What’s A Board For?
Corporate entities are expected to have a Board of Directors. For small businesses that are evolving into corporations, this may come as a bit of an adjustment. After all, small businesses, particularly single proprietorships and family businesses, are typically used to having a Chief Executive Officer who has the last word in everything pertaining to the company. So why bother having a Board?
Preserving the essence of the company
Rest assured that a good and sound Board is responsible for ensuring that the principles, values, policies and directions as originally espoused when the business was incorporated shall be preserved. More to the point, the interests of the owners are protected as well. After all, a professional organization may end up with CEOs who may not necessarily rise from the ranks and may not clearly understand what the business is all about. It is the Board’s responsibility to ensure that the interests of the company’s stakeholders are protected, as much as the integrity of the company’s identity is preserved as well.
For family businesses that transform into corporate entities, it is not unusual to have the family members sit in as members of the Board. After all, ownership is a primary consideration when selecting the members of the Board.
However, there are disadvantages in filling all the Board seats with “allies.” Especially if these so-called “allies” tend to be yes-men who would simply agree to everything that the corporate patriarch (or matriarch, as may be the case) would want.
The Board exists as a check-and-balance team. It is responsible for ensuring that no single individual in the organization gets away with milking the company for the interests of a few. Conversely, the Board should also be a control mechanism against the possibility that the majority owners of a company would milk the company to their benefit at the expense of the minority.
This is why good governance requires that outsiders also sit in at the Board of Directors. Outsiders bring an objective view into the discussions, preventing the Board from possibly sinking into a myopic and self-serving perspective that may end up destroying the organization in the long term. Also, outsiders bring fresh insights that an “inbred” Board may not have the opportunity of obtaining.
For small Boards, at least one outsider may be needed in order to establish the perspective of a third-party observer who has no vested interests in the firm. Larger Boards can have up to three outsiders.
What should be the qualifications of these outsiders? For starters, these Board members should be reputable professionals who have had substantial experience in the field of operations of the company. This gives credibility to the Board member, as well as assures that the Board member has sufficient experience to be able to contribute to the discussions.
In the Philippines, there is a common misconception that Board members should always be attorneys. This is not true. While the Board formulates policies and laws under which the company would operate, this does not mean that one has to have a law degree to fit into this role. In fact, having too many lawyers in a Board can be counterproductive as the insights of business professionals may be of greater importance than the ability to put together a well-worded rule. In fact, a single corporate attorney present at Board meetings or acting on retainer (whether or not a member of the Board) is already more than sufficient to cover the possible technical requirements of law formulation at the Board.
The CEO may sit as a member of the Board (usually on an ad hoc capacity). And in many organizations, the CEO even serves as the de facto Chairperson of the Board. This arrangement, however, may be counter-productive since this gives the CEO undue influence over the Board. Again, the Board is supposed to serve as a check-and-balance mechanism. If the CEO controls the Board, then this defeats one of its most critical purposes in the organization.
Unless they are doing double-duty as executives, Board members are not expected to perform managerial duties and responsibilities for the firm. Rather, their main concern is policy formulation. Of course, for small corporate entities, this does not hold true and, almost always, the Board elects the executive officers among themselves.
But as an organization matures and reaches a level of professionalism, it should be noted that this practice should be shelved in favor of an approach that separates the executory functions from the policy-making functions.
The Board is also responsible for assessing the performance of the CEO and should therefore have the power to vote a CEO in or out of office.
For small companies, it is understandable to find Boards that consist of the company’s executives. But it should be noted that there should be a separation between policy-formulation and executive functions. So as an organization grows, the Board should be professionalized accordingly with the introduction of professional outsiders and a separation from the executory roles. Doing so will help strengthen the company’s check and balance systems.