THE BOARD OF DIRECTIONS ON THE AGENDA ®
Year
IV – No. 1
Editor: Luciano Carvalho Ventura
In
our opinion, this happens for a number of reasons that we shall discuss
below. The order in which
these are given does not ascribe to them any greater or lesser importance
in respect of an effective board of directors. These reasons can be
grouped into the following three main categories: (i) the method whereby
the board was originally structured or improvements were introduced, (ii)
the qualifications and actions of its members, and (iii) the type of
duties performed by the board of directors.
1
– Structure of the board of directors.
On
being formed or, upon being periodically evaluated, the board must
consider the aspects vital to its effectiveness, which are:
a)
Joint development.
The
basic structure must be defined with the active involvement of the
shareholders or a group of major shareholders.
This is because it is through the board of directors that they have
a say in the company. Also
this involvement in the board formation generates a commitment to the
proposed structure and to the efficient performance of such shareholders.
b)
Specific areas to be addressed.
Although
most boards of directors have much in common, the structure or enhancement
of any board must take the following aspects into consideration:
*
Company size and type (present and future).
Just
as an example, a board of directors that works well for a bank is not
likely to work so well in a capital-intensive industry.
Also, if for obvious reasons, the size of the company is an
important factor in forming the board structure, the company’s projected
future size must also be considered in creating the board.
*
Background and interests of the company’s chief shareholders.
As
a rule, a board of directors composed of major shareholders and
individuals with in-depth knowledge of the company and its business, and
who are genuinely interested in their role of board member, meets
requirements for a good working structure, unlike the boards of other
companies where control is split between institutional investors or even
companies with widely distributed control, and this must be taken into
consideration.
*
Political aspects.
As
is the case with any group of people, companies live with politics at all
their levels, including the shareholders’. Political aspects between
shareholders must be dealt with at board of director level and not at
executive board level, thereby protecting company business from their
effects.
*
Executive Management
As a rule, a well-run board of directors was structured or improved based on both its specific role of regulating agent vis-à-vis the executive management’s role of regulated agent, and, even more importantly, on its work based on the degree of qualification and professional experience of its executives. In other words, a company comprised of young executives needs a very efficient board of directors that can guide and supervise these executives more closely than required for an executive management of more experienced professionals. Moreover, without losing board independence, harmony between the Chairman of the Board and the CEO, substantially contributes to good company management at its highest level.
*
Control system
An
effective board of directors usually has a good system in place for
controlling the company’s assets and operations.
Boards that lack reliable control systems cannot function well,
since the implementation or improvement of such a system is a priority,
taking up too much board time and distracting its attention from its
members’ essential duties.
*Information
system.
In
order for the board of directors to work efficiently, the company must
have a reliable system whereby information is rapidly available and at a
sufficiently high level to enable it to dispense guidance and, above all,
take decisions. If this does not occur, not only is the board unable to
function efficiently, due to the absence of reliable control systems, too
much of its time is taken up in implementing or improving such system. As
a result, board members tend to devote less time to their official tasks.
c)
Structure of duties.
In
addition to joint development and specific formulation policies, more
effective boards of directors also have a structure in place with the
following features:
*
Objectives and Duties.
An
effective board is fully aware that its chief objectives are: to increase
company worth over the long-term and to safeguard all its shareholders’
interests and not just the interests of some, with due regard for the
interests of other company stakeholders. The duties to be carried out by a
board of directors are discussed below in a specific section.
*Composition.
Practice has shown that the most effective boards are those whose members are selected based on a specific formulation concept, described above, numbering ideally at around a minimum of five (5) and a maximum of nine (9) members. Insofar as possible, a board should seek members from diverse areas but who complement one another. Ideally, there should also be a good balance between outside members, independent members, and in-house members, the latter, whenever possible, being limited to the CEO, to create the ideal action environment.
*Compensation
and Evaluation.
In
the past, certain board member fees irrefutably confirmed that “symbolic
fees only produce symbolic contributions”. In other words, the basis for
an effective board of directors is a fair compensation system in line with
market rates, as well as a periodic system of individual and collective
evaluations of each member’s performance, dedication, his/her
contribution to company results, and to the work of the board itself.
*
Technical Committees.
The
role of Technical Committees is to support and expedite the work of the
board of directors. Effective
boards create these specialized groups based on their needs and the
company’s respective business sector.
The nature, technical competence, and actions of these committees
are determining factors in the quality of a board’s performance.
*Meetings
Board
of Director meetings are an essential condition to their effectiveness,
particularly since the foundation of this management body is basically
collegiate. Consequently, the quality of the meetings helps some boards
to function more efficiently than others.
