This writer has been privileged to have attended the full program of the Institute of Corporate Directors (ICD) and one of the key learnings from the program is the policy on board relationship with the CEO and the management team. It is a very critical policy statement that deserves universal understanding.
Let me start with a quote from the ICD material. “The CEO is the key, main link between the Board of Directors and the management team and — through the management team — all others in the corporation. The CEO plays a central intermediary role: as a member of the Board of Directors, the CEO is part of the governance team of the corporation. He or she is at the top of the management team, to which day-to-day operational responsibilities are delegated.”
“The CEO is a peer of all the other directors as individual members of the Board. However, before the Board as collegial body, the CEO representing the management team reports to the Board and is subject to its instructions. The CEO as the leader of the management team is the “only” subordinate that the Board, as a collegial body, gives instructions to. He or she is the main — generally the sole — channel that the Board uses to communicate with the management team in the governance of the corporation and in providing the overall direction for the affairs of the corporation.”
“The Board should observe restraint in going far into the smaller bowls (within the organization) much closer to the inner core. While it is duty bound to pronounce a policy at the broadest, outermost periphery concerning ends and means, it should take care to leave a wide enough area for discretion of the CEO and the management team.”
Under the Tricker Model advocated by the ICD, there is a clear identification of the duties that boards must focus on and it centers on the future and on the external environment. The model stresses the performance duties of the board to be principally on strategy and policy. Strategy focuses more on the future (particularly the long term) and it takes into account the external environment. Policy also focuses on the future, although it takes into account the internal circumstances of the corporation.
Of course the Board has compliance duties. Monitoring focuses on the present and the immediate past, taking into account mainly internal operations. Accountability asks for a system of checks and balances as well as of reporting, and this includes reporting to external parties such as other stakeholders, the regulators and the general public. Compliance duties are essential, but their focus is mainly to report on and draw from the past in order to serve the present and the immediate foreseeable future.
The relationship between the CEO and the board represents an important delineation which demands a clear sense of professionalism from all concerned. The board has to delegate operational responsibility to management. According to consciousgovernance.com, the board can direct but individual directors cannot. It should therefore refrain from interfering too closely into day-to-day operations. There must be a clear line between the board and management. It is important therefore that the board puts in place a competent management team.
In a recent article by Constance Dierickx at the Harvard Business Review, the role of a good board was articulated — provide strategic advice, protect the interest of shareholder and minimize risk. But sometimes, fueled by unease, wrong or lack of trust, board members reach beyond the CEO and far into a company for information or to influence. Dierickx said that in her 25 years of advising boards and top management, this type of meddling is not unusual. And it puts senior executives in a very difficult position. It is however not healthy as the board should provide oversight and strategic guidance without giving orders to executives.
The programs of good governance espoused by the Institute of Corporate Directors is a must for the strengthening of institutions in our country. It should be requisite for both board directors as well as senior management people so that their roles are well understood. The fundamental demands of good corporate governance is built around principles of fairness, transparency and accountability. These principles must be embodied in the long list of roles that a Board of Directors is expected to play.
The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs.