board culture

Meeting of shareholders

Board Organizational Frameworks

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Developing a strong organizational framework for the board of directors is critical to ensuring that company matters are addressed by the correct committees and receive the attention necessary for solving these matters. Issues of importance should be prioritized appropriately and given ample time for review. 

Corporate Culture and Board Organization

There are many mechanisms for organizing the board, all of which lead back to the topic of corporate culture. Corporate culture begins with the board; if the board is unable to establish an understanding grasp of what motivates corporate behavior, the rest of the company will follow suit. Failing to give thoughtful attention to employee and executive interactions, behaviors, and language will undoubtedly result in a disorganized board and a company that lacks a clear focus of what defines its team members. Thus, it is important for boards to maintain an environment that fosters engagement and meaningful conversation as a backdrop against accomplishing agenda tasks. This is the first step to spreading a culture of candor and trust within the company and cannot be accomplished through one 40-minute team bonding meeting. It must be consistently worked upon and established over time through healthy discussions of sensitive topics, transparency about company goals, and acknowledgment of personal weaknesses to make room for learning growth. 

Corporate culture should also be included in a company’s formal risk assessments as it can very easily influence workforce productivity, company reputation, and law breaches. According to the 2017 Board Leadership of Corporate Culture in Europe Report, approximately 85% of the value of leading businesses come from intangible assets, such as a company’s brand, reputation, and internal relations. These intangibles are all inextricably linked to the board’s ability to set the right organizational culture and are important factors to business success. Thus, investing more time and resources into mindful culture development will bring a company greater returns. 

Tailoring the Board to Meet Company Needs

When talking about board organization, it is important to keep in mind that not every board is the same. Board work should be tailored to the specific needs and culture of the company. What makes sense in the context of one board may not work for another. While looking at best practices and board trend reports may be helpful in establishing a general framework for your own practices, it should not be viewed as the golden rulebook of board organization. Such trends come and go; a company should only adopt a policy after considering the specific benefits it will bring in their unique corporate circumstances. 

One example of the significance of examining company specifics is the debate over combining or separating the chairman and CEO roles. One generally accepted argument is that the role of the CEO/management is to run the business operations while the role of the board is to oversee this management, thus the leadership of the two roles must be separated to keep each other in check. Conversely, others argue that the role of the CEO and Chairman go hand in hand and can be combined to one position of oversight. This age old debate has no one-size-fits-all answer because it depends on the circumstances of the company. In the U.K., the CEO does not serve the dual role of the chairman, whereas in the U.S., over 50% of CEO’s surveyed also serve as chairman. 

A simple yet helpful device for setting the distinction between management and board decision-making is to set up periodical reviews of the specific responsibilities reserved for the board. While this is just one example of how different systems can adopt differing policies, in general, all major questions regarding board and leadership structure require careful consideration of the unique set of company needs and corporate culture that influence these decisions.

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What is the Role of a Board of Directors?

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In simple terms, boards are the governing bodies of corporations elected to make major decisions concerning financing, mergers and acquisitions, selling the company, nominating the CEO, and when or if they should release an IPO to take the company public. 

The board serves the corporation as its agent and makes decisions in an unbiased service of the company and its shareholders’ best interests. An important distinction to note between board members and management teams is that it is not the board’s responsibility to run the company. Their responsibility falls more under oversight and ensuring that the right people are running the company. Boards that get too involved risk undermining the management team and fail adherence to the crucial board principle of acting with independence. 

The sum of these responsibilities is a board’s fiduciary duty, meaning they must place the company’s best interest before their own. This sounds simple in theory, but in practice, many boards run into trouble when faced with difficult decisions that go against their personal interests. Therefore, it is poor practice for board members to have strong financial ties with the company that will inhibit them from acting ethically. 

High performing boards will maintain an active spirit of debate. Because every matter of strategic importance needs the board’s approval, good directors must always be on their toes and highly involved in deliberating the best course of action. Additionally, good board members must listen carefully to and respect opposing opinions. Only then can a consensus be reached efficiently and smoothly. 

The leader of the board, the chairman, must ensure that everyone remains in check and leads the decision-making process. The chairman should not be affiliated with the CEO and should weigh the CEO’s opinion of no greater importance than the board directors. A strong chairman will drive its board to ask the necessary hard questions, challenge the status quo, and continuously evolve to develop highly informed, up-to-date perspectives.

The trending evolution as of late has been a sweeping move to incorporate more diversity members and women on boards. A more diverse board reflects an independent board selection process and predicts a greater ability of the board to make unbiased decisions that have been considered from all angles. 

