As the regulatory framework continues to evolve, the role of a company’s board of directors and its corporate governance policies and practices will continue to be under intense scrutiny.
“The board of a corporation has overall responsibility for the activities of the corporation,” says Aneezal H. Mohamed, an attorney with Kegler, Brown, Hill & Ritter. “If the board of directors is conveying conflicting information, that cannot be good for the organization. So the message coming out of board deliberations has to be consistent as such.”
Smart Business spoke with Mohamed about how to ensure your board is at its most effective.
Why is corporate governance important?
Effective corporate governance helps a company achieve its objectives, which generally are strategic and business planning, risk oversight, financial management, HR planning, compliance and accountability through effective controls and procedures. Also, effective corporate governance helps a company prevent corporate fraud, scandals, and possibly civil and criminal liability. At the end of the day, it makes good business sense; a company with a good corporate governance image enhances its reputation. It is attractive to investors, customers and suppliers and other entities would be comfortable doing business with a company that has a good corporate reputation.
What is the role of the board of directors?
Generally speaking, the primary duties of a board start with its fiduciary responsibilities. Members of the board of directors have a fiduciary responsibility to act in good faith and with a reasonable degree of care. They must not have a conflict of interest. So the interest of the company must take precedence over personal interest of the individual board members. Board members are also responsible for setting the mission of the company. The board can change the company’s mission, but it should only be done after careful deliberation. The board does not manage the day-to-day activities of the company, but it does set overall policy and exercises oversight responsibility.
What are some common problems that companies have with their boards of directors?
Because the board of directors is so critical to an entity, it is very important that the organization utilizes a well-thought-out nominating process to nominate qualified individuals to the board. One factor companies may need to assess when selecting a board member is whether the potential board member is able to devote the necessary time to be sufficiently engaged in fulfilling his or her obligations. The individuals selected to be on a board have responsibility for the activities of the corporation. The board acts on behalf of the shareholders to make these overall policy decisions. It is very important to have the right nominating process to select qualified individuals who will work to do what’s in the best interest of the company. If individuals are on too many boards, they may be stretched too thin and not have enough time to focus on board matters. Most large companies have a nominating committee handle the process of selecting potential candidates. They generally have a vetting process in place to identify the right candidate, and review qualifications and expertise. The committee is looking for what these people can bring to the table to add value in a very meaningful way — along with their ability to commit the necessary time.
How can a board that is not in line affect the company?
A board that is not in line will not be beneficial to the company or its shareholders. Keep in mind that the board works to advance the interests of the corporation and its shareholders. If a board presents a united front, then the message conveyed to shareholders, investors, the management team and the company’s other partners is that the company functions as an organization — not as individuals. A board that is not in line is not conveying the same message as a company that is very well organized and has good governance processes in place. If the message is not consistent that would not be good for a corporation.
How can the board debate the company’s direction while ensuring its message to shareholders is consistent?
A lot of work must be done behind the scenes. Board meetings should be a forum where the members can freely express their opinions and deliberate in private. It is critical that those deliberations remain private. There is no reason for those discussions or disagreements to be publicized, other than if something improper or illegal was being done. Board members should be able to deliberate in confidence and freely express their opinion, but the message that is conveyed to shareholders, investors and the management team should be consistent. That one unified message must always advocate what is ethically in the best interest of the company.
What steps can be taken to avoid trouble and ensure a strong, cohesive board?
The board of directors must remember its key purpose, which is to ensure the company’s prosperity by ethically and collectively directing the company’s objectives and advocating for what is in the best interest of the company. In addition to business and financial issues, the board must deal with challenging and complex issues relating to corporate governance, corporate social responsibility and corporate ethics. All of those issues play into making sure the message is consistent. The board also has oversight responsibility over the management team. That is important because if there is no accountability, it will not be in the best interest of the corporation.
Aneezal H. Mohamed is an attorney with Kegler, Brown, Hill & Ritter. *Mohamed is authorized to practice federal and Michigan law, but not Ohio law. Reach him at firstname.lastname@example.org or (614) 462-5476.