What is board governance: the fundamentals guide for board members
In December 2001, an innovative energy company Enron with $63.4 billion in assets, went bankrupt. Some of the company’s executives were imprisoned for fraud, and shareholders filed a $40 billion lawsuit against the company. It used to be the biggest bankruptcy in the history of the United States.
What was the reason for such a massive fall? How were fraudulent accounting practices and straight-up lies even possible? And the answer is–poor board governance. The board of directors felt invincible, as there was no way to control them back in the day.
Now, when businesses understand the importance of proper board governance, another question arises–how to bring it to life? In this article, we will try and find the answer.
What is board governance?
Board governance is the framework that defines the structure of the board and the way it operates. For a better insight into the board governance definition, Deloitte suggested a governance framework that perfectly illustrates the scope of board governance objectives and its relationship with corporate governance and corporate boards. On the chart below, the green segments indicate the areas the board is expected to oversee, and the blue segments represent the areas that require monitoring from the board.
Board governance and other types of board structure
Board governance models and approaches are different in for-profit and non-profit organizations, and it also greatly depends on the organization’s size and type. However, there are six most common types of board of directors structure and board governance models:
- Governing board. The governing board responsibilities within this board governance model are to provide direction to the organizational management and to act in the shareholders’ best interests.
- Working board. Within this board governance model, the board’s role is not only to provide directions for the organization’s strategy and policies but is also responsible for their actual implementation.
- Managing board. This board governance model implies each board member is responsible for the decision-making and also manages the organization’s day-to-day operations.
- Cortex board. This board governance model focuses on the value the company brings to the community. The board members’ responsibilities include defining standards and expectations for boardroom performance to meet the company’s objectives.
- Policy board. Under the policy board model, board directors are second to the Chief Executive Officer regarding influence inside the company. Members of an organization’s board are to create general organizational policies for all staff to follow, and the CEO and senior executives are then responsible for implementing those policies.
- Advisory board. Within this board governance model, people consult the company’s management and governing board. Members of the advisory board have the skills, knowledge, and experience to provide professional guidance to the organization’s leadership.
What is the difference between a governance board and an advisory board composition?
A governance board is legally responsible for the governance, management, direction, and control of the organization. Governance board members have fiduciary duties to the board on behalf of major shareholders. An advisory board solely serves the role of an advisory body. They provide the management team with non-binding advice, critical thinking, and strategic insights on the company’s development and growth.
Simply put, governance boards have a decision-making model where decisions are binding to senior management and overall organizations. While an advisory board is never authorized to act on behalf of the organization or make board decisions.
Although each board has its peculiarities, they all have something in common. It is vital to ensure effective board management. Let’s take a look at some of the best practices to help you do that.
Board management best practices
1. Make managing risks your priority
In times of uncertainty, businesses rely heavily on their risk management board. It is vital for the companies’ resilience that boards assess and manage risks, as well as discuss potential vulnerabilities and strategies to mitigate them.
Frequently, the board establishes a dedicated risk committee aimed at addressing distinct risks. Committee members are selected based on their professional expertise in various risk domains (e.g., financial and legal).
2. Engage the experts with diverse expertise in your board structure
Create a board with diverse skills, experiences, and backgrounds to provide well-rounded perspectives and insights for strategic discussions. This will also make following the most recent board governance trends easier, as the experts with diverse backgrounds will surely bring innovative ideas to the table.
However, keep in mind that it is vital to ensure proper onboarding of the new board members. The initial step in introducing new directors involves an official announcement. This shows their importance and authority and gives them a chance to remind everyone about the company’s goals.
3. Establish clear communication
Maintain transparent and open board communication to ensure alignment and informed decision-making. Effective communication stands as the cornerstone for the board’s making of crucial decisions. Moreover, it cultivates transparency within the board and bolsters the relationships between board members and management. In situations where corporate governance is not in sync, disagreements can become sources of frustration and add complexity to decision-making processes.