Diversity standards typically mean having at least one person of color, one woman, and one independent director on the board, though recent growing pressures to increase diversity have caused some companies to raise the standard to at least two people of color and women. The current top-three public companies ranked by board diversity are leading this movement with numbers as high as 60% female directors in Stitch Fix, 50% ethnic-minority directors in Hewlett-Packard, and 92% independent directors in Verizon. Further proof of the diversity movement is seen through Goldman Sachs CEO David Solomon’s statement that the bank will no longer take companies with all-male, all-white boards public. 

It will be interesting to see how these shifting board dynamics play out, but in the meantime, we can rest assured that the overarching roles of boards are not changing anytime soon. 

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Overview of Board Committees

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In the ever-changing digital age, board committee structures must constantly evolve to keep up with changes in capital markets and trade policy. Board members face new challenges everyday regarding the complexities of corporate values, strategy and risk management. 

A recent Harvard Law School study tracked board structures since 2013 to examine how S&P 500 companies are using board committee structure to address oversight needs. They found that although boards have been growing to encompass additional committees, the underlying framework has remained largely the same and rely on three key committees– audit, compensation, and nominating and governance– that are required by the stock exchanges. Bank holding companies (BHCs) are required to have one additional risk committee to review their global risk-management framework. Beyond this basic structure, most institutions have one additional standing committee to oversee finances or executive order.

During 2013-18, the portion of companies with at least one additional committee grew marginally from 74% to 76%, and the average number of additional committees remained largely consistent.

Harvard Law School Forum on Corporate Governance

Top Additional Committees

Findings on the top additional committees in 2012-18 are as follows.

Executive Committee: Exercises authority of the board when the board is not in session, except in cases where action of the entire board is required by charter, bylaws or applicable law. (36% of S&P 500

Finance Committee: Oversees capital allocation, financial policies, strategies, capital structure, and annual operating and capital budget. The finance committee may also oversee investments, dividend policy, credit and other market risks, share repurchases, and mergers and acquisitions. (36% of S&P 500)

Compliance Committee: Oversees programs and performance related to legal and regulatory risks, as well as implementation and maintenance of the company’s code of conduct and related matters. The compliance committee may have special focus on compliance in a specific area, e.g., environmental, health, safety and technology. (16% of S&P 500)

Risk Committee: Recommends the articulation and establishment of the company’s overall risk tolerance and oversees enterprise-wide risk management to identify, assess and address major risks facing the company, which may include credit, operational, regulatory, interest, liquidity, investment, funding, market, strategic, reputational, emerging or other risks. The risk committee reviews and discusses management’s assessment of the company’s enterprise-wide risk profile. (11% of S&P 500)

Technology Committee: Oversees and assesses the company’s technology profile and related strategies and makes recommendations regarding the execution of technology enablement formulated by management. Technology committee members address opportunities and risks regarding technological strategies, including aspects of cybersecurity. (7% of S&P 500)

Public Policy and Regulatory Affairs Committee: Reviews significant legislative and regulatory initiatives by state, federal, or foreign government authorities, as well as other public issues likely to affect the company and its shareholders. They oversee the development of company policies in response to these developments and may have a related compliance function. (7% of S&P 500)

Corporate Responsibility and Sustainability Committee: Reviews policies and practices related to specific public issues of concern to shareholders, the company, its employees, and the general public. They maintain oversight of corporate responsibility, environmental sustainability, diversity and inclusiveness, and reputational risk. (6% of S&P 500)

Finding the right committees for your specific company depends on the company’s unique needs and must address the company’s major concerns in a forward-thinking manner that will motivate new strategic thinking. However, some common trends that span across all industries is a focus on technology and sustainability as we move into the new decade. Keeping these trends in mind when considering the most effective committee structures will be a smart move for companies who want to succeed in today’s hyper competitive, highly disruptive markets.

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Board Structure Strategy

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The board of directors is appointed by a company’s shareholders with the expectation that directors will govern according to the shareholders’ and company’s best interest. Their purpose is to discuss strategies and make key decisions on financial affairs that will lead the company towards long-term prosperity and sustainability, while protecting the interests of all shareholders and stakeholders. Ranging from corporate governance, to corporate ethics, to corporate social responsibility, board directors are expected to have individual areas of expertise and impart their knowledge during debates to collaborate with other directors on defining the best course of action. To execute this duty, boards are split into committees that each oversee a specific area of the company’s performance. The structure of these committees depends on the type of company it is and the company’s goals.

