The Fundamentals of an Effective Board
The Fundamentals of an Effective Board
The Fundamentals of an Effective Board
With 9 years of boardroom experience, I have been witness to "a quiet revolution," as boards become more active, take more responsibility and accept more accountability for the overall governance and sustained performance of the corporation.
Against this back drop, I felt that the time was right to define more formally "best practices" that companies might adopt to speed up the evolutionary changes we are seeing today. The result is the "The Fundamentals of an Effective Board" you see here. Some of these are radical in nature representing a look to the future of boardroom activity and not all of these would be practical for every company.
My intention is to encourage boards to take a fresh look at how they are operating and to continue to improve their effectiveness as the legal overseers of the corporation.
There are five key fundamentals that boards should focus on as to fulfill their responsibilities for overall governance and company performance.
1. Strategic direction and implementation.
Fundamental to the operation of any business is its strategy. Boards are rarely in a position to create strategy, but they can give input and advice on the direction that the CEO and senior management team create for a corporation.
Particularly, when board members come from different back grounds, countries, companies and types of organizations, they can share a wealth of information and serve as a reality check providing outsiders ' views on the strategy's effectiveness.
Since most strategies fail not because they are flawed in concept, but because they are poorly implemented, boards can play a critical role in evaluating how well the business strategy of the organization is being carried out.
In the case of a poorly executed strategy, boards are often in the best position to determine whether a strategy is failing because it is inappropriate or because it is not being implemented correctly and what to do about it. Ultimately, of course, the marketplace will make the final decision, but an alert board can anticipate problems.
2. Monitoring financial performance.
One of the board's top priorities should be to monitor the financial performance of the company making sure that net earnings, earnings per share and stock price and dividends are healthy, monitoring capital structure and the balance sheet, seeing that the right investments are made in the corporation's future growth and keeping an eye on the long-term value to shareholders.
3. CEO development evaluation and succession.
No one else in the organization or in the stakeholder community has the unique combination of the legal mandate, information about the company and its executives, knowledge of other companies and the expertise needed to select, evaluate and develop a CEO.
The board can help the CEO recognize needed areas of improvement and guide the CEO's continuing growth and development.
The board is also uniquely positioned to make sure that succession plans for the CEO and other senior executives are in place and are reviewed periodically to determine whether they are still viable and meet the goals of the organization.
4. Monitoring the legal and ethical performance of the corporation.
Boards not only have access to information about ethical and legal behavior of an organization they have the power to act if problems occur. They need to do a visible and proactive check on the way
senior management and the corporation do business, looking for early warning signals before they become major problems.
5. Crisis management.
In today's turbulent business times, corporations are frequently faced with unexpected crises and developments. These range from poor management performance to hostile takeovers to illness striking a key member of the senior executive team. Boards should devote a significant amount of time to monitoring the environment to try to anticipate potential threats and ward off crises before they occur.
Particularly in the case of crises involving senior management and major corporate financial transactions, boards are the only ones who are legally empowered to act and must be prepared to do so swiftly and effectively.
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