What is the role of the board of directors of a private company and how does that affect the powers/authority of the managing director
“Growing up” in a corporate environment
If you’re running a business which is doing well, growing and getting attention, you may well find yourself faced with attending board meetings and dealing with non-executive directors (“NEDs”) for the first time. This can be challenging and it’s natural to feel apprehensive and unsure as to what to expect. The boardroom should not be a comfortable place. There should be a healthy tension between those running the business, the executives, and those who are independent or external, the NEDs. That tension is appropriate though as the main role of the NEDs should be to challenge the executives but this should be done in a positive and constructive way. The boardroom should be a safe environment after all.
Establish the rules
All directors appointed under the Companies Act 2006 have a statutory duty to perform their role in the best interests of all stakeholders, not just the shareholders. It’s important to remember that whereas authority can be delegated, accountability cannot. One area of increasing importance in today’s world is reputation and “doing the right thing”. This is the main reason why effective corporate governance is essential for any organisation as it provides the framework and mechanisms to ensure that both the organisation and the people within it “behave” appropriately.
Normally, the Chief Executive Officer (“CEO”) is a member of the board and certain powers, duties and responsibilities will be delegated to this individual, usually to “run” the business. However, the entire board remain accountable for the actions of the CEO. Boards make decisions collectively and both the executive and the NEDs have the same statutory duties under Company Law.
This is why key governance documents like the schedule of matters reserved for the board which sets out decisions that sit at board level (big ticket items like strategy and culture) and what rests with management (operational matters like recruitment and IT) are essential. Just as important is an up-to-date schedule of delegated authorities. Establishing delegation and understanding exactly “who does what” and “how” is one of the most important things to get right in a growing business where governance is not yet fully embedded. This will help determine the roles and how each party communicates and interacts so the executive can get on with their “day job” whilst the board can have confidence that the mechanisms to monitor performance and evaluate the implementation for policies, strategies and budgets are in place along with the necessary internal controls (of which setting the annual budget is the most important).
Understanding each other’s role is crucial and this is particularly the case in a growing company which is adopting formal governance processes for the first time. All the directors need to work together to achieve a balance of both expectations and outputs.
Drive the conversation
You may find yourself asking “Why am I here when I could be doing what I’m good at?” and “Who are these people asking me awkward questions?” There’s nothing wrong with feeling that way but board meetings are an essential part of business life once your company has become more established. Make the most of board meetings. They are a unique opportunity to pick the brains of experienced people who all have something different to say, probably something you haven’t thought of. Board meetings are expensive and a use of valuable resources. Everyone should be there for a reason and have something to offer. Treat a board meeting as a personal learning experience. You shouldn’t just be telling them what’s just happened as the board’s main purpose is to think about what’s coming next. This is the key strategic role the board fulfils. You don’t need NEDs for the operational detail so steer the conversation away from that onto what you should be talking about. Lots of NEDs will have had “your” job and all have their favourite topics to discuss or specialist subjects but you need to own and drive the debate.
Report on an exception basis – what they actually need to know.
NEDs often ask for more detail or deep dives but that can be handled outside of a formal board meeting – these are valuable, expensive uses of time and should not be “teach ins” about operational matters. Board reporting should be, therefore, high level and not operational – a company will not get maximum value from an experienced board if they are focussed on the minutiae. Board meetings should be about decision making – this is why they are valuable.
Make sure you have input into the agendas. This is what drives the board conversations. Don’t be reactive. You need to learn the language of the boardroom and the processes that make it work which may be unfamiliar to you but you will need to have a working understanding of them as the company grows. What is the purpose of minutes and the AGM? What is a resolution, why do we use them and when? How are shares allotted and why do we need different classes of share? It’s normal to have these questions which is why you’ll need the support of a Governance Professional.
Your relationship with the board
This is crucial to the success of the company. Dysfunction, not to be confused with tension or challenge, is a classic sign of a struggling company. It’s much more subtle than the classic employee/employer relationship though due to the unequal levels of understanding of the business. The CEO must know the business inside out. A board member, particularly if they are a NED, will not have this knowledge but should have sight of the “bigger picture” and let the CEO focus on getting the detail right. Additionally, the board may only meet formally perhaps quarterly or six times a year. The roles are therefore very different, requiring different skillsets and personalities. The board of directors is responsible for the actions of the CEO and needs to monitor the management of the company. At the same time, management needs to take the board into confidence about its decisions and it’s natural to sometimes feel a little nervous as to what to share. Remember that neither the management nor the NEDs can exist without each other and hence both need each other to keep the company healthy.
An enlightened CEO should see the board as a “boss”, someone to share problems with, work out solutions, seek guidance from and learn from. Not as a blocker or a threat. Different perspectives are essential, and an effective board will have time to think and offer opinions when the CEO is often more of a “doer” and unable to step back from an issue.
As a successful CEO, you will be used to being the public face of the company and the “leader”. The person directly responsible for maintaining a well-motivated workforce and driving the company as the principal decision maker. However, as the business grows, you will need the board’s help to grow into your role and so perhaps it might be helpful to find a “sponsor” or mentor among the directors, such as the chair. See your fellow directors as part of your team who can share your burden. You’re all on the same side after all.
Some NEDs will bring independent experience to the board whereas others may represent a major shareholder or owner. They will rely on management to grow their investment and keep the company healthy for the long term. This can of course lead to conflict over dividend payment expectations or capital expenditure. Strong corporate governance can help smooth the relationship by providing the language and the tools to help all involved, perhaps by taking the heat out of a debate or resolving a potential conflict of interest, particularly if things are not going well.
It’s natural to feel apprehensive about board meetings and when judging what to share with the board, particularly bad news. This is why building trust and strong relationships with your NEDs are important both inside and outside the boardroom; your fellow directors should not be strangers.