Best Practices for Board Structure

Typically, board terms are staggered to prevent hostile takeovers. The candidates are elected during a corporation’s annual general meeting by current board directors and shareholders, and should possess some level of managerial experience. Though today, many companies are changing their criteria for board candidates and reducing the amount of managerial or board experience required, instead focusing on the unique area of expertise a candidate can bring to the table that the company is lacking in. For example, a company may decide to appoint a former IT specialist or software engineer with no prior board experience if the company is trying to strengthen their technological strategies.

Having a certain quota of independent directors is also important regardless of the company type or direction because it minimizes bias and external pressures in the boardroom. The Securities and Exchange Commission (SEC) requires that public companies have a majority of their board be independent directors. The reason independent directors are preferred is because they are more likely to provide an objective opinion on what is best for the company and less prone to hop on bandwagon opinions that mostly serve upper management. Independent directors must also possess a strong level of business expertise in order to accurately translate their opinions into financial decisions and approve transparent financial statements. 

While board members are expected to bring at least one area of outside expertise to the table, nowadays, the most successful boards are composed of directors who are experts in multiple topics. It is currently well-encouraged for company boards to recruit recent college graduates with a major in business and minors in related fields such as cybersecurity, data science, or marketing management. This ensures that the board is composed of the most up-to-date, well-rounded intelligence. 

Another key topic to board composition is diversity. There has recently been increasing pressure for companies to appoint more women and people of color to their boards to reflect a more independent board selection process. The reasoning behind this is that companies with a predominantly white, male board most likely possesses some level of bias in their selection process and is not guaranteed to deliver a diversified range of opinions that serve public interest. The more diverse the board, the more diverse its range of robust expertise and perspectives. 

Finally, boardroom best practices recommend establishing term limits to consistently refresh and evolve board composition. In the past, board members could expect an automatic reappointment at the end of their terms. This is no longer the case because it leads to boardroom stagnancy and a recycling of the same perspectives. With today’s fastly evolving technological and corporate landscape, board directors are expected to serve a maximum of 12 years in tenure. This standard is meant to open up more vacancies for new, forward-thinking members. 

With these practices in mind, nominating committees have much to consider in electing the most qualified, highest performing board. The key takeaway to remember is that no matter the service a company provides or the industry it belongs to, all companies need a highly independent, diversified board with expert knowledge in a wide range of fields in order to successfully oversee management and lead the company to success.

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Tone at the Top: Why Board Member Values Matter

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No matter how many policies and guidelines a corporation issues regarding standards of behavior, the lessons that matter are not expressed through writing. Tone at the top tier management level is all about trust, and trust is earned through actions. People on all rungs of the corporate ladder notice on a daily basis the attitude of their leaders and talk about it at the water cooler. If leaders do not act in a trustworthy and ethical manner that upholds consistent company values, its effects will be amplified throughout the organization. This can generate a detrimental cascade of morale loss and productivity plummets whose effects extend beyond the company to its shareholders, ultimately hurting one of every firm’s most important intangible assets— public goodwill.

It won’t be long before these effects are reflected financially as earnings per share begin to drop and the company’s reputation falls apart. Not to mention, the loyal employees of the company will also lose respect for its management, causing efficiency to decline and structural organization to weaken. Employees value the sense of pride and integrity that comes with working for a company, beyond simply turning a profit. When choosing where to work, employees look for companies exhibiting strong, cohesive values that resonate with the public. 

Hence, establishing and exercising core values in the boardroom early on is imperative to ensuring a company’s credibility and unity.

Strategies Proven to Improve “Tone at the Top”

