Despite their potential, many Boards of Directors are significantly underutilized in the corporate decision-making process. Many Boards, particularly in private companies, are marginalized bodies consulted at the last minute as a formality to rubber stamp company management’s preferred course of business action. This often results in making suboptimal decisions and losing the opportunity to use the decision-making process to make companies significantly stronger. This article suggests ways to strengthen the Board of Director appointment and management process so companies can make better decisions, become more competitive, and create long-term value.

Board of Director Models of Influence

The Board of Directors is a governing body in a company elected by the company’s shareholders that is responsible for overseeing the activities of a company and protecting its shareholders’ interests. Whether a company is required to have a Board and the technicalities of its structure and operations are determined by the law of the jurisdiction where the company is established.

Boards can be divided into low-influence and high-influence.

The role of the Board in company decision-making varies widely from company to company. From a decision-making perspective, Boards can be divided into two types:

• Low-influence Boards; and
• High-influence Boards.

Low-influence Boards. A low-influence Board is often characterized by several factors:

• Board members are appointed as a formality to comply with a legal requirement or the request of a third party with a vested interest in the company’s operations, such as a bank or an investor
• The majority of Board members are people who have operational roles in the company
• Board members are empowered to opine on a narrow range of issues that occur very infrequently, such as company mergers and large financing transactions
• Issues that should fall within the Board’s purview are delegated to company management
• The Board has a rubber stamp function and automatically approves all items management presents.

Low-influence Boards are often the result of one or more factors:

• A company’s executive team views the Board as a bureaucratic drag on business operations and engages with it as little as possible
• The Board receives little or no information about company operations
• The Board is provided with a skewed picture of what is happening in a company and the decision-making context, so decisions are foregone conclusions
• Board members are appointed essentially as representatives of individual rather than corporate interests and are selected to stack the Board to ensure that the decisions of one individual or group will always be approved.

High-influence Board. A high-influence Board, on the other hand, has the opposite characteristics.

• Board members are appointed based on careful consideration of their expertise, experience, and ability to complement the views of other members of the Board of Directors and the management team
• Board members have broad oversight over company operations, are aware of issues affecting the company, and are consulted regularly, even on matters that do not technically require Board approval
• The Board retains key oversight powers rather than delegates them
• Different firm functions, such as risk management, report to the Board on a regular basis and are responsive to Board feedback
• The Board exercises independent judgment and is not afraid to push back on executive preferences if it is in the shareholders’ best interests to do so.

From Influence to Value Creation

The benchmark for evaluating Board performance should not merely be the influence it has but also the degree to which its presence in an organization is helping to make good decisions and build firm value. This is a significant shift in the perspective of many Board members who primarily view their role as avoiding bad decisions rather than creating good ones.

To maximize the chances that a Board will build value, there are several key areas of focus. These concern the Board’s:

• creation and composition
• presence in the company’s overall structure
• operations
• relationship with external parties; and
• record-keeping practices.

Board Creation and Composition

Board design is often largely based on three issues:

• ensuring that key interested parties have Board representation
• making sure that the majority shareholder controls the Board
• making sure that deadlocks are avoided.

While this approach has several advantages from a control perspective, from a decision-making perspective it does not consider the number of people that should be on the Board to balance optimal dialogue regarding the issues that a company is likely to face and the size of the company. Just as Boards that are too small have disadvantages, Boards that are too large for a company’s size can make the decision-making process cumbersome and inefficient. Boards are also not fixed in size: as a company grows and its needs change, the structure of the Board can be modified.

Board structure can be modified as a company grows to balance appropriate decision-related analysis and decision-making efficiency.

Once the structure of the Board is determined, the next issue is Board member qualifications. In the Board member selection process, several factors should be considered:

• the key issues the company is likely to face, given its business model and business circumstances
• areas that are crucial for the implementation of the company’s business plan where it does not have deep expertise
• the person’s skill set and experience
• whether the person can dedicate sufficient time to Board activities given other professional or personal commitments they may have
• potential conflicts of interest.

Board Presence in Company Operations

The Board’s ability to create value is also affected by its presence in a company’s overall operations. In some companies, the Board is an isolated body with little or no contact with day-to-day firm operations. However, there are several ways that Boards can have greater exposure to or oversight over firm activities to help strengthen them. Two ways this can be done are:

• Setting up or overseeing committees that are responsible for decision-making in certain areas; and
• Requiring that certain functional areas of a firm, such as the risk management or the legal function, report to the Board.

Another element of the Board’s awareness of firm operations is the information it receives. If the Board simply receives a report once a quarter with summary information, it likely will not have enough knowledge of the issues that the company is facing to add value to company management. For good decisions to come out, high quality information must go in.

Functioning of the Board

To increase the likelihood that the Board will add value to the decision-making process, there are several key points.

• Rather than receive information for decision at the last minute, the Board should receive relevant information on a timely basis so that it has time to consider it and ask questions about things that are not clear
• the Board should not merely view its function as voting yes or no but more broadly as asking whether the correct issue is being presented for consideration
• the Board should carefully present its reasoning regarding issues to company management so that it can be discussed
• the Board should carefully consider not only the immediate implications of a proposed decision, but also the impact the decision may have in the medium and long term.

Board Relationship with External Parties

To make good decisions, a Board should not feel constrained to make decisions only based on its own knowledge, review of relevant information, and discussions with company management. If necessary, the Board should consult with outside experts.

Record Keeping Practices

Another important element of good Board decisions is good record-keeping practices. As with a firm in general, the better a Board’s record-keeping practices are, the better the chances of learning from the past and making better decisions in the future. This includes:

• keeping careful minutes of Board meetings, points discussed, and opinions expressed
• noting whether the Board requested information or follow-up actions and, if so, what those were and whether or not steps requested were taken
• decisions that were taken
• whether decisions led to expected results; and
• making sure that information regarding Board decisions is well organized and easily accessible for future reference.

A Board should not view itself as a static entity but rather one that can improve its decision-making ability over time.

Conclusion

While Boards of Directors are generally perceived as powerful corporate bodies, they are often significantly underutilized in helping to address corporate opportunities and challenges. If Boards of Directors are carefully set up, they can not only assist in making good decisions but also in creating long-term corporate value.

The photo for this article was taken by Shane Rounce and is available on Unsplash.