Effective corporate governance requires that everyone involved has clear and structured roles and responsibilities. It also assists in promoting an environment for work that is inclusive and promotes fairness. These frameworks can be applied to a diverse array of organisations, from large corporations to professional societies and families.
The board creates and approves corporate strategies designed to produce sustainable long-term value; selects the chief executive officer (CEO) and supervises the management in operating the business. The board also allocates capital for investment and assesses risks, manages them and establishes the “tone at the top” for ethical conduct. The board usually consists of the insiders–major shareholders, founders and executives as well as independent directors with experience in managing or directing other large companies. Independent directors are regarded as beneficial to governance because they do not have the same ties as typically exist between insiders, which could lead to conflicts of interests.
The composition of a board is important because board members face complex and often technical issues that require multiple perspectives around the table. Because of this, governance experts generally recommend that boards should have at minimum an equal number of independent directors. Diversity and tenure are also important for ensuring that the board is able to efficiently function, particularly when discussions are long and filled with strong opinions. New board members can offer fresh perspectives, and those with a long time on the board can provide continuity and knowledge of the institution.
The board is also accountable for understanding, reviewing and coordinating the annual operating budgets as well as plans of management. Additionally, the board through its corporate governance committee and nominating committee, should be conducting regular shareholder outreach in order to discover and comprehend the opinions of shareholders who are major and communicate regularly with them on important issues that affect the company.
