The role of the board of directors

In the Final Report Royal Commission in to Misconduct in the Banking, Superannuation and Financial Services Industry Volume 1, Commissioner Hayne made comment on the role of a board: 

“The task of the board is overall superintendence of the company, not its day-to-day management. But an integral part of that task is being able and willing to challenge management on key issues and doing that whenever necessary.”

What is the role of the board?

In organisational terms, the role of the board of directors includes governing, directing and monitoring an organisation’s business, affairs and operations in two broad areas of director responsibility:

1. Overall organisational performance – ensuring the organisation develops and implements strategies and supporting policies to enable it to fulfil the objectives set out in the organisation’s constitution. Commonly, the board delegates the day to day operations of the organisation to the management team via the CEO but remains accountable to the members and shareholders for the organisation’s performance. The board monitors and supports management in an ongoing way.
2. Overall organisational compliance/ conformance – ensuring the organisation develops and implements systems, processes and procedures to enable it to comply with its legal, regulatory and industry obligations (complying with the law and adhering to accounting and other industry standards) and ensure the organisation’s assets and operations are not exposed to undue risks through appropriate risk management.

The differing emphasis of these two areas of organisational performance and conformance/ compliance responsibilities can result in conflicting pressures on boards and their members. Boards must balance these roles and responsibilities and give appropriate attention to both.

Board responsibilities

The board is responsible for the overall governance, management and strategic direction of the organisation and for delivering accountable corporate performance in accordance with the organisation’s goals and objectives.

This responsibility is usually set out in the organisation’s constitution or in the enabling legislation under which the organisation is registered or incorporated.

In performing its role, specific responsibilities commonly reserved to the board either in its constitution, its board or governance charter (or by cultural practice) include:

• Providing strategic direction to the organisation and deciding upon the organisation’s strategies and objectives in conjunction with the CEO;

• Monitoring the strategic direction of the organisation and the attainment of its strategies and objectives in conjunction with the executive;

• Monitoring the operational and financial position and performance of the organisation generally;

• Driving organisational performance so as to deliver member value or benefit;

• Assuring a prudential and ethical base to the organisation’s conduct and activities having regard to the relevant interests of its stakeholders;

• Assuring the principal risks faced by the organisation are identified and overseeing that appropriate control and monitoring systems are in place to manage the impact of these risks;

• Reviewing and approving the organisation’s internal compliance and control systems and codes of conduct;

• Assuring that the organisation’s financial and other reporting mechanisms are designed to result in adequate, accurate and timely information being provided to the board;

• Appointing and, where appropriate, removing the CEO, monitoring other key executive appointments, and planning or monitoring executive succession or management capability planning;

• Overseeing and evaluating the performance of the CEO, and through the CEO, receiving reports on the performance of other senior executives in the context of the organisation’s strategies and objectives and their attainment;

• Reviewing and approving the CEO's and, in conjunction with the CEO, other senior executive remuneration;

• Approving the organisation’s budgets and business plans; and monitoring major capital expenditures, acquisitions and divestitures, and capital management generally;

• Ensuring that the organisation’s financial results are appropriately and accurately reported on in a timely manner in accordance with constitutional and regulatory requirements;

• Appointing and, where appropriate, removing the company secretary;

• Ensuring that the organisation’s affairs are conducted with transparency and accountability;

• Overseeing the design, implementation and periodic review of appropriate and effective policies, processes and codes for the organisation, which depending on the organisation, may include with respect to ethics, values, conduct, securities trading, disclosure of securities’ price sensitive information, employment, remuneration, diversity and otherwise;

• Ensuring sound board succession planning including strategies to assure the board is comprised of individuals who are able to act out the directors' duties and responsibilities;

• Overseeing member and stakeholder engagement, reporting and information flows.

The role of the board of directors in corporate governance

Corporate governance can be defined as the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. There are practical benefits for an organisation in having effective corporate governance. Some studies indicate firstly, a correlation between strong organisational performance and a good or effective practice of corporate governance and secondly that corporate governance is a significant factor for investors, in particular institutional investors, to consider when making investment decisions.

Boards are responsible for the corporate governance of their organisations. There is no one size fits all when it comes to what constitutes good corporate governance for an organisation. Much depends on various aspects including the organisation’s size (scale and geographic spread), people (skills and experience), business model (mature or evolving), nature of operations (relatively simple or complex), regulatory exposure and risk profile.

In Australia, corporate governance of ASX listed public companies operates on an if not, why not approach rather than mandatory detailed regulation as is more common in the USA. This approach means that, in general, Australian directors do not have to comply with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations but, if they do not, then they must disclose and explain in their organisation’s annual report or other public statement on its board governance the reason(s) why not.

This approach aims to provide guidance while allowing the flexibility in application of the principals and ensuring transparency for investors and other stakeholders about the reasons why the entity has chosen not to follow the principals.