Oversight, care and loyalty – exploring board and director responsibilities
The board of a public or private organisation is responsible for setting the policy and direction of an organisation and driving its success.
A director as defined in the UK, Ghana, United States Company’s Act and governance guidelines is anyone who carries out the role of directing a body corporate to legally and ethically meet its obligations to shareholders and stakeholders.
The African Corporate Governance Network, Securities and Exchange Commission-USA, Institute of Directors (IoD) UK and Southern Africa succinctly expound that the role of the board of directors is simply “to ensure the company’s prosperity by collectively directing the company’s affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders.” This view is also supported by leading experts including Ussem R, King M, Hicks Midanek D, Shultz S, Charan R, Eisenstein L and Carey D. The board is thus ultimately accountable for ethically sound actions taken by the organisation that ensure commercial success.
The dual obligations of care and loyalty as enshrined in amongst others the UK Code on Corporate Governance, OECD Principles of Corporate Governance, King IV, Sarbanes-Oxley Act of 2002/3 and the Dodd Frank Act-2010 have all served to empower board directors as corporate overseers. More recently, the extension of duty of care to communities and society as whole is increasingly becoming a topical issue within executive corridors.
All governance models continue to reaffirm that boards must:
- Develop a strategic plan and ensure that it’s adhered to.
- Firm up the organisation’s vision, mission, goals and purpose.
- Select and appoint the chief executive of an organisation.
- Approve or provide sound reasons to reject a nominated chief executive.
- Assess and reappoint or dismiss the chief executive for lack of performance or for bringing the name of the organisation into disrepute.
- Be entrepreneurial and drive the business forward while keeping it under prudent control.
- Assess their own individual and collective performance.
- Provide financial oversight.
- Assist the chief executive to improve the organisation’ tangible and intangible service offering.
- Ensure that its members are sufficiently knowledgeable about the workings of the company to be answerable for its actions.
- Recruit and orient new board members.
- Certify that the organisation has adequate resources to meet its obligations.
- Ensure compliance and ethical standards are maintained at all times.
- Manage resources responsibly for the benefit of shareholders.
- Enhance the organisation’s public standing through effective dialogue and communication.
- Be sensitive to the pressures of short-term issues and yet take account of broader, long-term trends.
- Discourage each other from undue interference in the day-to-day operations of the business.
- Set goals and incentives for the executive management team.
- Establish a culture of ethics and integrity.
- Be informed about ‘local’ issues and be aware of potential or actual wider competitive and societal influences.
- Be focused on the business needs of the organisation while acting “responsibly” towards its employees, business partners and society as a whole.
- Adopt a policy for addressing conflicts of interest.
- Institute a policy on unethical practices.
- Ensure that members of the board do not act in any way that will bring the name of the company into disrepute.
As a general rule, the board is responsible for appointing the nominated chief executive or the managing director; thus making these individuals accountable to the board and not to the nominator. This is generally not the case in most developing economies where especially in the public sector, an entity’s chief executive is appointed as per the respective constitution and not necessarily by the board.
The board is also responsible for performing the duties of strategic planning and oversight as well as developing compensation packages in alignment with the agreed CEO’s goals, and establishing policies and frameworks for management to operate within.
At the same time, the board, according to the IOD, needs to keep the organisation under prudent control, should be aware of short and long-term competitive influences, should be sensitive to industry pressures and trends and must remain focused on its responsibility to its employees and society as a whole.
As Price N. J. rightly pointed out “board of directors need to be well-informed and fully engaged with all major issues that affect the corporation.” Key to an effective board’s supervisory role according to amongst others, Lord Cadbury and Professor King is the ability to identify, interpret and help the CEO to manage organisational, industry and societal risks.
Mckinsey’s Huber C, Sebastian Leape S, Mark L, and Simpson B rightly highlighted the need for a board to articulate a clear purpose, anchored in measurable environmental, social, and governance (ESG) commitments and goals.
The need for independent oversight
Not only are the board of directors expected to objectively and independently lead the way in terms of establishing ethical standards and fulfilling their roles to the organisations various stakeholders, they must also meet their vital role of establishing and maintaining a sound governance framework and providing active oversight.
In performing its oversight duties, the board of directors serve as an essential form of check and balance for an organisation. As a result, board members must have complete understanding of their oversight and governance responsibilities. To be effective leaders, board members must not only develop a full understanding of their governance and oversight roles, but they must have a basic understanding of what their organisation does, the risks it faces, and how these risks are monitored, measured and controlled.
Independent oversight of a board has become essential in improving organisational credibility and good governance. This independent oversight is achieved through the appointment of non-executive directors who act as an independent guide for the organisation, adopt a watchdog role, contribute towards good governance endeavours and very often bring external knowledge, experience and expertise to the organisation.
According to Deloitte, a board of directors has a fiduciary responsibility to an organisation and “is required to consider the greater good of all of its stakeholders”.
They describe fiduciary duty as “the legal duty to act in good faith in promoting and protecting the interests of a beneficiary…It is important to note that directors owe this duty to the company as a legal entity, and not to any individual, or group of shareholders.”
Fiduciary responsibilities are largely about trust. When it comes to corporate governance, stakeholders need to be able to trust that a board will act in good faith and has the interest of the organisation in mind when making any decisions. Fiduciary responsibilities or duties are often divided into different categories. The duty of care, loyalty and good faith stand out as particularly significant. All directors are bound by these fiduciary duties.
The fiduciary duty of care requires that directors perform their responsibilities with the care, skill and diligence that may be reasonably expected from someone in a similar role and who has the same knowledge and experience. This is especially related to the way that board members take care in making decisions that impact on the organisation. Directors are viewed as meeting this duty of care if they act in good faith and in belief that their decisions are in the best interest of the organisation.
The fiduciary duty of loyalty refers to the responsibility of directors to act in the interests of the company before their own. The duty of loyalty speaks to the fiduciary relationship of trust and confidence that exists between a director and the organisation that they serve.
This relationship insists that a director must perform his or her duties in good faith and in a manner that acts in the best interest of the organisation and its stakeholders. In short, this duty refers to the responsibility that a director has to prevent conflicts of interests between themselves and the organisation and never to allow personal or professional interests to come above those of the interests of the organisation.
Directors who compete individually with the organisation, gain secret profit from the organisation or gain unfair opportunity from the organisation will be seen as being in breach of the duty of loyalty.
Another important fiduciary responsibility is the duty of good faith. This duty requires directors or board members to explore all options related to decision making processes, and thereafter, make decisions in the best interest of the organisations’ stakeholders.
According to Deloitte, other fiduciary duties of directors can include: “the duty to individually and collectively exercise their powers bona fide in the best interest of the company; the duty not to exceed their powers; the duty not to act illegally dishonestly, or ultra vires; the duty to act with unfettered discretion; the duty not to allow their personal interests to interfere with their duties; the duty not to compete with the company; the duty not to misuse confidential information”.
When it comes to fiduciary responsibilities it is important that all board members have a clear understanding of what is expected of them and how their role is impacted by each of the fiduciary duties they are connected to. A lack of understanding or ignorance related to the board member roles, expectations and fiduciary responsibilities will not relieve them of their obligations to the organisation, nor will it prevent them from being held responsible for failing to fulfil their duties.
In short, Deloitte notes that “by accepting their appointment to the position, directors imply that they will perform their duties to a certain standard, and it is a reasonable assumption of the shareholders that every individual director will apply his or her particular skills, experience and intelligence to the advantage of the company.”
In conclusion, the board is the highest governing authority within the management structure of a body corporate be it public or private. Their statutory duty is to protect and represent the interests of the shareholders. It is important to note that the board is not there to run the entity on a daily basis.
Today, how boards of directors and the chief executives perform their respective duly authorised functions have implications for an organisation, industry and society. It is for this reason that chief executives are given the latitude to run an organisation, but are overseen by an experienced board of directors who help to lead and direct the organisation on matters of critical importance to shareholders, stakeholders and to society as a whole.
>>>the writer is an international chartered director and Africa’s first-ever appointed Professor Extraordinaire for Industrialisation and Supply Chain Governance. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world. He is the CEO of PanAvest International and the founding non-executive chairman of MY-future YOUR-Future and OUR-Future (MYO) and the highly popular daily Nyansa Kasa series. For more information on COVID-19 updates and Nyansakasa visit www.myoglobal.org.