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Corporate Governance Best Practice

Boardroom Roles

by Sir Adrian Cadbury

Executive Summary

  • The role of the board is to direct, not to manage.

  • Balance of board membership and choice of individuals are key.

  • Chairmen are responsible for the effectiveness of their boards.

  • Nonexecutive directors have a particular contribution to make to the work of a board.

  • Board committees are important structurally and for the tasks they undertake.

  • Executive directors should be appointed solely for the value they can add to the board.

  • Board members have different roles; what matters is how they combine to form the board team.

The Role of the Board

The crispest definition of a board’s role is Sir John Harvey-Jones’s: “to create tomorrow’s company out of today’s.” Boards are in place to direct and control, not to manage. Boards have the task of defining the purpose of their enterprises and of agreeing the strategy for achieving that purpose. They are responsible for appointing chief executives to turn strategic plans into action, for supporting and counseling them in so doing, and if necessary for replacing them. Above all, boards are there to provide leadership, and it is in that context that the roles of board members need to be considered.

Board Composition

A single board at the head of a company is the commonest form of board structure. Unitary boards of this nature are made up of executive and nonexecutive or outside directors. Two-tier boards separate these two kinds of director, and their structure is covered briefly in the next section. Given that both executive and outside directors sit on unitary boards, the first issue is the balance between them. In the United States the chief executive is often the only executive on the board, and is usually its chairman as well. Fifteen years ago the ratio on UK boards was around two-thirds executive directors and one-third outside directors. This has now moved through parity to the position where outside directors are in the majority.

The Combined Code on Corporate Governance,1 in provision A.3.2, states: “Except for smaller companies, at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.” The issue of independence is dealt with under the heading of the Role of Non-Executive Directors.

In addition to the question of balance, there is the question of size. There is a clear move to smaller boards, both in Britain and the United States. Martin Lipton and Jay W. Lorsch, in their “Modest proposal for improved corporate governance” (Business Lawyer vol. 48, no. 1, Nov. 1992), recommend a maximum board size of ten and favor eight or nine. The argument for smaller boards is that they enable all the directors to get to know each other and to contribute effectively in board discussions, thus arriving at a true consensus. The crucial point is that boards are teams and provide collective leadership. So the balance of membership and choice of individuals are key to forming the team.

Two-Tier Boards

These boards are constituted of a supervisory board whose members are all nonexecutive and a management board made up of executive directors. The management board is responsible for strategy as well as for running the business. The supervisory board appoints and can dismiss the management board, and no one can be on both boards. The legal responsibilities of the two boards and of their directors are different, whereas with a unitary board all directors have the same legal duties however the board is structured.

Since supervisory boards may have employee members, this raises the question of their role on boards.2 My own view is that employees can most effectively participate at levels below the board, where the decisions are taken that affect them most directly and to which they can contribute knowledgeably.

The Chairman’s Role

Chairmen are responsible for the effectiveness of their boards. This responsibility rests with chairmen whatever their other duties. It leads on to the point that all companies are different and the issues they face are constantly changing. Individual boards have to follow accepted board principles, but in ways which meet their particular circumstances. It is chairmen who have the responsibility of ensuring that the make-up of their boards is appropriate for the challenges ahead. Similarly, it is chairmen who have the task of welding their directors into an effective team. Effective boards are not brought into being simply by sitting competent individuals around a board table. Creating effective boards requires effort by their members, but above all coaching and leadership by their chairmen. This is an argument for chairmen not also being chief executives.

Chairmen are responsible for the running of their boards. Their responsibilities include the agenda, the provision of adequate and timely information to all directors, and the actual conduct of board meetings. They are also, provided they are not chief executives, responsible for putting in place a means by which their boards can evaluate their own performance.

Where chairmen are also chief executives, their duties in relation to their boards remain the same, but the senior independent nonexecutive director would be responsible for the appraisal of the chief executive and for the review of the board’s performance.

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Further reading

Books:

  • Carver, John. John Carver on Board Leadership. San Francisco, CA: Jossey-Bass, 2002.
  • Charkham, Jonathan. Keeping Better Company: Corporate Governance Ten Years On. 2nd ed. Oxford: Oxford University Press, 2005.
  • Harvey-Jones, John. Making It Happen: Reflections on Leadership. London: Profile Books, 2003.

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