The role of the Board of Directors
The board of directors is the topmost decision making body, appointed by the shareholders (for a listed company or public entity) or owner of the business (in case of a private or family owned business). Public companies for example those listed on the Uganda Stock Exchange (USE) and those owned by Government of Uganda, must have a board of directors by law. The objective is to protect the interests of the general public and shareholders.
Good boards are composed of people with diverse skills, experience and exposure to provide effective oversight for the long term success and growth.
Instead of asking how to make profits in the short-term, Board members explore strategies to ensure business or organisational competitiveness and sustainability for the foreseeable future.
The board looks at bigger picture aspects and how to position the business for unprecedented future success. To this end, board members are concerned with business strategy to deliver stakeholder expectations, overcome business disruptions and remain responsive to customer needs amid a tough business climate.
In Uganda, once great companies have suddenly gone down under. One of the major causes of business collapse is bad corporate governance characterised by incompetence, conflict of interest and selfishness of the members. Any business without a board of directors stands on unstable grounds. Take the case of the one of the local companies that was once a household name in real estate business in Uganda. It is now no more. Many companies have collapsed due to absence of a competent board.
The primary role of the board is to ensure effective oversight (risk management and compliance) and going concern (strategy, structure and accountability) for long-term success of the company.
Every business small or big needs a board of directors for good governance and future success. As a small business owner, you need to identify two to five people with a track record of success and good leadership to sit on your company board. Experience has shown that board members who are not needy financially are better as they tend to be independent of management and are forthright.
Owners expect a better return on their investment. It is the role of the board to ensure they put in place proper strategy, systems and structure to grow the business. A good board identifies, recruits and supports a managing director or chief executive officer to run the business on their behalf.
Making an impact on your board?
Becoming a board member is one thing and making an impact is another. One of the reasons many board members are ineffective is lack of clarity of their mandate. You need to first understand the expectations on you by the stakeholders.
Great doctors are good at diagnosis medical history, lab tests and symptoms, so are great board members. They invest time in gaining thorough understanding of the business or entity so their advice is informed by facts and data not mere hearsay. You cannot improve what you do not understand.
Know the strategic foundation or technical insights and the major stakeholders with high interest and influence over the business strategy. As a board member, your role is ensuring effective oversight and going concern of the business.
Oversight involves providing direction to the executive to ensure that they do things in the right way. To deliver on this role, you must review the organisation’s risk management strategy, key policies over major operations and functions, the regulatory framework and major contractual obligations. You want assurance that potential events that could threaten the business’s survival are under control else, the board must attend to them urgently.
The output is a one-page articulation of the board’s risk appetite, within which the managing director must operate the business.
The board is also responsible for the going concern – what is the business strategy to ensure long-term growth? Obtain the current copy of the entity’s strategic plan and internalise it. Is there a clear strategy or it is a mere research paper being referred to as strategy? A strategy has clear choices of what the organisation will do (target customers, delivery channels, key products and geographical coverage), how it will win (three to five key areas of strategic focus), the capabilities and management systems required to succeed. If your strategy is silent on these areas, challenge the Board and management to review it. The output is a one page score card to the managing director against which his or her performance will be measured. The ultimate measure of a great strategy is in effective execution.
Truth is most entities in Uganda survive by luck. There is limited competition due to protective tendencies and barriers to entry. Such success is not sustainable. Every business needs a strong board which must appoint a competent managing director, set clear targets and oversee execution.
Of window dressing Board and bad governance
There are some people who establish systems just for keeping up appearances. To the outsiders, the system is working efficiently when it reality it is not. The old saying goes, the fish starts rotting from the head. When it comes to corporate governance; it also starts rotting from the head. If the quality of your Board is not good, the organization will not succeed.
There are instances whereby for a given business to access certain services, it has to project an image of being well governed. An image of good governance comes when external stakeholders see indicators of good governance in place for example board of directors, internal audit department, external auditors, a business strategy, risk management strategy, anti-fraud policies and management structures. But on a thorough review, these structures although in place, are not supported or financed to ensure they deliver on their mandate.
I have found internal audit departments that are not resourced and supported to add value to the business.
You have the internal audit department, but it lacks a budget to develop the staff skills as well as acquire the requisite tools. Good governance requires the Internal Auditor to report directly to the board, because the department must be independent of management. If this is not the case, the effectiveness of internal audit as a catalyst for improving on governance and risk management and the board’s eyes on ground, is rendered ineffective. If the board is unable to set up a vibrant internal audit, it risks become a window dressing one.
You have seen cases in government and other top companies where the board of directors have been involved in fraud. Many scandals involving huge sums of tax payer’s money have been reported in the media. Whether you agree it or not, any board that presides over an entity involved in huge losses due to fraud has failed in its role of oversight and going concern. That is a classic example of a window dressing board. You must establish effective strategy, structure and systems to ensure corruption, fraud and other risks are adequately managed.
Window dressing boards are usually composed of incompetent members. Appointments not based on merit, usually lead to bad boards.
Other than in the banking sector where Bank of Uganda vets all board appointments, it appears window dressing boards are here to stay.