In December 2001, an innovative energy company Enron with $63.4 billion in assets went bankrupt. Some of the company’s executives went to prison for fraud, and shareholders filed a $40 billion lawsuit against the company. It was the biggest bankruptcy in the history of the United States. Experts believe that one of the main reasons for such a historical failure was poor board governance.
Read this article to know what board governance is and how important it is for a company’s growth and prosperity.
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What is board governance?
Board governance refers to the framework that defines the structure of the board and the way it operates.
Simply put, board governance is the collective term that comprises all the approaches, systems, and processes that govern the activity of the board of directors and the entire organization they represent.
For a better insight into the board governance definition, Deloitte suggested a governance framework that perfectly illustrates the scope of board governance objectives and its relationship with corporate governance and corporate boards.
On the chart below, the green segments indicate the areas the board is expected to oversee, and the blue segments represent the areas that require monitoring from the board of directors.
Board governance and other types of board structure
Board governance approaches are different in for-profit and nonprofit organizations, and it also greatly depends on the organization’s size and type.
However, there are five most common types of board of directors structure and governance model:
- Governing board. The governing board responsibilities are to provide direction to the organizational management and to act in the shareholders’ best interests.
- Working board. The board members of this type of board are also employees of the organization. Simply put, they not only provide directions for the organization’s strategy and policies, but are also responsible for their actual implementation.
- Managing board. This governance model implies that board members are responsible for the decision-making and also manage the organization’s day-to-day operations.
- Cortex board. This governance model focuses on the value the company brings to the community. The board members’ responsibilities under such a model include defining standards and expectations for boardroom performance to meet the company’s objectives.
- Policy board. Under the policy board model, board directors are second to the Chief Executive Officer in terms of influence inside the company. Board members are to create general organizational policies for all staff to follow, and the CEO and senior executives are then responsible for implementing those policies.
- Advisory board. As the name suggests, an advisory board provides advice to the company’s management and governing board of directors. Members of the advisory board have the skills, knowledge, and experience to provide professional guidance to the organization’s leadership.
What is the difference between a governance board and an advisory board?
A governance board is a board of directors who are legally responsible for the governance, management, direction, and control of the organization. Governance board members have fiduciary duties to the board on behalf of major shareholders.
On the other hand, advisory boards solely serve the role of an advisory body. They provide the management team with non-binding advice, critical thinking, and strategic insights on the company’s development and growth.
Simply put, governance boards have a decision-making model where decisions are binding to directors and overall organizations. While advisory boards are never authorized to act on behalf of the organization nor make board decisions.
The role of board governance
The roles differ from company to company, depending on the organization’s type and the board’s structure. The responsibility will be different in private and public companies, as well as in for-profit and nonprofit organizations.
However, the common board governance role implies the following duties.
Ensuring the organization’s success
This is the key role, which consists of many aspects. The set of actions board members perform should lead an organization to growth and prosperity.
Defining long-term strategic vision and mission
The board of governance is responsible for establishing the overall purpose of the organization — its mission. Board members develop strategies and policies that will help the company reach its objectives with the pre-defined purpose in mind, while the implementation of the strategic planning lies on the organization’s management.
Shaping organizational leadership
The board searches for and hires C-level executives, as well as fires them when necessary. Evidently, the shaping of the core leadership of the organization is driven by the overall company’s mission and strategies, which executives are then to reach.
Assisting with decision-making and risk management
The board helps the organization with fast and efficient decision-making, which leads to the company’s growth. It also helps to quickly resolve conflicts, improve crisis management, and find answers to the appearing questions, which prevents stagnation.
Oftentimes, a board helps to improve organizational performance. The expertise, knowledge, and skills board members share can provide new insights to the company’s executives or help them seek solutions outside their perspective.
Board governance VS management: Principal differences
The terms for governance and management are often used interchangeably, but this is actually a mistake.
A board of governance implies that the board of directors comes together to make decisions about the company’s direction. In other words, they provide guidelines and establish strategies for the company’s direction.
On the other hand, management is responsible for making actual decisions at different levels to bring suggested strategies to life.
Top 4 board governance challenges
There are a few challenges a board of governance can face.