4. Perform regular evaluations
Conduct periodic assessments of individual director performance and overall board effectiveness to identify areas for improvement.
5. Plan strategically
Engage the board in strategic planning sessions that align with the company’s long-term vision and goals, fostering a collaborative approach.
6. Work on board development
Provide ongoing training and education opportunities for directors to enhance their understanding of the company’s industry, challenges, and best practices. Board governance training for both corporate and nonprofit boards can, for instance, concentrate on these aspects, among others:
- Board oversight: Training for corporate boards helps directors follow organized and proper board setups led by the board leader and split into smaller groups. Basic concepts of nonprofit management, board responsibilities, and following the law help new members if the corporate board gets started.
- Risk mitigation: Such training is about learning how to handle different types of risks in business and nonprofit groups. These risks include things like finance, operations, following laws, and reputation. Understanding how to manage risks helps board members oversee important operations within the organization.
- Strategic planning: This knowledge helps board members tackle challenges related to finance, operations, management, etc. Strategic planning is used by both companies and nonprofit organizations to manage finances and come up with new revenue streams.
7. Maintain ethical standards
Uphold high ethical standards and a strong code of conduct to promote integrity, accountability, and ethical decision-making.
8. Develop a clear succession plan
When it comes to good board governance, it is vital to develop a clear succession plan for board leadership positions to facilitate smooth transitions and continuity in leadership. Effective boards cannot function without such a plan in place.
These practices contribute to a well-organized and effective board that adds value and guides the company toward success.
The role of finding the right board governance model
The roles within the executive board differ from company to company, depending on the organization’s type, the board structure, and board governance models. The responsibility will be different in private and public companies, as well as in For-profit and non-profit organizations. However, the common board governance role implies the following duties.
1. Ensuring the organization’s success
This is the key role, which consists of many aspects. The set of actions board members performs should lead an organization to growth and prosperity.
One of the ways to ensure an organization’s success is to conduct a board retreat. A board retreat isn’t like a regular meeting in a conference room, nor is it a monthly team-building event for employees. Instead, it’s a gathering where the organization’s board discusses the company’s future direction. It could be a fun occasion or a bit boring if not done well. The outcome depends on how good the planning and organization are.
Typically, board retreats result in new strategic ideas and development plans and have a positive impact on the business state.
2. Defining long-term strategic vision and mission
The board of governance is responsible for establishing the overall purpose of the organization — its mission. Board members develop strategies and policies that will help the company reach its objectives with the pre-defined purpose in mind, while the implementation of strategic planning lies on the organization’s management.
3. Shaping organizational leadership
The board searches for and hires C-level executives, as well as fires them when necessary. When it comes to new hires, it is vital to perform board orientation. It involves acquainting new board members with the organization and furnishing them with essential insights about the company. Such orientation is vital for the core leadership of the organization.
4. Assisting with decision-making and risk management
The board helps the organization with fast and efficient decision-making, which leads to the company’s growth. It also helps to quickly resolve conflicts, improve crisis management, and find answers to the appearing questions, which prevents stagnation.
5. Sharing expertise
Oftentimes, a board helps to improve organizational performance. The expertise, knowledge, and skills board members share can provide new insights to the company’s executives or help them seek solutions outside their perspective. Besides, the duties will depend on the specific governance type. For example, IT governance board roles and responsibilities include setting IT strategy, approving IT budgets, ensuring data security, and aligning IT activities with business objectives.
Numerous studies highlight the need for improvement in fundraising as a primary responsibility of boards. However, a common trend among board members is to delegate fundraising goals to the executive director or staff. Surprisingly, only a small 5% of nonprofit organizations consider fundraising to be within their realm of strength.
Nonetheless, active board fundraising activities are essential to provide organizations with the necessary resources for accomplishing business objectives.
Board governance VS management: Principal differences
The terms governance and management are often used interchangeably, but this is actually a mistake. A board of governance implies that the board comes together to make decisions about the company’s direction. In other words, they provide guidelines and establish strategies for the company’s direction. On the other hand, management is responsible for making actual decisions at different levels to bring suggested strategies to life.
