With a new year upon us, it is incumbent on all boards to step back, take a critical look and assess their structure, composition, committee charters and past performance and determine whether the board is prepared for the current challenges and the challenges and risks associated with its organization’s strategic plans.
This year, we will address the topics below in a series of articles all with the goal of creating the best possible board for your organization.
- Annual review of the Roles and Responsibilities of board committees and committee charters
- Board best practices audit
- Board evaluations and individual director evaluations
- Board succession planning; and
- Board education/training.
For any organization to be successful it must commit to improvement. To improve, an organization must look at its current practices and make changes where necessary. This includes changes to the board’s composition and practices. While some boards may be instilling new members this year through election or to fill a vacancy, the majority of the directors on your board today are your organization’s team that will lead it over the next year. To get the most out of this team your organization should consider the following:
Annual Review of the Roles and Responsibilities of Board Committees and Committee Charters
All organizations need to review their committee charters, annually at minimum, to ensure that such committees have the requisite authority necessary to complete its delegated tasks and additionally to ensure that such committees do not have authority greater than what the full board desires to grant. Committee charters are often the most ignored governing document for any organization. The charter of any committee should be discussed, if not negotiated, between the directors who are on the committee and the remaining directors who will rely on the committee on an annual basis.
A charter not only protects non-committee members from liability but also imposes that liability on the committee members. For directors, state law allows them to rely upon a committee of directors of which they are not members. However, a director may rely upon a committee only for matters within the committee’s designated authority and the committee has a legal duty of care to carry out that authority as an ordinarily prudent person in a like position would do under similar circumstances and a legal duty of loyalty to do so only in, and not opposed to, the best interest of the organization. Thus, it is imperative that the authority of a specific committee is properly and clearly designated in its charter.
Best Practices Audit
Most organizations, either by choice or regulation, have their financial statements audited on an annual basis. However, very few conduct an audit, either formal or informal, of their corporate governance practices. An annual audit of governance practices goes a long way in creating a productive board.
Board Evaluations/Individual Director Evaluations
“If you want one year of prosperity, grow grain
If you want ten years of prosperity, grow trees
If you want one hundred years of prosperity, grow people”
Boards must strive for commitment to excellence in their corporate governance and not just adhering to minimum standards prescribed by law. This requires a goal of continuous improvement. Similar to evaluating the organization’s chief executive officer and management for the organization’s performance, the board must evaluate itself to constantly improve. A yearly board evaluation will allow an organization to:
- Check progress against mission and goals
- Give directors a meaningful measure of accountability
- Allow for a check of strengths and weaknesses
- Emphasize the accomplishments of the board
- Provide a yardstick with which the goals of the coming year can be measured
- Encourage teamwork approach to decision making; and
- Give a feeling of accomplishment.
Board Composition/Succession Planning
Succession is critical to the life of any organization, and as such, one of a board’s most important responsibilities is succession of management and the board. A good succession plan helps to prevent staleness on the board. Preventing staleness or “institutionalization” of thought on the board is in the best interests of the company. However, adding directors with fresh or non-institutional thoughts comes with a price, whether accomplished through traditional approaches such as term limits or age restrictions or by involving the board in making itself an “expertise” board. Getting your board to buy into a succession plan helps create a multi-generational board that is future oriented and prepared of emergency absences.
“A board’s effectiveness depends on the competency and commitment of its individual members, their understanding of the role of a fiduciary and their ability to work together as a group [including] an understanding of the fiduciary role and the basic principles that position directors to fulfill their responsibilities of care, loyalty, and good faith.” See “III. Director Competency & Commitment” of the “NACD Key Agreed Principles.” Boards will be measured by their least common denominator, so it is important that all members are knowledgeable not only with the policies and governance of the organization but also educated on how to be better directors. Such education sessions can be reserved for one or two day board retreats or part of a board’s regularly scheduled meetings. Either way, it is important that all boards know what it means to be a board and how to fulfill their duties as board members.
Commitment to continuous improvement requires work. Committing to accomplishing any of the above five topics, if not all, will lead to improvement with your board. In turn such commitment add to the growth and performance of the board’s organization.