Board Charters - A Guiding Tool

"In a shifting business environment, a Board Charter should occupy centre stage, particularly given that it is meant to contain practical recommendations in case of Board-level disagreements, thus providing useful reference points for resolving disputes."

Bharat Dhawan,Partner, Mazars talks about Board Charters as a guiding tool for an organisation, in the June 2017 publication of CFO Connect.

Board Charter – A guiding tool

A Board Charter is a document which defines the role, responsibility and authority for the members of the board, individually and collectively. This document is designed to be used along with an organization’s existing corporate governance codes. It is aimed to serve as a model for the board members in untoward incidents that call for difficult decisions. As a top-level policy document, it serves as a reminder to the board members of the permissible legal framework of the organization, within which it can operate.

These documents have gained immense popularity lately as they serve as a management tool. For the purpose of framing these documents, first discussions are called for, then policies and guidelines are documented that serve as a guidance for governance of the organization. With changing business environment, board charter of any organization occupies the center stage as it contains practice recommendations in case of board disagreement, providing reference points for resolution of disputes.

While preparing a charter, every company has complete discretion defining its contents. Some companies may choose a smaller documents covering major governance issues others may prefer to address a wide range of them in a comprehensive document. In this article, we have enumerated a few guiding principles to be followed by the Board in the boardroom.

Tone at the Top

“Tone at the top” is a term that describes a firm’s general ethical environment which is usually established by the Senior Management, Board of Directors (BOD) and Audit Committee. These three are an organization’s administrative and governing authorities. This also means that they take the decisions regarding creating stakeholders’ value by deciding on firm’s goal, its strategy, mitigating risks, plans and their execution. Setting the right “tone at the top” is very crucial to the organization as it has a major impact on an organization’s values and culture and consequently on the behavior of its employees. Therefore it is very important that a moral and an honest tone is set for the employees to follow. It also involves prevention of fraud and other unethical activities and practices, especially those that involve the larger society.

When a company decides to keep its stake holders and society as the focal point of its business; its strategies, plans etc. revolve around maximizing their benefits. It involves allocation of a substantial amount of time and effort, however it also is the most important task the top level of a company can accomplish. Effective stewardship of a company requires long term goals and planning, which mature and sophisticate boards realize.

Skills and Experience

For determination and execution of the “tone at the top” in the desired manner, it is imperative for an organization to have people with right skill sets and experiences to steer the organization in the desired direction. An effective board will also mean requisite independence exists for the members to maintain candor and perform assigned duties. This will also require the board to appoint suitable people in other positions through direct appointments.

In order for this to continue unhindered for a substantial period of time, suitable succession arrangements must also be made by the board. New members should be appointed in consideration with the skills needed and larger goals of the organization. This document also serves as a point of reference in case of disputes and as an induction and guidance tool for the new management and director recruits.

Appropriate Board and Management Structure

To help achieve the set objectives, it is of vital importance to have an appropriate board size and an optimal management structure in terms of numbers. The company has to determine its own optimal size of the board as there is no set number. The size of the board generally depends on the size and the function of the company. A smaller board may not have adequate capacity to delve on all the important issues while in case of a large board, accountability and individual participation may suffer. The law in some cases determines the requisitions of the board indicating minimum size and membership structure. For example, the Indian Law requires women directors to be 1/3rd of the total strength of the board. These are mandatory requirements which have to be followed by the companies.

Engaged Board Culture

Engaged culture means the board members are constructive and honest with well-defined and timed agendas for meetings with ample opportunities for informal meetings. This also means that they are prepared for the meetings, seek out other member’s opinions and are not afraid to criticize them if necessary. The members are also responsible for various stakeholders, while actively participating in governance and being personally accountable for the running of the organization. Adequate meetings should be convened and proceedings of all of them should be recorded in the minutes, signed by the presiding authority of the meeting and circulated amongst the members of the board.

An effective board charter is a legacy of the previous boards to be carried on in the future by successive boards. However, these charters can be called effective only if created with appropriate investment of thought, time and other resources. Creation of this document from the early stages of the organization is both helpful and insightful. As this is a very important document it must be very fluid in nature, closely aligned with the organization’s strategy, reviewed and updated at frequent intervals. This document is also helpful in building organization’s reputation, when shared with various stake holders.