Boards of directors have two main activities: Advising and Monitoring. The last quoted role was extensively treated in the literature. For example, the auditing committee was examined with a lot of details. But what about the advising part of the role of the board of directors? How to measure the implication of directors in the advising side of the board's activity?
ADVISING: In order to advise on a particular issue, the adviser must be near the source of the problem or know the problems intimately. Under this condition, if the Board member becomes active in advising to solve problems, prevent problems, etc., he/she ceases to be a Board Member and becomes a manager of the firm.
STRATEGIC LEVEL: The Board acts at the strategic level of the organization. Is advising part of the role of the board? Even if it is, the advise that the Board could give is in the most general term, i.e. in light of the objectives or goals of the organization. It can tell the firm "what to achieve?" but not "how to achieve it?" Every audit report ends with a recommendation for corrective measures--hence advising. For members of the Board to become active in advising, that would be redundant sine the audit committees submits its reports to the Board.
ROLE OF THE BOARD: The role of the Board is to serve as a guardian of interests of the shareholders. In this capacity, the Board (i) establishes policies; (ii) appoints the CEO; (iii) ensures adequate financial resources; (iv) approves annual budgets; (v) reports to shareholders on company performance; and (vi) set salary for the company's management. As for advising, it would not do directly. Like auditing (for its monitoring function), it would be a secondary function carried out at committee level, i.e. advisory committee. This committee will interact with the management and operational levels on day-to-day operation to make sure that the Board's organizational goals will be achieved.
Hi Patrick, my answer is a bit different to Paul's as I have interpreted your question a bit differently. I think Paul answered well the role of the formal board of directors serving the role of guardian of shareholders. This is very important where you have separation between the ownership and management of firms.
There is another type of board, which I think you are talking about, known as an advisory board or advisory committee. These are more commonly used in privately owned firms where the owners are the managers of the firm and there is limited legal requirements or agency need for an independent board of directors . The advisory board is typically made up of a group of experienced people with a range of skills and experience relevant to the company and its stage of growth. This type of board is established to assist and guide the CEO but does not have the same power or responsibilities as a formal board of directors. For example, an advisory board cannot fire the CEO (although they can recommend that the CEO/ owner appoints a professional executive if the business grows beyond the owners competence) and generally recommends course of action or provides feedback on plans rather than mandating strategy or ratifying executive decisions. The CEO/ owner remains the decision maker and is free to accept or ignore the recommendations of the advisory board.
For example, I am on the advisory board of an agricultural company. The company has a single shareholder who is also the CEO. There are four of us on the board contributing skills such as finance, management, legal, industry expertise etc. The CEO with his management team develops strategies and plans and seeks advisory board feedback and advice. The advisory board performs some monitoring of performance, e.g. reviewing financial statements and key performance indicators but more to advise the CEO on potential emerging issues. However, the CEO can choose to ignore suggestions. The advisory board is not a decision making entity in terms of corporation law and does not have the teeth of an advisory board.
As the company grows and adds external shareholders the advisory board will be replaced by a formal board of directors with the appropriate responsibilities and powers.
In my opinion, to measure the ability of the board to advise we should investigate the background of the members of the board (previous professional experience, relational network, education, role, etc.). In other words, we should investigate the board considering a multicultural perspective. For example, one or more board members who come from the financial institutions, they will have on the one hand the right experience in the financial sector, and on the other hand, appropriate skills to dialogue with the banking industry. The gap that I have found so far, according to my humble experience, is that this aspect have been little investigated. Future research should investigate on human and relational capital of the members of the board.
Thank you to al of you!
international experience, as well as professional experience in finance, or in communcation are precious to develop good advising. I think that too busy boards are detrimental. But some interlocking members between several boards may be useful. But I am concerned with the importance of committees (auditing, nominating, compensation,...) and their impacts on the advising task of the board.
I try to go further,
Are good advisers boards really bad monitors of management? In fact proximity may help trust to take place. But connected boards with the CEO may be bad monitors when it is needed. What is your feeling about that?
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