Introduction
Many times, I have been asked by readers particularly young people to explain the role of the board of directors of a company. Some have told me that they know a board makes decisions but they are not sure of the kind of decisions. I have previously written articles on the functions or role of a board of directors versus shareholders. In this article I will focus on the kind of decisions made by a board of directors to answer many readers. I will try to simplify it as some of the people who want to know include students and inexperienced businesspeople.
Role of the board of directors
Broadly, a company is owned by its shareholders. These shareholders normally appoint directors to have oversight over the affairs of the company. Unless they are restricted or they do not want, shareholders may be directors in the company. The role of directors is to have oversight over the company including in the following areas:
• Strategy formulation and implementation.
• Policy formulation and implementation.
• Risk management.
Decisions made by a board of directors
Some of the decisions made by the directors of a company cover the above key areas. I list below some of the key decisions made in board meetings:
• Noting contents of reports presented by management.
• Approving or rejecting proposals or recommendations by management.
• Giving direction or guidance to management.
I explain below some of the decisions.
Noting reports or presented by management
Some of the reports presented by management serve to give information to the board on the performance or situation of the company. Many of those reports are usually noted by the board though the board may raise certain issues after receiving such reports. In fact, such reports may inform further deliberations or decisions by the board. I will give financial statements or marketing reports as examples. In financial reports, the board notes actual financial performance versus budgets and prior periods and may pose questions on variances especially if the variances are unfavourable. Management will be asked many questions including detailed explanations. Other than simply noting the reports the board may give certain direction or guidance to the management in order to rectify unfavourable performance. In the case of marketing reports, which I favour so much, management may present new market trends, market share and other information for the board to note. Further, management may then make certain proposals in order to advance the company’s marketing efforts. I really like marketing because it is mostly about strategy. How to compete, how to grow the business, target markets, the human capital required, capital equipment required, financial resources that should be committed, etc.
Approving or rejecting proposals by management
This is the party where management and the board need each other. Management, headed by the Chief Executive Officer or Managing Director, is on the ground yet non- executive directors are not regularly involved in the company. The directors and management usually interface through board meetings.
The norm usually is that management makes proposals to the board on how to move the company forward, usually guided by the vision, mission, values, strategic plans or annual budgets of the company. Such proposals my be on variation of certain strategies, human capital, financial resources, operations or other areas. Management should present well thought out proposals whose benefits to the company are clear. The proposals should have clarity such that the board knows the decisions being sought by management. A board is happy to receive from management proposals that are likely to add value to the company.
I have been part of boards where management have made proposals that would go a long way to change the fortunes of a company. I have also been part of boards where management has been so selfish as to make proposals that would benefit themselves and not the company. In one extreme case we had to replace the Managing Director.
Giving direction or guidance to management
A board is expected to give direction or guidance to management. It is always pleasing to work with board members who bring different dimensions or angles during a board meeting. Some directors are so analytical that it is a pleasure listening to them. The board can then give direction to management on key issues such as on business development, marketing, improving operations, expansion, capital expenditure, risk management, financial management, human resources and so on.
Conclusion
Broadly, during meetings a board of directors may note reports presented by management, approve or reject proposals by management or give direction or guidance to management.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He sits on the Board of the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com. Visit www//:hofisilaw.com for more articles.
