Why Corporate Governance and Ethics Matter (Part III): Building an Effective Board

Building and creating an effective board of directors that deliver results and governance excellence in today’s corporate environment is not unlike building a UEFA Champions League winning team. One must consider the particular needs of the company, the different personalities involved, the various legal requirements and the dynamics within the boardroom.

The best board on paper is no guarantee that the board will perform and be effective, any more than buying and bringing in the most expensive players guarantee a UEFA Champions League trophy as PSG fans know by now.

Building an effective board is a difficult task for any company. You need a variety of skill sets and this vary from one board to the next. Nonetheless, there a few common elements. First, as pointed out in part 2 of this series, the company or if it is a public entity, the government must go beyond the traditional search parameters for directors. The experience and technical skills they bring on board must be diverse and the industry knowledge deep.

Having constituted a dynamic and solid board in terms of members' experience and background, the next task is for the directors to create a structure which allows them to focus on the issues of significance. This is increasingly becoming difficult in the era when boards often find much of their time taken up by regulatory issues or details which were traditionally in the territory of management. However, the board must remember that its primary functions are strategic direction (Leadership) and oversight (Compliance).

For meetings to be productive, directors must be sent materials to be discussed at board meetings sufficiently far in advance to allow their proper review prior to the meeting. This should not be difficult in today’s electronic age. The board should have its membership and procedures regularly reviewed to ensure that directors are doing the job they are being paid to do well, sometimes, directors stayed on beyond their effectiveness. When this happens, it leads to bad governance and creates unnecessary risks for the company.

For boards to be effective, it is important to remember the significance of dissent in the boardroom. Historically, the dissenter in the boardroom has not always been a welcome presence. However, in today’s environment, there is a special need for a dissenter to make sure that the board has considered the various points of view on the significant issues. As a general policy, directors are not liable for making wrong decisions, but they can be liable for not giving enough thought or consideration to all aspects of a matter. In Ghana, the law of willful causing financial loss to the state can be applied (Boards of public entities) if there is no serious and robust debate looking at all angles of a decision. A dissenter within the boardroom helps to ensure that all angles are considered, obviously within the context of confidentiality and cordiality necessary for a well-functioning board.

Taking the oversight role (monitoring and compliance) and Strategic planning and leadership role (performance) of the board into consideration, we can further enhance its effectiveness by starting with a clear board charter. On the monitoring side, ensure that the following are observed;

1. Reporting: ensure timely and accurate reporting to shareholders and other stakeholders

2. Supervision: provide timely supervision of executive or management team in the interest of all stakeholders

3. Compliance: ensure compliance on all legal and regulatory issues

4. Minority shareholders: ensure fair treatment and protection of

minority shareholding interests

5. Risk: evaluate and agree on all major business and corporate risks

6. Controls: ensure adequate controls are in place throughout the business (in conjunction with internal and external audit teams)

7. Share capital and dividends: discuss and agree on matters relating to capital structure and dividend policy.

On the performance side, where board strategic direction and leadership role is needed, the following must be adhered to;

1. Strategy: challenge and validate corporate strategy generated by the executive or management team

2. Appointments: endorse all director and senior executive or management team appointments.

3. Performance evaluation: evaluate performance of Management team members, overall board and committees on regular basis.

4. Major transactions: challenge and endorse, particularly large capital expenditures (over an agreed limit) and major acquisitions and disposals.

5. Monitoring: review annual plans and budgets and conduct quarterly reviews against plan as well as previous year.

6. Counselling: provide advice and guidance to management team as needed

An effective board determined to ensure good governance after putting in place a board charter will work with management to put in place code of business conduct and rules for conflict of interest. In line with raising the corporate culture with a focus on enjoying the benefits of good corporate culture, management must ensure there is clear organization charts and job descriptions which establish clear responsibilities and reporting lines. It is very important to develop senior management and the boards own technical and leadership competency, particularly in areas of strategic planning and leadership through regular trainings and retraining.

It is imperative for boards to be dynamic and have the correct blend of diversity of skills to perform its role effectively. To ensure effective governance, boards must strive for more independence and not rely on spoon fed information but must have access to real time information.

It must focus on key strategic issues and always remember, Nose in – Hands out. One thing to bear in mind is that, there are two elements to corporate Governance. The ‘hard’ elements consisting of: regulations, rules, laws, frameworks, policies, structures and processes, and the ‘soft’ elements: relationships, trust, culture, behavior, practices etc.

There is no one solution to building an effective board. In today’s corporate environment, this is a team effort which requires the participation of management, counsel and other advisors as well as directors and in the case of public boards, the government. The board must be carefully chosen with the needs of the business in mind and must put in the necessary honest labour.

REMEMBER: No Corporation or company is too big or too small to fail.