Stemming from my earlier write up on corporate governance, this article is the second part of the series which looks at the factors and qualities that create good corporate governance and its best practices. For this article, we shall address the area of Board of Directors, since they are the driving force of every organization. Therefore, a strong governance framework needs to be established, and should serve the following objectives:-
- Clarify the roles, responsibilities and accountabilities of the board members and management team;
- Enable the board to provide strategic guidance and effective oversight of the management; and
- Ensure that no one single individual has too much power or influence on the organization.
Further to the above, the board’s main role is to protect the interests of the shareholders and other relevant stakeholders. At the same time, they have to ensure that the company is able to compete in the market. The directors are also expected to be able to have a firm grip on the company’s internal controls processes, to ensure operational and financial risks are identified, addressed and managed.
In a general context, the effectiveness of a board within an organization depends on a few factors, namely, size and composition, competencies, activeness and leadership qualities. These factors are non-exhaustive and non-conclusive whereby every organization should include relevant gauge wherever necessary.
Size and Composition
There is no such thing as the optimal size for the board, but the Companies Act 1965 determines the minimum number of directors and the Articles of Association normally specifies the maximum. However, instead of arriving at the absolute number, an organization should look into certain factors to gauge the optimum size of the board. Some of these factors include:-
- Size of the organization, scope of business and geographical diversity;
- There should be a balance between executive and non-executive directors as well as the independent elements of those non-executive directors. This is mainly to achieve the check and balance whereby no single individual has the ultimate control over the board;
- Whether the board has representation diversity in terms of professional experience, race, gender and technical know-how of the industry.
There should be a mixture of core competencies among the directors in the board to cover most aspects of the organization. Certain directors need to have relevant industry specific knowledge and experience whereas others are professionals having focused expertise in areas such as finance, accounting, risk management etc.
The board is required to play an active role in directing the organization. Although they may not be playing an active role in the daily operational issues, the board is expected to be vigilant in ensuring the management is implementing the direction of the board.
In addition to playing the strategic role within the organization, the board is also expected to monitor the management’s decisions and actions, and if there are inconsistencies found, they should question the management based on factual knowledge. Furthermore, the board is also expected to ensure that the management conducts their tasks ethically and comply to all financial reporting and regulatory requirements.
Being the driver of the organization, the board must should leadership qualities such as having ability to inspire talents and provide strategic direction and vision of the organization. They have to be able to evaluate strategic decisions, conceptualizing ideas and innovation to continually pressing for growth and address future challenges.
Whilst the board of directors plays a very big part in corporate governance, certain other factors like risk management, internal and external audits too affect the framework of corporate governance.