Top 4 board governance challenges
There are a few challenges a board of governance can face.
1. Increased scrutiny
It’s getting harder for boards of directors to meet the demands of activist investors since they impose various governance-related requirements that involve the board’s composition, structure, remuneration, accountability, voting rights, or leadership changes. The governance board of directors has to face the challenges or face the financial and reputational consequences.
2. Conflicts of interest
Some companies require individual board members to sign the conflict of interest policy when joining the board. However, it’s not always a solution if, for instance, shareholders’ interest is in short-term benefits while the company’s executives focus on long-term results. As a result, board members might feel pressure either from the CEO’s or shareholders’ side.
3. The culture inside the company
In some companies, senior executives are never subject to question or challenge. This naturally creates an atmosphere where effective performance is impossible since directors of a board can’t influence the leadership.
4. Different stakeholders’ needs
The overall disagreement between stakeholders can cause huge obstacles to governance. For instance, when one particular shareholder prefers a conservative direction for the company’s growth, and the other opts for a riskier but potentially more beneficial approach, it’s impossible for the board to establish a single effective growth strategy and mission.
Tip: All the governance challenges are handled easier when using dedicated board portals since they allow for efficient governance, provide a tool for a virtual board meeting, and offer high-level security.
5. Board transparency
It is vital, as it offers a clear view of the board of directors’ actions within a company. This, in turn, informs and provides an understanding of the organization’s corporate governance methods. However, ensuring board transparency is no easy task. It requires conducting annual evaluations, establishing clear policies, and many other aspects.
Boards often face substantial risks from cyber attacks, which commonly encompass substantial data breaches or significant disruptions to the public.
Hence, the board’s role in cybersecurity is immensely important. Each member of the board should grasp that cybersecurity is a collective responsibility of the entire board, extending beyond the risk committee or the Chief Information Security Officer (CISO).
Board governance best practices
A well-run board can ensure efficient governance and lead the organization to a sustainable future. Undoubtedly, the approaches to successful governance change over time, but there are several timeless practices that improve board effectiveness:
- Advocate diversity. To perform well, it’s important for the board to be diverse in terms of gender, ethnicity, background, age, and skill set. Diverse governance ensures the company gets insights from all possible perspectives, which is highly beneficial for the organization’s growth. Remarkably, according to PwC’s 2022 Annual Corporate Directors Survey, 88% of respondents say gender diversity is essential to create a diversity of thought on the board.
- Conduct annual board evaluations. According to the above-mentioned PwC’s Survey, 48% of board executives think one or more directors should be replaced. This speaks about the importance of regular board evaluations to ensure board effectiveness is on a high level.
- Hold board meetings effectively. Be it an annual board of directors meeting or regular board gatherings, it’s important to clearly state the meetings’ agenda and focus on what should be accomplished in the defined period. This saves board members’ time and effort, and helps them focus on the company’s objectives and prioritize critical topics for discussion.
- Avoid micromanaging. Board members should understand that day-to-day organizational tasks are not their business. Instead, they need to focus on the long-term goals and leave the responsibility for implementation to the company’s executives.
- Provide quality training when onboarding. For board members to have collective responsibility and accountability and to better perform their duties, it’s essential to offer comprehensive board governance training that clearly defines board members’ roles, responsibilities, and governance expectations. This allows boards of directors to focus on achieving organizational purposes.
- Engage shareholders. The results of the PwC’s Survey also display the growth of the shareholders’ engagement — 60% of directors of boards say that a member of their board had a direct engagement with a shareholder during the last 12 months. They also point out that such direct connections positively impact certain board discussions.
- Throw informal meetings sometimes. The informal setting can help to get to know board members better, which, in turn, can positively impact the effectiveness of the board of directors governance.
For-profit VS Non-profit organizations: key differences in a board of directors
While both these organizations types have boards of directors that play a governance role, and have a similar board structure, their purposes, financial goals, stakeholder considerations, and overall approaches differ significantly due to their distinct missions and operational models. There are several key differences between the board of directors in for-profit and non-profit organizations:
|Financial goals||Profit generation and financial growth are central to a For-profit board’s decisions, as they aim to enhance the organization’s financial performance.||Financial sustainability is important for non-profit boards, but their focus is on achieving their mission while managing resources effectively.|
|Sources of revenue||Revenue comes from the sale of goods or services, and profits are distributed to shareholders, reinvested, or used for expansion.||Revenue typically comes from donations, grants, fundraising events, and other non-commercial activities. Any surplus is reinvested in furthering the organization’s mission.|
|Governance structure||Boards in for-profit organizations often have a more hierarchical structure, with shareholders having varying degrees of influence based on their ownership stake.||Governance in non-profit organizations is different because boards can have a more diverse structure, including members from various stakeholder groups, and decisions are driven by the organization’s mission rather than financial interests.|
|Stakeholder considerations||Shareholders are the primary stakeholders, and decisions are influenced by their financial interests.||Non-profit boards must consider the interests of various stakeholders, including donors, beneficiaries, volunteers, and the broader community.|
|Accountability and transparency||Accountability is largely to shareholders, and financial performance is a major measure of success. Transparency is required for regulatory and market reasons.||Accountability is to the organization’s mission and the community it serves. Transparency is essential to maintain donor trust and demonstrate impact.|
Also, each non-profit requires a board of directors bylaws. Essentially, it is a documented set of guidelines to define their governance framework. These guidelines constitute legally binding rules that dictate the functioning of the board.
Any tips for non-profits?
The governance of a for-profit and non-profit organization differs on various levels. The table below covers their main differences.
|Aspect||For-profit organizations||Non-profit organizations|
|Purpose||Generate money for owners||Serve the public interests|
|Indicators of success||Making a profit||Meeting the public needs|
|Board members compensation||Yes||No|
|Profit||Distributed||Spent to fulfill the mission|
|Who enforce rights||Stockholders||State Attorney General|
The main tips for effective governance in nonprofit organizations are basically the same as for the For-profit companies:
- Attract the right board through recruitment
- Conduct effective board training during onboarding
- Ensure effective planning
- Conduct meetings effectively
- Asses boards regularly
- Perform self-assessment
How can board governance software help?
The governance process can be significantly streamlined when using board management software. It offers a variety of tools that help in planning, monitoring, and performing, it also helps to conduct a paperless board meeting.
|Discover iDeals Board as the most “universal” board management software that’ll fit the needs of all-sized companies.|
Key features of board governance software
- Document management. Efficiently organize and manage board documents, such as agendas, minutes, board reports, and policies, in a centralized and secure digital repository.
- Meeting management. Streamline the entire meeting lifecycle, from scheduling and agenda creation to document distribution and action item tracking. If you do not use such software yet–you still need to manage meetings effectively.
- Collaboration tools. Facilitate real-time communication and collaboration among board members through secure discussion forums, chat features, and shared workspaces.
- Security and compliance. Ensure data security with encryption, access controls, and compliance features that align with legal and regulatory requirements. Apart from cybersecurity, it is vital to ensure the safety of confidential information. Here is when executive session minutes come in handy. Typically, executive session minutes are not accessible to the public and are only accessible to participants of the executive session upon request to the secretary.
- Virtual meeting capabilities. Enable remote participation through virtual meeting tools, ensuring all members can join meetings regardless of their physical location.
These features collectively enhance board efficiency, greater transparency, communication, and compliance, making board governance software an invaluable tool for modern organizations.
What does a board governance committee do?
A board governance committee oversees the board of directors and board processes and takes part in shaping the leadership of the company and specifying their compensation ranges.
What is nonprofit board governance?
Nonprofit governance focuses on ensuring the company is moving towards its mission and serves the public.