Desirable Qualities For Directors
Directors could be described as many things. They are caretakers, trustees, stewards and representatives for the company’s shareholders. That is their primary responsibility. Depending on the company’s commitment to Stakeholder Theory, they also hold this role to a greater or lesser extent (AIB 2022).
Directors must act ethically, openly, transparently and honestly in all their dealings on behalf of those they represent. This includes ensuring that they put the interests of the company above self-interest.
A notable point is that companies do not make decisions despite the fact it is an entity in its own right. People make decisions, and in respect of a company, the directors. Consequently, the integrity of directors is of paramount importance.
Core Competencies For Directors
Every director is an individual and accordingly brings an individual level of skills, knowledge and experience to the board. Diversity of skills and abilities is essential on a board to provide a range of talents for the board to draw on.
Tricker (2019, p. 349) contends that the following are essential skills needed by a director:-
- strategic reasoning, perception, and vision;
- a critical faculty capable of quantitative and qualitative analysis and financial interpretation;
- planning and decision-making capabilities;
- communication and interpersonal skills;
- networking and political abilities.
In addition to these skills, directors need to know about the company’s business and the context in which it operates. Directors need a wide range of skills relevant to the company, and financial literacy is vital so they can understand the company’s financial position, its funding and its risk in terms of gearing.
Another critical skill needed by a director is the ability to think independently and make decisions on that basis. Being fiercely objective will also assist a director in avoiding any conflicts of interest.
Roles of Directors
Directors contribute to four different areas on the board. Two of these are performance-oriented, and two are conformance oriented. These roles have been discussed in module 3.
Assessing the Directors
Why Should you Assess the Board?
Everything in life is dynamic and requires ongoing review to ensure the status quo still serves its original purpose. Boards are no different in this regard. The ASX recommends that boards evaluate their performance once a year under Recommendation 1.6 (ASX Corporate Governance Council 2019).
Assessment is not about compliance. Assessment is about looking for strengths and weaknesses on the board and improving its performance. One particular aspect of the ASX recommendation is worth noting. The review should look at the director’s skills and knowledge. However, it also needs to examine whether any other director commitments may have influenced their decisions. Director’s roles can be fluid across companies, and another board appointment may result in a relationship that needs to be considered. Such appointments may cause nothing more than an impact on available time. Does the director still have adequate time to perform their duties properly?
What Should be Assessed?
According to Tricker (2019), research suggests that the best predictors of board effectiveness are not structure, independence of directors and committee use. These are issues that are readily assessable. Tricker (2019) goes on to suggest that it’s the underlying skills that need to be considered, including:-
- the structure of the board, including diversity and independence
- skillsets and experience of directors
- what training or professional development might be appropriate for directors
- what is the succession plan if one exists
- is the strategic thinking and decision-making process sound
- risk management policy
- consider committee structures and access to information by directors to inform decision-making abilities.
- Look at the who
- The board’s makeup, diversity, skills and attributes of directors.
- Look at the what
- Activities the board is overseeing. Strategic planning, succession planning etc
- Look at the how
- The structures and practices to do this work, including the work of committees
Peer-to-peer review can be effective but would rely on the trust culture of the board and the level of Artificial Harmony as described by Lencioni.
Board succession planning is important. Perhaps there should be a policy around this for LEAD. Difficult for directors to find new directors through their networks where the board is actively pursuing diversity. The people of diversity the board may be seeking may not exist in the existing directors’ networks.
Who Should Conduct Board Assessment
In some companies, the chair oversees the assessment. It is considered a better practice for a senior non-executive director assume this role. Of course, external facilitation is the most thorough method of conducting such an assessment. The frequency of such assessments are generally recommended on a tri-annual basis. This could depend on any problems identified on the board, however.
What Really Goes on in Boardrooms?
From the outside looking in, people may well perceive a group of people working together in complete harmony for the benefit of the company and its stakeholders. The reality is that people serving on boards are human beings and have all the problems with that. Any group of people will be political by nature. People will align themselves with others, and there can be interpersonal conflict on boards. This is all part of the process of being human.
Consequently, there are some principles that boards and directors should agree on regarding behaviour. First and foremost of these would be respect, not only for the other directors but in terms of listening and behaviour towards fellow directors. As a result, the leadership of the board by the chair and the way directors work together in harmony will largely provide the basis of how effective the board will be (Tricker 2019).
The Chair’s Role
The power and authority of the chair varies between organisations. Where the chair is the CEO as well, they have a great deal of power at both the board and operational levels. A chair should be a good leader, which involves far more than just running the board meeting.
Tricker (2019, p. 373) contends that the chair has some key functions, which include:-
- Leadership of the board – primary duty of the chair
- Management of meetings – an extensive role critical to the operation of the board
- Strategic leadership – ensuring all directors pursue the strategic goals of the organisation
- Linking the board with management – all communication with management should go through the chair in the first instance, at least
- Arbitration between board members and others through conciliation
- Being the public face of the organisation
Concept of Governance Power
“The fundamental legal power of the board derives from the shareholder members who have delegated the running of the company to their directors. This power is reinforced by authority derived from the company’s constitution, backed up by company law” (Tricker 2019, p. 378). However, there are other sources of power that can impact a board. These can include:-
- dominant shareholders
- hostile takeover threats
- potential litigation
- influence from auditors
- social and mainstream media pressure
- changing business landscapes.
The Humanity of Boards
As mentioned, boards are comprised of human beings with all their virtues and faults. Boards can get quite political. Tricker (2019, p. 380) provides an interesting summary of the games directors can play, which can include:-
- Alliances – between directors to influence a board decision or decisions
- Silence – when the elephant in the room is not discussed
- Cronyism – where advantage is awarded to directors on a relationship basis, not skillsets
- Deals – negotiations outside the board room between directors to achieve outcomes.
- Lobbying – attempts to influence other directors outside the boardroom.
- Snowing – overwhelming a director who asks a question with huge amounts of information such that it can’t be consumed.
It is worth noting that not all the above behaviours can occur with malicious intent. They may well be with the best interests of the company and shareholders in mind and directors working together effectively. It is when these behaviours are incorrectly used that problems occur.
These notes have considered the capabilities and desirable skills of directors on boards. The assessment of the performance of boards and directors has also been reviewed, and the question of who should conduct such a review. In addition, we have stripped away the professional unified perception of boards and talked about how human frailties can influence the working of boards. The role of the chair and the importance of good leadership have also been covered.
When it comes to corporate governance, there is a critical need for ethics, integrity and sound business acumen coupled with good communication and interpersonal skillsReferences
- AIB 2022, Module 4: Directors’ capabilities and assessments: Directors’ capabilities and responsibilities, Aib.edu.au, viewed 11 November 2022, <https://learning.aib.edu.au/mod/book/view.php?id=116295&chapterid=43193>
- Tricker, B 2019, Corporate governance : principles, policies, and practices, 4th edn, Oxford University Press, Oxford ; New York, Ny