Board governance: The ultimate guide for new directors
When organizations make decisions like board structure, composition, independence and processes, what they’re talking about is board governance. Just as corporate governance guides the entire business, board governance creates guardrails around board conduct to ensure it’s effective and ethical and fulfills their fiduciary duties.
Getting board governance right isn’t one-size-fits-all, and it’s not one-and-done, either. Instead, governance should evolve with the board, refining and perfecting how the board pursues the organization’s strategic objectives. To help you create board governance that works, this article will explain:
- What board governance is and why it’s important
- The role of the board in governance
- Common board governance structures
- Elements of board governance
- Integrating board governance software
What is board governance?
Board governance definition: The policies, systems and structures that guide how boards operate.
Board governance defines what boards are responsible for and structures how boards address those responsibilities. Because the board then sets the organizational priorities, board governance becomes the foundation of the entire corporation’s governance structure.
The role of the board in governance
Though board governance applies directly to the board, it’s critical to the entire organization. How the board is governed trickles down to the governance structures that dictate how the enterprise will achieve its strategic objectives, comply with relevant regulations and more.
For boards, governance includes:
- Selecting a governance model
- Defining a board and leadership structure
- Establishing elements like independence, composition, compensation and more
- Creating corporate governance policies and processes
The above then informs corporate governance practices like:
- Corporate strategy
- Compliance
- Risk management
- Reporting
Why is board governance important?
Board governance is important because it’s the foundation for an organization’s success. Everything from a corporation’s strategic direction to its financial management boils down to how the board governs itself.
Good governance paves the way for:
- More strategic decision-making: The board sets the corporation’s direction and oversees its progress. With good board governance, structures are in place to ensure both decision-making and execution are efficient.
- Better accountability: Governance tells boards what expectations they’re accountable to and which responsibilities they must meet. Without that, it’s easy for boards to fall into inefficient patterns or make mistakes that expose the organization to liability.
- Comprehensive financial management: Boards must act in the best interest of a company’s finances. Governance informs how the board oversees budgets, reporting and financial performance.
- Improved understanding of risk: Boards spearhead the corporation’s approach to risk, whether that is shareholder activism or cybersecurity. Governance informs how proactively the board develops risk management strategies.
Common governance structures for boards
As important as board governance is, there is no one right structure. There are many different frameworks, each of which lends different strengths to the board’s responsibilities.
An organization may combine elements from any of the following to create a governance model that meets the organization’s needs. These include:
- Inside board: Company executives serve as directors on inside boards, also called working boards. This includes senior leadership and managers, and the CEO is often the chairperson. While this can limit external points of view, it empowers boards to move more quickly with a deep understanding of day-to-day operations. Some corporations benefit from this agility.
- Outside board: Also called governing boards,these are independent boards with most directors external to the organization. This encourages diverse perspectives and reduces bias, which can lead to more effective decisions. In this governance structure, the chairperson could either be an independent director or a lead director.
- Advisory board: These boards include experts who offer advice to inform company decisions. The key here is that advisory boards don’t actually make decisions — they instead provide the information decision-makers need to act strategically.
Elements of board governance
Even after defining board structure, there are several different elements boards must consider to effectively guide their activities. For example, how diverse will the board be? How will the board support strategic planning?
These are the elements essential to board governance:
- Board committees: Most boards will utilize committees. Each committee can focus on a single issue, like audit or governance. This expands the board’s capacity because committees can operate in parallel with the board, rather than every board director having to address every issue the corporation faces.
- Board diversity: How diverse will the board be, and what benchmarks does the board need to hit? Diverse backgrounds and perspectives enhance board performance, so taking this seriously can meaningfully improve board governance.
- Board composition: Board effectiveness depends on highly qualified, skilled and diverse directors. Governance will define which industries and expertise should be represented among the directors.
- Board independence: When directors are independent, they’re less likely to fall victim to conflicts of interest. Part of board governance is determining whether directors will also be employees — as in a working board — or if they’ll be external to the company.
- Board evaluation: The board may underperform, or individual directors may fail to meet expectations. A regular evaluation can identify weaknesses and opportunities for improvement to keep all directors performing their best.
The challenges of implementing board governance
Implementing board governance isn’t always easy. While it’s helpful to the board in the long run, it can feel like a nuisance in the short term by challenging bad habits or inefficiencies the board has adopted. As you execute your board governance structure, expect to hit roadblocks like:
- Resistance to change: Corporate boards have existed for generations. As such, there are many inefficient practices entrenched in board norms, like interlocking directorates. Your new board governance model may challenge those practices, and you could face resistance. This can make it difficult to truly embed new best practices.
- Lack of clarity on roles and responsibilities: As governance evolves, directors may be unsure of their roles or responsibilities. Be clear with each director to reduce confusion and maintain accountability.
- Balancing the board: Diversity is critical to boards, but it’s also something many organizations have been slow to adopt. Getting the right balance of industries, backgrounds and skills remains a challenge.
- Limited stakeholder engagement: Though board governance applies directly to the board, it does require engagement with employees, investors and the community. Failing to get that input can lead to decisions that don’t consider the broader impacts on the organization.
- Short-term thinking: Governance is a long-term effort, but the change can lead to short-term thinking that harms the board’s effectiveness. Boards should equally weigh short-term performance and long-term impacts like sustainability and risk.
Key practices for effective board governance
On its own, board governance gives corporations a critical structure to aid their path forward. Best practices put those governance principles into action, setting the board up to steer the corporation toward success.
Some important best practices include:
- Aligning strategy with goals
- Creating accountability
- Prioritizing ethics and integrity
- Recruiting a diverse board
Learn more about corporate governance best practices here.
Embrace modern governance with board governance software
A map and compass are effective, tried, and true navigation tools. However, the map on your phone is faster, simpler and takes the guesswork out of getting from point A to point B. For board governance, that tool is software.
Though board governance comes down to the directors who serve, it’s also a complex web of processes, policies and procedures that can be easy to lose track of. Giving each element of board governance its due is also a delicate balancing act.
Board governance software keeps governance on track, from communication to collaboration to centralized insights about the organization. Learn more about Diligent Boards and how it can improve your board governance.
