THE role of a board is to promote long term success of its stakeholders. This looks at the going concern for the foreseeable future of the business to ensure that the business does not collapse.
The board’s business is to look at long term perspectives. Instead of asking how to make profits, they ask how the business will remain competitive for many years to come.
The board is looking at bigger picture dynamics and how to position the business for unprecedented future success. They are focusing on strategy, how to remain responsive to customer needs and ensure the company meets them.
Many companies have collapsed because the board has not looked at the bigger picture. Before the advent of mobile telephones and digital cameras, companies like Kodak took time to change. They kept the old ways of taking photos using films, so by the time they realised people are taking photos using digital cameras; they found it was too huge a mountain to climb in terms of making the business successful.
What exactly is the role of the board?
The business of the board is to promote long term success of the company for its stakeholders, owners, or shareholders. Founders expect a better return on their money, so that the business gives them what is called ‘return on investment.’
The board’s business is ensuring that they make the shareholders happy. But also to ensure long term success, the board has to establish a strategy and effective governance system to ensure risk management and on-going concern.
People often do not quite understand the difference between strategy and plan; they think strategy is like a plan. Yet these two are different. A strategy is a unique idea, a game changer. I will give an example of audit firms.
These do auditing but also consultancy. If currently in 2014, the revenue from audit is 50% and that of consultancy is also 50%, the question, is this the ideal picture? The partners could say the model is not sustainable because in audit, the risk is too much.
Management may say in three years’ time, revenue from consultancy should be 70%.
That way of saying the revenue from consultancy should exceed audit by 20% is what we call choice. The next question is how do you do that? That is called strategy.
To conduct the business of the board effectively, there must be board charter. This explains the key functions of the board, which include based on Australian Institute of Company Directors governance roles, key board functions. It is the mandate of the shareholders to ensure that when they are appointing the board, they follow proper criteria.
Does the shareholder make a board charter and impose it on the board members? It is recommended that initially management can document a draft board charter against which the board composition and appointment is based so they own the charter.
The board must agree on its meetings, board papers and agendas so that everything is streamlined.
The board charter has to define when board members should receive the charter papers. Because the board’s business is strategy, they must communicate to the company through the director.
They communicate their expectations. It is their mandate to identify the right person as a Managing Director and empower him with the right tools. Once this is done, the board will be in the right direction. — firstname.lastname@example.org.