The modern boardroom is structured to serve a dual purpose to protect the interests of the absentee owners and to direct management to enhance shareholder value. In this lesson, we're going to discuss the roles and responsibilities of each of these key players in the North American corporate governance model. Let's begin by looking at the board itself as a group of people. The board is intended to be a small representative subset of the ownership of the organization. In a public company directors are typically nominated by the incumbent board. Though it's entirely possible for additional nominations to come from the floor during annual meetings.

One of the few powers of an individual owner is to elect nominees to the board of directors. Board size in North American style of governance can vary, and many corporate boards will be composed of a group of individuals of say three to 18 people. I have served in a number of small cap public companies with market caps ranging from From 25 million to 200 million, and in these companies we typically have five to nine directors. Most directors participate in all discussions as the companies get larger committees help divide up the business of the board. The most common committees include the audit committee, when financial monitoring and regulatory reporting become a requirement for accessing capital markets. The compensation committee to deal with setting CEO compensation and performance evaluation, the governance and nomination committee to deal with board effectiveness and recruiting new directors for nomination to the board and the risk committee to oversee risk management across the enterprise.

A lot of governance buzz and regulations centered around the idea that management and the board of directors should be separate bodies, which is why we did pick the fence between them. But how does this fence exist in practice, and inside director is one who is management or associated with management in some way say through A consulting arrangement or a familial Association, and the independent director is one with no ties to management. Governance best practices would have you believe that the board should have a majority of independent directors and the logic being that the interests of management and the interest of owners can and do often vary. For example, management may want to grow the business by taking on more risk and issuing more equity owners may have other interests. So if the board is composed of insiders, the interests of the owners get subverted to those of management or so theory holds.

An interesting report by Businessweek found that the relationship between the independent directors and the separation of the CEO from the board chair role to have no effect on corporate performance. These findings fly in the face of most governance best practices. Instead, the distinction is not whether there is a legal definitional separation between the board and management, but simply whether there is Independence and thinking and engagement. The Business Week special report found that s&p 500 companies with a founding families involved in both management and a disproportionately higher percentage of non independent directors actually outperform the s&p index. And one explanation was that in the case of a family business, or director with familia ties to management cannot help but think about the business at a deeper level than an independent director without such ties. The same goes for directors with large financial stakes in the company.

Those directors too are often the ones that are the most active in the boardroom. So our first principle of establishing the board is to ensure that the directors chosen have the freedom to act and think independently of management without getting too hung up on the legal definition of independence. The important distinction and the line that must clearly be drawn in the sand is that the board must be free to exert its authority and discretion over The CEO when either the CEO or the board fail to respect or exert the authority over this relationship, then the board effectiveness and the promise of governance advantage are immediately lost. But that is as far as the board's authority should extend. The CEO is management's sole representative to the board, and acts as a single conduit to the staff of the company. This establishes a clear line of authority, which is not to say that the board doesn't have access to the staff, but they do so without undermining the line of authority with the CEO.

At the same time, accountability flows in the opposite direction to authority. Staff are accountable to the CEO, and the CEO is ultimately accountable to the board. Authority flows down accountability, which includes information flows up, it's very important that the role definitions between management and the board be clearly articulated and agreed upon. I'm rather fond of this analogy. Provided by Jim Brown. A good board should have their noses in the business but their fingers out.

In other words, they should be highly engaged in the business, but not meddling in operations. The business of the board can be broken down into five primary areas, according to another governance expert ranch around of Harvard, first picking the right CEO and planning for succession. Secondly, by setting the appropriate compensation package for the CEO, third, by working with the CEO to set the right strategy for cultivating a strong leadership pool, and then fifth, monitoring the financial health operational performance and the risk profile of the organization. Of these five areas Dr. shuren suggests that the first one picking the right CEO is by far and away the most important with a better understanding of the board under our belt. Let's talk about directors as individuals for a moment. A corporate director is typically going to be someone with a high level of qualifications.

Current and former CEOs are favorite nominees because they are well rounded, seasoned and often bringing relevant experience. These are individuals that have developed great instincts on matters pertaining to strategy people in operations. Other favorite profiles are highly qualified people with legal financial, human resource and industry relevant backgrounds. A strong director also comes with the innate ability to work cooperatively with equally respected peers. This can be delicate in the boardroom when you have to articulate a dissenting view. But those directors that can do this well challenge one another and encourage deeper thinking and discussion on important matters confronting the business.

The result when this sort of dynamic is nurtured is that strategic decisions are stronger. The real substance of board work requires impeccable judgment, the highest ethical standards and careful prudence boards tend to make a lot of off the cuff decisions. The actual responsibilities of a director somehow pale in context to the qualifications we just discussed. Yet Sadly, many directors fail in one or more of the following three simple responsibilities. First to come to every board meeting prepared. This requires a director to have read all information circulated by management, and do have done their preparation in advance of the meeting.

Secondly, to contribute during the meeting by articulating their viewpoint in such a way to foster a productive debate of the issues at hand, and then third, to acknowledge the conflicts of interest when they arise. When a discussion pertains to matters that directly impact the director through any other means, then perhaps their ownership interest, the directors should recuse themselves from those discussions. Finally, we need to consider the role of the CEO and of management, which includes the CFO, if that happens to You remember that one of the most important functions of the board is to appoint the right CEO. And having recruited the right person leading boards, we'll take the time to document their mandate and define the roles of the CEO and of the lead director. Let's take a moment to compare and contrast the responsibilities using the table on the screen before you. The CEOs job is to simply execute strategy to achieve the organization's mission and vision as established by the board in a way that respects the corporate values and abides by the board's policies.

The CEO sets the direction of the organization with the board and not simply for the board, which is an important distinction and allowing the board to direct without getting involved in the execution. The CEO is responsible for leading the board meetings. Guy Kawasaki, a renowned venture capitalist in Silicon Valley and many times a board member gives the guideline that the interactions during board meeting should be conducted 70% of the time between the CEO and the board. The other 30% will come from other executives, including the CFO on specific matters. Notice how there's not only an obligation but an expectation that the CEO with your help is constantly communicating information to keep the directors informed and educated. organizations where the CEO embraces the board as their most important strategic adviser are closer to realizing governance advantage.

Take a moment to reflect upon your own board. Does your system of governance feel like what was just described? In this lesson, we looked at three important elements of the governance system. First, we talked about the role of the board who speak on behalf of owners. Secondly, we explored who directors were and what their responsibilities entailed. And then thirdly, we discussed the role of the CEO as the leader of the management function, having a clear distinction between matters of the board and those of management ensure the efficient function of the organization.

The CEO executes the strategy which has been developed with the board's input. management reports progress on the strategy execution to the board to establish accountability, and then through an ongoing series of interactions, progress towards mission and vision is achieved.