The Relationship between the Board of Directors and the Management
Board and management relations are critical to an organisation's long-term success. problems arise is when the different interests are not defined. among board members and between the board and management. Source. The board of directors, including the general manager or CEO (chief executive officer), has very defined roles and responsibilities within the business organization. Conversely, management is not responsible for the overall policy decisions of the business. 4) Govern the organization and the relationship with the CEO. It seems that the paper definition – management committees make policy while . the Executive Director\Senior Manager(s) and the committee, leading to.
These decision-making responsibilities should not be delegated, and the Board should always reserve all matters which have the potential to have a material impact on the reputation and financial stability of the organisation. Therefore, directors ought to solely carry out the assessment of such statements and, in circumstances where an error is identified; they must then seek the advice of management and external advisors. While it is noted that care should be taken when applying this decision outside of a financial reporting context, the case outlined the limitations of the extent to which directors can place reliance on management and external advisors in this realm of responsibility.
This is an example of a role which must be maintained by the Board. The decision-making role of the CEO is different. The CEO is responsible for carrying out and implementing the direction, goal and policies, which have been designed or created by the Board, and then reporting on operational outcomes. It is also the responsibility of the CEO to ensure that everyone within the organisation is aware of the agreed strategic direction, goals and policies so that all are heading in the same direction.
CEO decision-making largely relates to the way in which it is best to practically implement those measurable objectives and goals developed by the Board. After all, the CEO will be responsible for implementing and monitoring these organisational policies. For example, if there is a need for an adequate program in the sector of the community that a non-profit organisation is serving, the CEO could propose a policy to the Board in order to address this policy gap. It is then the role of the Board to decide whether this is a suitable use of organisational resources and, if so, hand it back to the CEO for implementation and management.
Financial Reports The CEO is required to prepare annual budgets and financial reports for presentation to the Board for review and approval. The CEO also has an opportunity to offer ideas and strategies on how performance can be improved. The role of the Board is to review, analyse and monitor the information presented by the CEO, as well as ask the appropriate questions to gain all the necessary information. The Board is ultimately responsible for the financial health of the organisation, and therefore requires the cooperation of the CEO in order to ensure that it is fully informed.
Nevertheless, it is crucial for the running of the organisation that this relationship is a healthy and professional one. There is potential for Board members to sometimes feel excluded or disempowered, and they may feel it is a struggle to secure the information they require from a CEO.
Likewise, many CEOs perceive the Board as a monkey on their back, due to the monitoring and controlling role of the Board. Support is also essential and is a recognition that both the CEO and the Board are on the same side, working together to achieve a common organisational purpose. Competence means not only relevant expertise that each director is bringing to the Board, but also professionalism in conduct as a Board member.
For any CEO, it is important to see consistency and certainty in decision-making by the Board. For companies with publicly trading stockthese responsibilities are typically much more rigorous and complex than for those of other types. Typically, the board chooses one of its members to be the chairman often now called the "chair" or "chairperson"who holds whatever title is specified in the by-laws or articles of association.
However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.
Inside directors represent the interests of the entity's stakeholdersand often have special knowledge of its inner workings, its financial or market position, and so on. Typical inside directors are: Other executives of the organization, such as its chief financial officer CFO or executive vice president Large shareholders who may or may not also be employees or officers Representatives of other stakeholders such as labor unions, major lenders, or members of the community in which the organization is located An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director not to be confused with the title executive director sometimes used for the CEO position in some organizations.
Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production. Independent director An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders.
A typical example is a director who is president of a firm in a different industry. Outside directors bring outside experience and perspectives to the board. For example, for a company that only serves a domestic market, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options.
One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate "insider dealing" between insider directors, as outside directors do not benefit from the company or organization.
Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest. On the other hand, they might lack familiarity with the specific issues connected to the organization's governance and they might not know about the industry or sector in which the organization is operating.
Terminology [ edit ] Director — a person appointed to serve on the board of an organization, such as an institution or business. Inside director — a director who, in addition to serving on the board, has a meaningful connection to the organization Outside director — a director who, other than serving on the board, has no meaningful connections to the organization Executive director — an inside director who is also an executive with the organization.
This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research. The examples and perspective in this section deal primarily with the United States and do not represent a worldwide view of the subject. You may improve this articlediscuss the issue on the talk pageor create a new articleas appropriate. May Learn how and when to remove this template message The process for running a board, sometimes called the board processincludes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an agenda for the meeting, the creation and follow-up of assigned action itemsand the assessment of the board process through standardized assessments of board members, owners, and CEOs.
Board meetings[ edit ] Typical board room setting A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means. For example, the nature of the business entity may be one that is traded on a public market public companynot traded on a public market a private, limited or closely held companyowned by family members a family businessor exempt from income taxes a non-profit, not for profit, or tax-exempt entity.
The Relationship between the Board of Directors and the Management
There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company. Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets.
Some organizations place matters exclusively in the board's control while in others, the general membership retains full power and the board can only make recommendations. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board.
These ex-officio members have all the same rights as the other board members. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in Robert's Rules of Order may be used. Governance[ edit ] Theoretically, the control of a company is divided between two bodies: In practice, the amount of power exercised by the board varies with the type of company.
In small private companies, the directors and the shareholders are normally the same people, and thus there is no real division of power. In large public companiesthe board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executives such as a finance director or a marketing director who deal with particular areas of the company's affairs.
Many shareholders grant proxies to the directors to vote their shares at general meetings and accept all recommendations of the board rather than try to get involved in management, since each shareholder's power, as well as interest and information is so small. Larger institutional investors also grant the board proxies.
The large number of shareholders also makes it hard for them to organize.
However, there have been moves recently to try to increase shareholder activism among both institutional investors and individuals with small shareholdings. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them. In most cases, serving on a board is not a career unto itself.
Improving board-management relations - Effective Governance
For major corporations, the board members are usually professionals or leaders in their field. In the case of outside directors, they are often senior leaders of other organizations.
Nevertheless, board members often receive remunerations amounting to hundreds of thousands of dollars per year since they often sit on the boards of several companies.
Inside directors are usually not paid for sitting on a board, but the duty is instead considered part of their larger job description. Outside directors are usually paid for their services. These remunerations vary between corporations, but usually consist of a yearly or monthly salary, additional compensation for each meeting attended, stock options, and various other benefits.
The Board and the CEO Relationship - Better Boards Australasia
In these countries, the CEO chief executive or managing director presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority.
The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person.