  1. Establish clear values and expected standards of behavior. The CEO and upper management should design and publish operating principles that reflect the company’s principles as well as provide stringent operational and ethical expectations for its workforce.
  2. Strive for consistency between standards and actions. When dealing with corruption cases, companies must issue a swift response and honor its guidelines. It is important for board members to focus on enforcing company principles rather than depart from them during high pressure situations to mitigate the damage of such cases. Failing to comply with company standards or trying to slide the problem under the rug will result in a larger scandal down the road and risk a major breach of corporate trust. 
  3. Stay vigilant for internal dissatisfaction. Monitoring corporate buzz and internal affairs will afford a richer understanding of company culture from the perspective of different stakeholders. This gives management a better idea of what’s working and what isn’t in striving to achieve greater employee satisfaction levels and productivity.
  4. Reward principled performance. Successful companies develop a framework for recognizing and rewarding ethical performance, especially in ambiguous or difficult circumstances. Spotlighting and rewarding good behavior throughout the company, regardless of status, will incentivize others to follow that same model.
  5. Manage upward paths carefully. Management should be careful not to promote anyone with blemishes on their ethics or compliance track record. Negligent promotions feed the belief that poor compliance records are overlooked and acceptable, leading to future nonconformism should ethical issues re-arise.
  6. Genuine networking to spread company ideology. Businesses are all about connections, so it is well-recommended for the CEO and board to establish connections with key stakeholders both within and outside of the organization. Leaders must openly communicate their values on an ongoing and transparent basis, using different platforms and dissemination systems. 
  7. Communicate with top management. While the behavior of all members of an organization carries a weight, remember that the CEO’s behavior is the most publicized when it comes to telling the company story and holding responsibility for a company’s growth or mishaps. Behind the scenes, boards hold a direct responsibility in overseeing and understanding how management’s actions are perceived by the public. Establishing collaborative communication between the two parties will keep company performance in check and boost the company’s public standing.

Key Takeaways

Setting the right company tone is pivotal to ensuring company success and reputability. Communicating the right values to both internal and external players will facilitate healthy corporate relations with investors, employees, suppliers, regulators, and other constituents. Many corporate failures can be linked to CEOs and governance boards who have neglected to develop a cohesive company culture grounded in integrity, leaving room for scandals to arise. Sometimes, all it takes is a single rumor of impropriety and inefficient conflict management to turn a company’s reputation on its head. Ultimately, the moral fiber of an enterprise rests upon the collective effort of its board members and management to monitor these rumors, deliver judicious consequences, and enforce strict company regulations.

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Representing Shareholders Best Practices

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Corporate governance is an important topic of interest to many investors because it represents a key metric for a company’s future sustainability and success. Both shareholders and stakeholders alike are keen to notice strong governance and a comprehensive board strategy, leading corporate governance to become a paramount determinant of corporate reputation. 

Best Practices for Improving Shareholder Relations

Establishing a strong foundation of governance principles the board should operate by is the first step to establishing a good reputation with the public. Strong values are intrinsic to forming trust with a company’s shareholders and can lead to a higher valuation of the company. Setting the right values and tone also ensures transparency and provides guidelines that hold the company accountable for any potential abuses of power or fraud. Creating a sense of corporate liability within the board is a key component of board culture and effective leadership, which prevent scandal outbreaks such as Enron’s downfall. 

When shareholders see that a company has a clearly structured framework of guiding principles and values, they are more willing to invest in the company. This is important for raising a company’s Earnings Per Share (EPS). Thus, company’s should keep their investors’ values in mind when forming such a framework. A robust and flexible set of shareholder rights must be established at the forefront to protect their stake in corporate ownership. Investors want to know that their investments are being protected against security and system risks. 

Once the basis of corporate guidelines is formed, boards must remain vigilant of the changing consumer landscape, digital trends, and market demands to be able to consistently update and improve upon their principles. Modern governance must evolve and adapt to technological advancements, current events, and information spread. Maintaining a fresh perspective on current affairs is necessary for understanding shareholder interests. 

How Much Control Should Shareholders Maintain?

The post Sarbanes-Oxley corporate climate defines a clear distinction between ownership and control. Security laws of the 1940s set up checks and balances to ensure that management operates in the best interest of all parties. The shareholders have ownership of the company, management controls the operations, and the board of directors are responsible for overseeing the operations and representing shareholder interests. 

Board directors are responsible for making nonpartisan judgement based on the company’s established principles to reign back management’s decision-making power. They act as agents of the shareholders and must have a strong understanding of policies that create long-term shareholder value. Shareholders typically have limited power to influence how a company is run; but if company performance drops, shareholders exercise their right as the owners to ask questions, examine board practices, and elect a new board should the existing one fail to meet their fiduciary duties. 

Board members are elected by shareholders based on the expectation that they will equally represent all shareholders, regardless of their ownership stake. During the annual meeting, all shareholders should have their opinions voiced by the board in terms of company values, goals, and vision. Board members must abide by a code of conduct which mandates there be no conflicts of interest between ownership and management. Should such conflicts arise, boards must ensure that management sets aside their personal gains for the interests of the company. 

These practices ensure that a company is operating with integrity, honesty, and corporate responsibility. Board members must maintain a transparent relationship with shareholders and be prepared to answer their questions to demonstrate that their investments are safe. 

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