Corporate boards: its role and function

by | Apr 11, 2020 | Boards of directors, Companies, In:Sight

I find it interesting and informative to work through the opinions expressed by others in recent times. Much has been written about corporate boards and their role and function.

Corporate boards

Importantly, the South African Companies Act, 2008 in Section 76(3) provides as follows in respect of the standard of conduct of a director:
”A director, when acting in such capacity, must exercise the powers and perform the functions of a director in good faith and for proper purpose, in the best interests of the company, and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as such director, and having the general knowledge, skill and experience of that director.”

This implies actual or deemed knowledge of a matter, i.e. the director ought to have known given his knowledge, skill, experience and appropriate degree of care exercised.

This requirement is quite onerous and not to be taken lightly.

Corporate governance

The UK Corporate Governance Code is generally accepted as the authoritative guidelines to be complied with by all UK companies.  The King Report on Governance for South Africa (the King III Report) similarly applies to SA listed enterprises.

Before the role and function of corporate boards can be analysed, one needs to understand it in the context of corporate governance.

The first UK Code issued in 1992 in my opinion best summarises this, as follows:

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.”

A more modern take on this appeared in the 2014 updated issue of the Code:

“The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.”

Corporate Boards on many an occasion have to apply their minds and sound judgment in situations that involve balancing different, conflicting interests of the enterprise.  This requires, experience, level-headedness and an ability to arrive at a decision through debate and discussion.

In my opinion the aspects of the role and function of corporate boards mean slightly different things, and furthermore do not make allowance for the critical dimension of board dynamics at play in every board.

The BusinessDictionary defines:

  • “role” as “a prescribed or expected behaviour associated with a particular position or status in a group or organisation” and
  • “function” as “a process or operation that is performed routinely to carry out a part of the mission of an organisation”.

On this basis a board of directors would typically have a role encompassing only a small number of strategic focus areas, which should not differ from board to board.  The functions of corporate boards by comparison would be a more extensive list, covering probably as many as twelve or more areas, which is likely to differ from company to company depending on industry or other circumstances.

Role of the board

The role or strategic responsibilities of corporate boards, in my opinion, covers the following four aspects:

  1. Ensuring the long-term success of the company.
  2. Providing strategic guidance and goal setting for management.
  3. Establishing and monitoring corporate objectives and policies. Oversight of the manner in which the value systems are communicated and practiced by the enterprise.
  4. Inculcating a value system. Cultivating a culture throughout the enterprise of doing business in an ethical manner, dealing fairly with customers and suppliers and generally acting professionally and with integrity, in compliance with laws and regulations.

Functions of the board

I also believe that the functions or specific responsibilities of the corporate board, should include the following (in no particular order):

  1. Risk appetite and management. Lead the risk appetite definition process. Oversee the risk management and legal & regulatory compliance programs of the enterprise, monitoring its maintenance and reviewing significant risk incidents.
  2. Oversight. Using the internal audit process to measure and monitor corporate performance across all divisions and business activities of the enterprise. Should highlight significant incomplete, deficient, inaccurate or unauthorised transactions, including deficiencies in safeguarding the assets of the enterprise. Detect erroneous or unreliable financial reporting. Identify non-compliance with laws, regulations, and corporate policies.
  3. Appoint the CEO. Choose the CEO, monitor his performance and have a succession plan in place.
  4. Oversee the appointment of the CFO. The CEO is responsible for appointing all the members of his Exco.  however, the position of CFO is quite critical and warrants the board remaining close to the process.  It should also monitor his performance and ensure that the CEO has a succession plan in place if needed.
  5. Operating strategies. Approve the enterprise’s strategic and operating plans, monitor its implementation and management’s performance.
  6. Stakeholder relationships, including government. Maintaining good relations with government and the communities in which the enterprise operates.  Sound business relationships to be maintained with suppliers and service providers.  This is the responsibility of management. The board should monitor these relationships.
  7. Operations. Reviewing financial and operational performance.
  8. Executive remuneration. Remuneration of the CEO and Exco should be determined by the board. Balancing the need to recruit and retain the right people without seen to be paying excessive amounts, should be the aim.
  9. Crisis management. Few enterprises comprehensively plan for a crisis as part of its risk management framework. Sometimes the position or person of the CEO is be involved.  A business threatening fraud or disaster occurred.  Significant reputational damage or a socio-political gaffe by an executive hit the front pages of the media.  The list goes on and on.  The board must be able to immediately step in and take control.
  10. Major business transaction or acquisition. The board must also take control whenever a significant transaction involving the enterprise as a whole – such as a take-over or merger is contemplated. It avoids any conflict between the interests of management, the shareholders, other stakeholders and the offeror.
  11. Corporate policies and procedures.
  12. Social responsibility. The bar for corporate social responsibility in South Africa is already set quite high. Enterprises have to comply with the provisions of the Companies Act, the B-BBEE Act, Skills Development Act and other aspects such as health & safety, the environment and community development. The board should insist that these standards of social responsibility be maintained and should monitor management’s performance.
  13. Board committees. Reviewing the work of the sub-committees of the board. Comprised of independent and non-executive directors. Chairpersons should be independent directors.
  14. Good working relationship with management. No director can properly assess the details contained in the board papers without spending time one-on-one with Exco members. Maintain a friendly, relaxed relationship. Ask frank and tough questions when necessary.