1. Increased scrutiny
It’s getting harder for boards of directors to meet the demands of activist investors since they impose various governance-related requirements that involve the board’s composition, structure, remuneration, accountability, voting rights, or leadership changes.
Governance board of directors has to face the challenges or face the financial and reputational consequences.
2. Conflicts of interest
Some companies require board directors to sign the conflict of interest policy when joining the board. However, it’s not always a solution if, for instance, shareholders’ interest is on short-term benefits, while the company’s executives focus on long-term results. As a result, board members might feel pressure either from the CEO’s or shareholders’ side.
3. Culture inside the company
In some companies, senior executives are never subject to question or challenge. This naturally creates an atmosphere where effective performance is impossible, since board directors can’t influence the leadership.
4. Different stakeholders’ needs
The overall disagreement between stakeholders can cause huge obstacles to governance. For instance, when one particular shareholder prefers a conservative direction for the company’s growth, and the other opts for a riskier but potentially more beneficial approach, it’s impossible for board members to establish a single effective growth strategy and mission.
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Board governance best practices
A well-run board can ensure efficient governance and lead the organization to a sustainable future. Undoubtedly, the approaches to successful governance change over time, but there are several timeless practices that improve board effectiveness:
- Advocate diversity. To perform well, it’s important for the board to be diverse in terms of gender, ethnicity, background, age, and skill set. Diverse governance ensures the company gets insights from all possible perspectives, which is highly beneficial for the organization’s growth. Remarkably, according to PwC’s 2022 Annual Corporate Directors Survey, 88% of respondents say gender diversity is essential to create a diversity of thought on the board.
- Conduct annual board evaluations. According to the above-mentioned PwC’s Survey, 48% of board directors think one or more board directors should be replaced. This speaks about the importance of regular board evaluations to ensure board effectiveness is on a high level.
- Hold board meetings effectively. It’s important to clearly state the meetings’ agenda and focus on what should be accomplished in the defined period. This saves board members’ time and effort, and helps them focus on the company’s objectives and prioritize critical topics for discussion.
- Avoid micromanaging. Board members should understand that day-to-day organizational tasks are not their business. Instead, they need to focus on the long-term goals and leave the responsibility for implementation to the company’s executives.
- Provide quality training when onboarding. For board members to have collective responsibility and accountability and to better perform their duties, it’s essential to clearly define board members’ duties and governance expectations. This allows boards of directors to focus on achieving organizational purposes.
- Engage shareholders. The results of the PwC’s Survey also display the growth of the shareholders’ engagement — 60% of board directors say that a member of their board had a direct engagement with a shareholder during the last 12 months. They also point out that such direct connections positively impact certain board discussions.
- Throw informal meetings sometimes. The informal setting can help to get to know board members better, which, in turn, can positively impact the effectiveness of the board of directors governance.
Any tips for nonprofits?
The governance of a for-profit and nonprofit organization differs on various levels. The table below covers their main differences.
|Nonprofit organizations||For-profit organizations|
|Purpose||Serve the public interests||Generate money for owners|
|Indicators of success||Meeting the public needs||Making a profit|
|Board members compensation||No||Yes|
|Profit||Spent to fulfill the mission||Distributed|
|Who enforce rights||State Attorney General||Stockholders|
The main tips for effective governance in nonprofit organizations are basically the same as for the for-profit companies:
- Attract the right board through recruitment
- Conduct effective board training during onboarding
- Ensure effective planning
- Conduct meetings effectively
- Asses boards regularly
- Perform self-assessment
How can board governance software help?
The governance process can be significantly streamlined when using board management software. It offers a variety of tools that help in planning, monitoring, and performing, it also helps to conduct a paperless board meeting.
On Board-room.org, we review the most popular providers that are often used by boards worldwide. We thoroughly test the functionality of every vendor and provide honest feedback on its main advantages and disadvantages. Our reviews can help you choose the best board portal for your company’s needs.
|Tip: Our experts recommend iDeals Board as the most “universal” board management software that’ll fit the needs of all-sized companies.|
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What does a board governance committee do?
A board governance committee oversees the board of directors and board processes and takes part in shaping the leadership of the company and specifying their compensation ranges.
What is nonprofit board governance?
Nonprofit governance focuses on ensuring the company is moving towards its mission and serves the public.