications that provide the means to achieve all these objectives. Our board governance software helps boards prepare the framework they need for effective performance, as well as the board governance tools to implement that framework.
First, Diligent Governance Cloud provides a vast library of insights on board governance and how to implement it. Next, the secure and reliable communications that our board portal enables drives discussion. And all that discussion, along with other documents and memoranda, is stored in encrypted form on the portal, so that directors can access it at any time and update it in real time.
Then our board management software offers tools to implement policies for every aspect of board governance. Diligent’s board succession planning helps with recruitment and nominations that scans thousands of candidates so that you can find the right ones for your board. The application supports creating a matrix for board composition and helps determine the best possible board members for the organisation’s mission. The governance library of materials will help board members make informed decisions about how to work with management or on formulating strategy. And a board evaluation tool makes this process easier and more effective.
All these functionalities work seamlessly with Diligent’s Governance Cloud, which provides a secure, cloud-based system that supports every aspect of a board’s work. Diligent makes it just as easy to access policies so board directors can review them according to legal or regulatory mandates, business objectives, risk and internal controls. Diligent’s Governance Cloud enables the creation of board governance that leads to improved performance.