Enterprise Governance: It Starts With The Board
Just what is Enterprise Governance (EG)? It is how an organisation is actually run, and is therefore the actual essence of corporate management. EG encompasses the proper running of an organisation and determines to a great extent what its risk culture should be. It “thinks ahead” or strategises the most effective ways to remove obstacles that may hinder the running of the business, thereby driving value creation, good decision-making and ultimately, the company’s profitability. At the core of EG is decision-making with the greatest implications, so any EG-oriented conversation must, out of necessity, start with the Board.
But this in turn implies that the Board needs to be properly sized and skilled so that the necessary checks and balances can be put in place, and – more importantly – the right questions can be asked. While all Boards follow an agenda, there should not be one person dominating it. Rather, the Board has to be a group of equals where everyone has a say in frank and open discussions. This does not always happen. In many companies, Boards may lean towards a management-heavy composition that skews the balance of power and weakens its function. Having too many members of management on a Board will severely curtail its independence.
Instead of providing leadership and direction, a weak Board is more likely to disrupt the organisation and hinder its growth, rather than support its efforts to compete more effectively in increasingly difficult, dynamic environments. A balance of Independent and Non-Independent Directors is imperative for the Board to function optimally. But for directors to be truly effective, they need to learn about the business as fast and as well as they can. They may have been appointed to the Board based on their individual professions or professional experiences, but these differ from one person to another and the professional knowledge they bring to their directorial positions may not be enough to bring them up the organisational learning curve.
One of the best and fastest ways of doing this is to ask questions. This will inevitably lead to revelations (which could sometimes be less than pleasant) that will result in a better understanding of the organisation, its business(es), people and culture. Diversity on Boards is preferable; it brings aboard people who are more likely to ask questions and not feel embarrassed at doing so. Board members should not be prevented from engaging with management. High levels of interaction between management, staff and Board members will make it easier to get things done as directors are not formally engaged in the activities and business in the organisation as much as full-time employees are.
Interaction also has another function: it allows Board members more visibility and may have the effect of improving confidence within the organisation, while setting the right “tone.” The CEO should not try to control or limit the interaction between Board members and management. CEOs who are confident about their performance and who know they are doing the right thing by the company, will be less likely to curtail this kind of interaction, and are likely to facilitate a free flow of information to the Board. For optimum governance, a Board of eight to 15 members is necessary – depending on the size, nature, and complexity of the organisation and its business. Too few members will make it difficult to fill positions on Board subcommittees.
With too many members, there may be overly long meetings with too many queries which may adversely affect decision-making and efficiency. It is a balancing act, but the Board should ensure that it has enough members for effective participation in the Executive, Audit, Risk Management, Nomination and Remuneration committees. While most organisations have a single-tier Board, some may decide to have a two-tier Board with an Executive Committee that can expedite quick decision-making when necessary. This may be applied when the organisation is spread across multiple countries or regions, and it may not be easy to reach all Board members for consensus.
Although it is best practice for the chairman and vice-chairman to be independent directors, there is no one-size-fits-all ruling when it comes to Boards. What works for one firm may not work for another. One of the most challenging aspects confronting firms when finding the right person for a Board position, is identifying competent, professional individuals. Not only that, they should actually be disinterested in the business as this decreases the likelihood of conflict of interest when it comes to decision-making, as arms’-length transactions are integral to good governance. Independent directors play a critical role as they can add value to decision-making by providing different perspectives, and are likely to avoid the bias of “group think.”
Again, this type of diversity leads to better quality decisions. It should be recognised, however, that not all directors can agree on all matters all the time. Sometimes they have to make decisions while agreeing to disagree, in order to get the job done. Disagreement is not necessarily a bad thing; it indicates that people are thinking. Besides, it is an indication that the process of governance is being applied, that Board members are cognisant of their respective roles, and are consistently performing. The role of the Board is to do the right thing, and ensure that the organisation complies with its regulatory and social responsibilities.
Good corporate management and good governance results from an empowered Board, and an empowered Board empowers management by providing the right advice and guidance, being responsible for the organisation’s strategy, and overseeing the performance of management. It is not management’s role to challenge the strategy as laid down by the Board. Rather, management implements the strategy, and for this reason, the Board needs to be sure of what it is doing, and be supportive of management. Corporate Management and good governance is about having proper frameworks, processes and systems in place, and having the “soft” skills to align human resources with them, to produce the desired outcome. With governance, the Board becomes more hands-on, not just a remote, unapproachable entity that dictates what should be done.