Quality in this context is a frequency of meetings of once a month
or, at least, once every two months, scheduled annually in advance. These
meetings
must have a fixed agenda of relevant topics that come under the board’s
jurisdiction, based on the nature of the company, appropriate support
material that is available to the board members sufficiently in advance of
each meeting to enable them to prepare themselves, records of the topic
announced, discussed, and approved in clearly written minutes, which serve
as the board’s collective memory. And,
lastly, a meeting well conducted by the Chairman, in terms both of the
time taken and of the search for general consensus.
2
– Board members’ qualifications and actions.
Board
members’ individual and collective qualifications, aligned with their
methods, represent the second block of reasons responsible for the better
performance of some boards. In
individual terms, a board member must have as many as possible of the
following qualifications: a good academic background, practical experience
in his/her specialized area, an overall business administration vision, a
strategic business approach, the ability to read management reports and
financial statements, some international experience, personal experience
in collegiate bodies, a wide range of good contacts in the business
community, and, lastly, political and negotiating skills.
In terms of collective qualifications, pursuant to the Third
Edition of Best Corporate Governance Practices of March 2004, issued by
the IBGC (Brazilian Institute of Corporate Governance), we believe
that a board of directors is more likely to perform better, when it is
comprised of a wide diversity of experience, knowledge, and backgrounds,
such as, CEO experience, crisis administration experience, risk
identification and control experience, a finance background, accounting
background, familiarity with the company’s business, domestic and
international market background, among others.
As
a rule, effective boards of directors consist of motivated professionals
with the time available to prepare themselves, for attending meetings, and
for dealing with their technical committee requirements.
3
– Board of Director duties.
Effective boards of
directors dedicate a significant portion of their time and attention to
formulating and monitoring company strategy, since they are well aware
that long-term successful companies are not those that are merely
operationally successful, but chiefly those that have correctly drawn up
their strategies and have carefully supervised their implementation.
The formulation and supervision of strategies is a board of
director role, and one that requires the cooperation of the executive
board, but should not be left to this executive management, a common error
of less effective boards. Insofar as strategies can also be regarded as the skill to
take advantage of opportunities and minimize their inherent risks, it is
true that only efficient boards pay sufficient attention to the risk
factor, when they draw up their strategies. In other words, they seek to
take advantage of the opportunities that arise while simultaneously
concerning themselves with minimizing the inherent risks. Further to this
strategy duty, unlike boards that function less efficiently, they also
spend considerable time analyzing and discussing the performance of the
competition and their potential future actions, that could impact
business. In respect of
the second and extremely important duty of any board of directors, the
selection,
development, motivation,
evaluation, and compensation of company executives, the more successful
boards of directors frequently, openly and transparently discuss these
aspects in relation to their chief executives, since they are aware of
their lack of powers of execution in the companies and that they only
“act” in their companies via their executives, when they provide
general business guidance. The
manner in which they perform the third core duty of any board of directors,
the relationship with the independent auditors, also ensures their more
efficient performance. These independent auditors who are regarded as
faithful and key allies aiding the board of directors in its duty of
monitoring the executive management either have direct contact, or a more
indirect relationship through the company’s Audit Board, with the board.
They attend meetings in which they explain and render an accounting
of their work, unlike boards that delegate this task to the executive
management – a potential conflict of interest.
Lastly, and in relation
to the fourth and last of a board’s key duties, the supervision of
company operations, some less effective boards of directors exceed
reasonable limits here. In other words, they spend too much of their time
in such supervision, thus relegating the other three duties to a secondary
level, when, in fact, it is the duty of the executive management to run a
company’s operations, and the board works better when it limits its
actions to supervision from a reasonable distance, except in circumstances
where the company is in crisis to a degree that its very survival is at
risk. Thus, an inefficient
board of directors dedicates the greater part of its meetings to
monitoring the financial aspect of company business, and neglects the more
important areas described above, such as strategy, the risk represented by
competition, performance, executive compensation, etc. The solution here
is to form a financial committee involving some board members experienced
in this area. In conjunction
with the executive management, this committee then calls a technical
meeting to examine the operation in detail prior to the respective board
meeting, where one of the committee members gives a summarized report on
company business to the other members of the board, answers questions and
gives the explanations required.
4 – Conclusion.
Relatively
few boards of directors fully meet the above requirements and conditions,
are correctly structured, comprised of qualified and pro-active members
and effectively perform their duties.
This does not, of course, mean that only boards meeting these
prerequisites work well. Boards
work well when they meet a majority of the many requirements described
above. What matters most is
familiarity with the variables of quality and to have a board undergoing
continuous improvement, and never to forget the importance of good
Corporate Governance in the company which has always been and still is a
direct consequence of the shareholder management – the board of
directors – the core of good Corporate Governance.
