BOARDROOM BEST PRACTICES

What is Board Governance?

At its heart, board governance is doing the right thing in the right way to serve the best interests of the organisation and its stakeholders. Although this might sound simple, it is anything but straightforward when applied to complex organisations operating in rapidly changing financial, legal, ethical and regulatory environments. That’s why successful organisations establish board governance frameworks to provide structure to the board’s mission and operations. This allows the board to formalise decision-making procedures, define roles and responsibilities, and monitor effectiveness.

What Are the Basics of Board Governance?

Governance is the system by which a business or not-for-profit organisation is directed and controlled in the pursuit of its aims. As such, it is the board of directors that bears the burden of governance by setting those aims, agreeing on strategy and providing the leadership and management oversight that enable the organisation’s goals to be realised.

Effective board governance ensures that directors are well-informed and accountable, have sufficient resources at their disposal to fulfil their duties, are not overburdened and are clear about the way in which board business should be conducted.

A well-governed board is high performing and benefits the organisation it serves. It brings clarity and transparency to decision-making and drives success. A poorly governed board, on the other hand, introduces risk through ineffective oversight and lack of understanding of the key issues affecting the organisation. This can create tension between itself and the business.

Different Board Governance Frameworks

A governance framework outlines the board’s approach to the distribution of powers and authorities within the organisation, so there is no one-size-fits-all model. Organisations place different demands on their board depending on factors such as their size, maturity, the sector they belong to (private, public or non-profit), the regulatory landscape they operate in and the profile and experience of directors. In not-for-profit organisations, directors may be enthusiastic volunteers, whereas for large corporates, highly experienced directors are well-compensated for their time.

These issues all have a bearing on the relationship between the board and the organisation and affect the board’s approach to fulfilling its duties. They should be taken into account, so the organisation chooses a board governance model that is appropriate to its situation.

The type of board governance framework or model will most likely end up unique to the organisation that implements it, but it is typically based on one of several established frameworks and then adapted as required.

In the academic study of board governance, there are several main models, each taking a different approach to the board’s mission and the principles on which it should operate:

  • Traditional model: this model is based on the principle that the board itself is a ‘legal person’, with directors operating collectively and speaking with a single voice as a board. The board provides governance and oversight through committees that mirror business functions but delegates management functions to the executive director.This model is widely used, due to its longevity, but it does not always deliver the flexibility and focus on results and accountability needed in today’s organisations.
  • The Carver (Policy) model: This model stipulates that boards focus on defining the ultimate targets, or “ends” of the organisation, and then devising the policies that management must adhere to when carrying out activities designed to achieve those targets.This can often amount to defining the limitations or parameters within which the CEO, who is recruited by the board, must work. By being clear about what is expressly not permitted, the board grants relative freedom to the CEO about how they go about achieving the company’s “ends” within those parameters. The board sits at arm’s length from the organisation and governance is clearly separated from management responsibilities.The model is based on ten key integrated principles, which its proponents stipulate must be followed absolutely in order to achieve the best results.
  • The Cortex (outcomes) model: iIn this model, the board is expected to focus closely on defining the outcomes that indicate success for the organisation. This requires that the board has a robust understanding of the value the organisation provides to the community on multiple fronts—from economic benefits, to corporate social responsibility and sustainability.Once the desirable outcomes have been identified, the board creates a framework that devolves responsibility for achieving them to different agencies such as board committees, the CEO or other stakeholders. Its ongoing responsibility is then to ensure that those accountable for achieving the outcomes have the right resources to do so, and that a structure for reporting on progress is implemented and adhered to so monitoring can be effective.
  • The Competency model: This model is founded on developing the skills and effectiveness of the board. By selecting directors for competency in key areas and working to enhance the knowledge and abilities of the board as a body, it delivers value for the organisation. The model prioritises communication, positive interactions within the board and between it and the organisation.A competency model can codify aspects such as expected levels of engagement by directors and prescribe the practices and activities the board must undertake
  • The Consensus model: This is a democratically focused model that gives equal weight to all directors in issues of liability, responsibility and accountability. It primarily addresses how the board makes decisions and how disagreements can be resolved.This model allows for considerable debate and the inclusion of diverse perspectives. All voices are heard before decisions are taken.The issue of what happens when consensus cannot be reached can be a challenge for this style of board governance. It is best suited to organisations without individual major shareholders to answer to, such as not-for-profit and family-owned businesses.

These are just five of the board governance models from which organisations might choose an approach, but they are not definitive. Governance experts have argued that changing times create demand for different models of board governance that are more flexible and transformative, and able to make decisions at the fast pace today’s environment demands.

As we move through the phases of the global pandemic, we are already seeing boards adapting practices and meeting schedules to better support their organisations through a uniquely difficult period. Even before this, the demands of digital transformation were putting pressure on boards to up their game—especially in sectors where digital disruption was threatening destruction for businesses that were slow to respond.

In his LinkedIn article, strategy and transformation executive Dr Dean Blomson asked, “can a board really wait 6-8 weeks between meetings to review key executive decisions, with data of similar vintage?” This underlines the pace at which organisations must operate today, and also points towards the role that data plays in modern governance.

Information is Foundational to Board Governance

Whichever model is chosen, the foundation of board governance lies in effective data sharing and knowledge transfer between the business and the board. Reporting structures should be in place to ensure that the right information gets to the right people in a timely way so that sound strategic decisions can be made. In today’s information-rich organisations, getting the right balance between quality and quantity of information and sharing it in a secure, accessible way is a significant challenge faced by many boards.

Modern governance tools seek to facilitate the uninterrupted flow of accurate, up-to-date information to boards. Platforms such as Diligent Governance Cloud ensure that boards have data at their disposal whenever it is needed, and directors can collaborate securely on confidential issues.

The right board governance model, supported by powerful modern governance tools, puts organisations in a good position to do the right thing in the right way and successfully achieve their aims. What today’s boards must consider is whether one of the accepted board governance models can deliver the right balance for their business, or whether they need to explore more critically different approaches that could deliver competitive advantage for their organisation.

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