Board responsibilities: A practical guide for directors

Board responsibilities: a practical guide for a board of directors to understand its role within an organisation’s governance.

The board’s job? Strategise and oversee operations, charting the course for the organisation. They’re the vital link between shareholders and the management team, ensuring the company thrives and protects everyone’s interests.

Today’s board members face intense scrutiny. Customers, investors, and shareholders want companies to be ethical and sustainable. This means that boards must be innovative, navigate regulations, and manage risks effectively. Understanding each director’s role clearly is crucial for good corporate governance.

Fiduciary duty is at the heart of being a director. It’s about acting in the company’s best interests, not your own. Directors are entrusted to act for the company itself.

While every country’s interpretation of this duty will differ, the UK and Ireland are two examples of countries that will give you a good idea:

• Act within powers: Stick to the company’s rules.
• Promote company success: Benefit the company and consider long-term impact and stakeholders.
• Exercise independent judgment: Make your own decisions.
• Exercise reasonable care, skill, and diligence: Be competent and informed.
• Avoid conflicts of interest: Prevent clashes and be transparent.
• Don’t accept third-party benefits: Avoid anything that could influence you.
• Declare transaction interests: Disclose any personal links.

Breaking these fiduciary duties can lead to legal trouble, potentially leaving directors personally liable.

A crucial board responsibility is strategic oversight – setting the long-term vision and goals. The board develops and agrees on the organisation’s strategy, shaping its culture and values.

To make strategies work, the board ensures the right resources are available. They also monitor management’s performance against targets. The board is accountable to shareholders and stakeholders. Active engagement in strategic planning is crucial, ensuring the strategy aligns with values and drives long-term results.

The board of directors is ultimately responsible for the organisation’s risk management framework. This means setting up adequate controls to assess and manage risks proactively. Key tasks include spotting risks, assessing their impact, creating mitigation plans, and monitoring how well they work.

The board also defines the organisation’s risk appetite. Risk management must be part of the company’s DNA. The board needs to monitor the effectiveness of risk controls and foster a risk-aware culture throughout the organisation.

Directors need to act with the skill, care, and diligence a reasonable person would show in similar situations.

That means prepping for board meetings, reviewing materials, and actively participating. Directors must seek extra information when needed. Failing to exercise reasonable care can lead to negligence claims.

The duty of loyalty means acting in good faith, with the company and shareholders as top priority. It demands putting the company first and avoiding conflicts of interest.

Directors must disclose any potential conflicts. The duty of loyalty strictly bans using company information for personal gain.

The duty of obedience requires directors to act by the company’s rules and only use their powers for legitimate purposes. Compliance with laws and regulations is a must. Directors must respect the limits of their power and ensure the company secretary has the right skills and resources.

All board members share key duties, including attending meetings and actively participating. Each must act in the organisation’s best interests. A core task is developing a strategic plan and overseeing the CEO and other executive board members.

Plus, board members must ensure open communication with stakeholders and the wider community. Upholding fiscal responsibility is essential, as is staying updated on financial and legal matters. Once a decision is made, all members must support it. Respecting the law and maintaining confidentiality are non-negotiable. Finally, board members must regularly assess the organisation’s performance.

Board committees boost corporate governance by allowing the board to delegate specific tasks. This allows for deeper analysis. Common committees include:

• Audit Committee: Checks financial reporting and controls.
• Risk Committee: Manages the risk management framework.
• Remuneration Committee: Sets executive pay.
• Nomination Committee: Leads board appointments.

Committee members have specific responsibilities, such as conducting analysis and making recommendations. The main board retains ultimate responsibility.

The chair is crucial for leading the board and setting its direction. They ensure the board works well, fostering open debate.

The chair sets meeting agendas, ensures members are informed, and facilitates communication between executive and non-executive directors. They also lead board appointments and oversee performance reviews. 

While smaller businesses tend to use the same person as both chair and CEO, it is generally not recommended for larger companies, whose governance requirements need a greater focus on checks and balances.

Non-executive directors (NEDs) offer an independent view of the organisation’s strategy. Chosen for their expertise, they challenge the executive team.

NEDs monitor performance and scrutinise financial information. They’re involved in key decisions and often serve on committees. Remaining independent is vital for NEDs.

Executive directors are on the board and are involved in daily management. They’re accountable for their areas, leading functions with deep knowledge of the business.

They help shape strategy and lead its implementation. This involves making decisions and guiding teams. Executive directors manage assets responsibly, ensure compliance, and report to the board.

Continuous learning keeps directors up-to-date. To boost your skills, check out the corporate governance courses offered by The Corporate Governance Institute. They have various courses and diplomas in corporate governance and ESG. Also, explore their board director courses for targeted training.