Best Practices For Effective Boards
A Board of Directors is the primary driver of corporate governance in a company. Corporate Governance refers to the manner in which the competing interests of a company’s stakeholders, namely: shareholders, management, the Government, creditors, employees and suppliers among others, are directed and controlled with the goal of creating long-term value and sustainability for the company and its stakeholders.
The Board of Directors of a company is heralded as the steward tasked with setting the strategic direction of the company and overseeing the conduct of the business of the company. It is mandated to balance the competing interests of stakeholders as well as attaining long term value and sustainability of the company.
The Institute of Certified Secretaries (ICS) has set out the best practices for adoption by private organizations in the appointment, composition, roles and functions of corporate boards in the Code of Governance for Private Organizations in Kenya (the “Code”). In light of the recent scandals and woes which have plagued many companies in Kenya, we note that the recommendations made by the Code would go a long way, if properly implemented, to ensure that companies are effectively run to ensure growth, longevity and sustained profitability. Below is a discussion of some of the pointers noted in the Code that can be embraced and implemented by corporate boards across the public and private sector regardless of the size of the companies’ balance sheets.
- Constitution of a Board
The constitution of a board determines how the company will operate as corporate culture is inculcated at the top and it is the leadership that sets the trend for the rest of the company. The composition of such a board should therefore be carefully considered.
Appointments to the board must be done in a transparent manner which should incorporate a competitive process to ensure that a company attracts the best talent available and that no bias is introduced and loyalties are not owed to any other party save for duties owed in exercise of one’s fiduciary duties.
The Code provides that a company should adopt a formal process for appointment of members of its board and that this process should take into account the diversity and skills required to execute the mandate of the board and ultimately achieve the objects of the company. The Code proposes the use of a nomination committee to identify suitable candidates for appointment. This committee should be guided by the terms of reference reflecting the needs of the company and should conduct the selection in a transparent and unbiased manner. Where such a model is followed, the directors appointed will not be held ransom by the interests of persons or forces who influenced their appointments and will be able to exercise their mandate bearing in mind that it is to the company that they owe their allegiance and not to an unseen puppeteer pulling their strings. It is important that just like in other engagements within a corporation, the terms of a director’s engagement should be clearly set out in a written contract or a letter of engagement. The contract or letter should detail the role of the director and the applicable remuneration and must be consented to by the incoming director.
A Board’s Composition should be one which is reflective of its shareholders. A well constituted board must have a balanced mix in terms of age, expertise, skills, gender, geographical diversity and experience amongst other factors. This mix is necessary in ensuring the company’s versatility and allows it to benefit from different ideas and different points of view. Having the persons of the same gender, or from the same tribe, or from the same profession results in a narrow-minded view of issues as there is no alternative perspective. All views are held from the same angle with no contrary view being expressed yet such a view could be held by the employees or the customers. Because these stakeholders do not have a way of voicing their concerns and lack representation at the top, their concerns are often overlooked to the detriment of the company. The Chief Operating Officer of Facebook, Sheryl Sandberg shared in her book, “Lean In”, about her experience while working at Google and the challenges facing pregnant women, attributing the oversight by the institution to the fact that there was no one at the management level who had experienced such challenges and there was therefore no one to voice the issues.
In addition to the foregoing, the constitution of the board should have an aspect of Independence and Accountability. This is recommended by the Code in the form of having non – executive directors (NEDs) on the Board in addition to executive directors. The executive directors are the directors who are involved in the day to day routine management of the company and include, among others, the Managing Director. The NEDs on the other hand are not involved in the operations of the company and can therefore hold the executive directors to account. In addition to this aspect of accountability, they are involved in strategy
formulation and policy making and this gives the company a chance to benefit from a certain caliber of leadership which may not be available to the company on a full-time basis. Their presence on the board therefore introduces an aspect of independence and facilitates the management of conflicts that may arise between the roles of the executive directors as managers of the routine business of the company and their oversight role as members of the board. The Code notes the vital role played by the NEDs and goes on to propose that the chairperson to the Board should be a non-executive director. In as much as NEDs are not part of the executive team, corporate governance requires that they should keep abreast with the developments in the company so as to engage meaningfully and give clear direction to the Company.
Size also matters when constituting a Board. The Code proposes that the number of members should not be less than five with NEDs making up two thirds of the Board. Such provisions are replicated across various regulated industries such as the banking sector and public listed entities regulated by the Capital Markets Authority. Although the Companies Act, 2015 allows a company to have one director and one shareholder, it should be noted that best practices in corporate governance hold a contrary view when it comes to the constitution of the board.
- BOARD EVALUATION
The Code provides that the Board should organize an annual evaluation exercise where the performance of the board as a whole, its committees, and members (including the chairperson, the CEO and the Corporation Secretary) are assessed. This should be facilitated by an independent governance expert and should result in a governance report complete with recommendations for implementation. Good Corporate Governance practices require that, upon their appointment, directors should be taken through an induction programme to familiarize them with their role, obligations, liabilities as well as the processes of the company. It is on this basis that the director’s performance can be fairly evaluated. For the Board members to adapt and keep abreast with changes in the relevant industry, and to equip them with skills and competencies essential for dispensing with their mandate, the Code recommends that the directors should be exposed to a continuous knowledge development program which should take place annually and in which members are briefed on relevant matters and changes in relevant laws affecting the company and its operations. In addition to the regular board evaluations undertaken, the Code also recommends that an annual Governance Audit should be undertaken by an accredited member of ICS.
- BOARD COMMITTEES
To ensure effective and thorough execution of the Board’s mandate, a board should be organized into committees with a framework of delegated responsibility to enable them consider specified matters in great detail and with due regard to professional detail.
The Code recommends that there should be four critical committees in any board, namely the Audit and Risk, Remuneration, Nomination and Governance and Compliance committees. Each of these committees should comprise of members with the necessary skills and competencies to execute their responsibilities.
- SUCCESSION PLANNING
The Code recommends term limits for NEDs by providing that they should not cumulatively serve for more than six years. To ensure continuity and to maintain institutional memory of the Board and the company by retaining and appointing new directors with the right set of skills and competencies, the Board should ensure that the terms of the NEDs are staggered to ensure a phased transition. Directors should be encouraged to mentor other leaders within the organization so as to build capacity and ensure that no gap is left when a director exits from the board of a company. A board should reflect the perpetuity of the company and the performance of the board should not rely on the personalities at the helm.
- BOARD CHARTER AND PRACTICE MANUALS
Boards should ensure that they have Charters and Practice Manuals which set out the rules, roles, responsibilities, structures, and processes of the board. These provide guidance to the members as to their mandate and the framework (legal or otherwise) within which they operate. Board Charters and Practice Manuals should prompt the practice of the tenets of good corporate governance by the board. In addition, for boards to be effective, they should develop annual Board Work Plans which, at the minimum should focus on risk assessment and management, strategic planning, governance and compliance, board evaluations and a review of the management’s implementation of strategies, policies and plans.
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