Roles of the Board of Directors in Good Corporate Governance

What is the roles of Board of Directors in Good Corporate Governance? An active and engaged board is an essential part of shaping and executing a successful strategy. Boards contribute to organizational performance when they fulfill five major responsibilities.

1. Directors approve the strategic direction of an enterprise. While the board does not create strategy their approval sets the organization in motion. Therefore, directors need to know enough about the business (the central business issues and non-financial factors that drive the business) so they can identify a winning strategy from a risky or problematic one.

2. Another concern of the board involves ensuring that resources are used most effectively and efficiently to achieve the strategy. As such, the board oversees the financial actions of an organization. They set fiscal policy and approve large capital expenditures. Many of these expenditures are highly strategic. However, the strategic relevance of these requests is not always clear because large funding requests do not demonstrate a tight linkage to strategy.

3. The board plays an essential role in counseling and advising the CEO. Board members are elected because their industry knowledge, functional acumen or strategic relationships are deemed contributory to the enterprise. The board meeting is the most frequent opportunity directors have to share their knowledge, discuss strategic tradeoffs and lend decision support. However, many board meetings are primarily approval forums and lack opportunity for meaningful discussion on strategy and its execution.

4. Selecting and motivating executives is another essential board role. Directors are expected to approve the hiring of senior executives, assess their performance and reward them appropriately. For the organization to remain a going concern, directors are also charged with succession planning.

5. A director is a watchdog for uncompensated risk and a guardian for compliance. A working definition of business risk is “the factors that can prevent an organization from achieving its objectives”. Compliance includes legal, accounting and regulatory requirements but also adherence to ethical standards. Directors receive insufficient information to effectively address key compliance issues and business risks that can prevent the organization from achieving its strategic targets.