However, the role and function of the board does not determine its effectiveness.  Board dynamics determine this.

Board dynamics

I firmly believe that an outline of the role and function of the board is incomplete without also considering the internal dynamics of the board itself. It is of little use to know what its role and function is, if the board is dysfunctional and unable to provide guidance to management.

For a board to be effective, its internal dynamics must be ticking over at optimal levels.  This in turn means that achieving board effectiveness is a journey, not an end result.

The following aspects have, in my opinion, a bearing on how internal dynamics play out at board level, which in turn directly impacts on the level of effectiveness of a board (again in no particular sequence):

  1. Board evaluation. Annually undertake an independent evaluation of the board’s effectiveness.  This involves assessing the performance of the board, its committees and each individual director. It should include such issues as age, length of service and independence.
  2. Chairman of the board. The chair must never be one of the executive directors. Should be elected from amongst the independent directors. If not, then also appoint a lead independent director. To lead a board is an art, not a science. Experience and ability counts for everything. He must promote a culture of frank debate and openness. Responsible for effective communication with the CEO.
  3. Diversity. Striving for a healthy mixture based on age, gender, cultural backgrounds, qualifications, business experience, insight and e
  4. Not tolerating weak, ineffective directors. Every director must possess the ability, capacity and motivation to contribute to the success of the enterprise.
  5. Competencies. Directors should be identified, selected and appointed on the basis of their competencies and experience.  Each should be able to contribute in areas which are relevant to the business operations of the enterprise.
  6. Director rotation. Serving for 3 years, with one third of directors retiring each year to maintain institutional knowledge and experience.
  7. Voting procedures. Avoid the all too common procedure of “sufficient consensus”. Record the results on a formal show of hands, including votes against and abstentions, by name.
  8. Power of persuasion of certain board members. Firm control by the chair needed to avoid 1 or more directors kidnapping a discussion.  Strong personalities can easily force their views through eloquent and convincing contributions.
  9. Level of participation by individuals during debate and discussion. Finely balanced control from the chairman needed.  He must ensure that all directors are given equal chance to contribute and participate.
  10. Mutual respect. All directors should endeavour to mutually respect one another and should maintain good level of collegiality with the other directors.
  11. Size of the board. The number of directors serving on a board is a very important factor in its capacity to be effective. Somewhere between 5 and 9 directors would be optimal, in my opinion. Beyond that the board loses its effectiveness and members begin to rubber-stamp decisions.
  12. Number of executive directors serving on the board. Limit to 2 or 3 maximum.
  13. Independent and non-executive directors. Limit the non-executive directors who represent constituent shareholders, to 1 or 2. Independent directors in number should exceed that of the non-executive directors.  Avoid individuals who serve on too many boards – a maximum of 5 boards should be the norm. The risk of insufficient time made available to attend to the affairs of your enterprise must be avoided.
  14. Preparation. Spend enough time to understand the details contained in the board papers. Meet the CEO or other members of Exco beforehand. Ask questions and seek clarification where necessary. Compare the details with previous board packs. Study the board committee reports and minutes. Above all, apply your mind and exercise an independent judgment.
  15. Minutes. Maintain well-documented minutes of all meetings. Minutes should neither be verbose and detailed, nor brief. Should exactly reflect the resolutions passed, and the voting results.
  16. Workload. Directors have a limited amount of time and capacity to spend on the affairs of the enterprise. Make use of board committees where possible. Find a balance between time spend on monitoring operations versus strategic planning.

Board directors have a demanding task if they want to be effective.  Few outsiders truly appreciate the amount of work that is required.

Several excellent articles on the role and function of boards and board dynamics can be found on the internet.  Here are only a few:

Here are related articles which we have recently published: