Insights into Directorships and the Boardroom: Composition and structuring is key to governance success

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MIIF announces new board: Prof Douglas Boateng to Chair the over $200m USD fund
Professor Douglas BOATENG

The board is responsible for protecting shareholders’ interests, providing oversight and also making decisions that are in the best interest of its stakeholders.  Through independence of judgement, its duly authorised members are expected to provide thought leading knowledge, expertise and experience to the board.  According to various Companies Acts (including Ghana’s ACT 992), members of the board act as overseers of the executives on behalf of shareholders and as correctly pointed out by King M “more and more” stakeholders.

It is important to distinguish between a shareholder and a stakeholder. A shareholder as rightly explained by Keay A, and Blair M could either be an entity or an individual owning a direct stake in a business.  A stakeholder according to Nimmer R, Stiles P and King M, has a direct or indirect interest in a business. Examples include employees, community residents, and customers etc whose interests are affected by the activities of a company.

Boards according to Wixley T, Light D, and Cole T, consist of a group of diverse and experienced individuals who are elected for the value that they can add to the overall effectiveness of an organisation.  Each member of the board has a multifaceted fiduciary role to the organisation they are empowered to “direct through supervision.

Most state or private businesses operating world-wide have a single board per organisation. This known as a unitary board.  A unitary board (aka single tiered) of a private company must have at least one director whilst publicly quoted companies must have at least two directors and a company secretary. In most African countries including Ghana, there is generally a single supervisory board per organisation.

In countries like Germany, it is very common to have a supervisory board and a management board. This is frequently known as a two tiered or dual board. It is interesting to note that most large publicly quoted companies are now opting for a two tiered structure; that is an executive or a management board and supervisory board.  The management board normally consists of executive directors.

They have functional responsibilities in addition to the directorship duties. Examples include the managing director or chief executive officer, finance, marketing, operations and increasingly, supply chain directors.  To ensure objective decision making, there is also the move to having more non-executive and independent directors than executive directors on supervisory boards.

The composition, expertise and experience of the board members as correctly postulated by Feinberg R, Taylor B and Stout L has a significant impact on the success of an organisation and therefore needs to be carefully considered. Gone are the days when board members were selected for their passivity, connections and friendships. Having the right qualified and experienced people as members of the board will determine whether or not a board will effectively fulfil its role and whether or not it will meet stakeholder or shareholder expectations. King M, Everingham G, Shultz S, amongst others have also observed that, boards work well when the chemistry among the experienced members is good.

Within a corporate setting, there could be both internal and external board members.

Internal board members can include the organisational chief executive officer or managing director, chief financial officer or finance director, or any high-level manager who works directly in the business on a day to day basis. If they are part of the management team, internal directors are referred to as executive directors and are generally responsible for business strategy, approving budgets and approving major projects and initiatives.

Deloitte explains that an “executive director, through his or her privileged position, has an intimate knowledge of the workings of the company.” They further note that executive directors are “entrusted with ensuring that the information laid before the board by management is an accurate reflection of their understanding of the affairs of the company.”

External board members, or non-executive directors, comprise representatives from outside of the organisation who are elected externally and are independent to the organisation. External board members offer independent oversight by offering unbiased input on issues under consideration by the board. While external directors do not form part of the management team, they are also responsible for contributing towards strategic direction and tend to offer knowledge and expertise that do not already exist within the business.

According to Deloitte, a non-executive director is an independent person who “is not a representative of a shareholder and has the ability to control or significantly influence management or the board.”

They further note that a non-executive director should have, among other things, “not been employed by the company or the group of which it currently forms part in any executive capacity, is not a member of the immediate family of an individual who is, or has during the preceding three financial years, been employed by the company or the group in an executive capacity, is not a professional adviser to the company or the group, other than as a director, is free from any business or other relationship which could be seen by an objective outsider to interfere materially with the individual’s capacity to act in an independent manner or does not receive remuneration contingent upon the performance of the company.”

Internal and external board members should all contribute a skills-mix that allows for the optimum effectiveness of the board. Board members should also demonstrate significant industry knowledge, strategic thinking, credibility, business ethics and integrity, decision making abilities and good judgement.

Some well-known directors include the chairman, chief executive officer, chief operations/ supply chain officer and chief financial officer.

The chairperson is normally elected from the board of directors and can occupy either an executive or non-executive position. The chairperson is responsible for the smooth running of the board, setting meeting agendas and working towards board consensus. Chairperson duties often include representing the organisation in public, strategy formulation, providing a platform for communication with the CEO and other executives, and maintaining corporate governance and integrity.

According to the Institute of Directors UK, Southern Africa, Tricker R and Palmiter A, the chairperson’s “primary role is to ensure that the board is effective in its task of setting and implementing the company’s direction and strategy.” They further note that the chair is usually responsible for the following tasks “providing leadership to the board, taking responsibility for the board’s composition and development, ensuring proper information for the board, planning and conducting board meetings effectively, getting all directors involved in the board’s work, ensuring the board focuses on its key tasks, engaging the board in assessing and improving its performance, overseeing the induction and development of directors, supporting the chief executive.”

The chief executive officer(CEO) or managing director(MD) according to Shultz S. Wixley T, and Charan R, is responsible for running the organisation and reports directly to and is accountable to the board of directors. While the CEO’s role may differ depending on the size, culture and industry of the organisation, they typically report directly to the chairperson of the board.  The CEO is required to implement the decisions made by the board of directors, maintain the effective operation of the organisation and serve as the core point of communication between the board of directors and other executives.

While there is no standardised list on the roles and responsibilities of a CEO or MD, the Corporate Finance Institute explains that typical CEO duties include: “communicating, on behalf of the company, with shareholders, government entities, and the public, leading the development of the company’s short- and long-term strategy, creating and implementing the company or organisation’s vision and mission, evaluating the work of other executive leaders within the company, maintaining awareness of the competitive market landscape, expansion opportunities, industry developments, etc., ensuring that the company maintains high social responsibility wherever it does business, assessing risks to the company and ensuring they are monitored and minimised, setting strategic goals and making sure they are measurable and describable.”

Whilst there should be a clear distinction between the roles of the chairperson and the CEO/MD these two roles are often combined in especially the United States.

This however, according to leading experts including King M, Keay A, Brown G, Carey D, is not an ideal situation as this can result in reduced transparency and accountability.

The chief operations/supply chain officer (COO/CSCO) is responsible for the organisation’s overall operations including sales, marketing, production, etc. The COO/CSCO reports directly to the CEO on matters pertaining to the day-to-day value chain activities of the organisation. Finally, the chief financial officer (CFO) is responsible for managing the organisation’s finances including financial planning, analysing and reviewing financial data, management of financial risk, financial monitoring and reporting and record keeping.

 To summarize, it is the fiduciary responsibility of each executive or non-executive board member to help maintain good governance at all times. It is for this reason why board members must be carefully selected based on the knowledge, expertise, experience and real value they can bring to the organisation

In conclusion, the board is the link between the shareholders and the management of the company.  Key to sustainable organisational “supervisional success” is the structure and composition of the board. Most countries have a unitary board structure whilst others have opted for the two tiered approach commonly practiced in Germany and Scandinavian countries. In both approaches, both executive and non-executive directors have a vital role to play in the realisation of organisational goals and corporate citizenry duties to stakeholders.

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.

 

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