Effective corporate governance requires that everyone involved has clear and structured roles and responsibility. It also helps promote an environment of work which values diversity and encourages fairness. These frameworks can be used by a variety of organizations, from large corporations to professional associations and families.
The board creates and approves corporate strategies to generate long-term value that is sustainable; chooses the chief executive officer (CEO) and oversees management in operating the business. The board also invests capital, assesses and manages risks and establishes the “tone at the top” for ethical conduct. The board typically consists of an assortment of insiders, including major shareholders, founders, and executives–as well as independent directors who have experience managing or directing other large companies. Independents are seen as helpful in the area of governance since they do not have the same ties to insiders, which could lead to conflicts of conflict of interests.
Board composition is critical because board members deal with complicated and often technical issues that require many perspectives at the table. This is why governance experts generally recommend that boards include at a minimum the majority of independent directors. The diversity and duration of tenure are crucial for ensuring that the board is able to effectively function, particularly in cases where discussions are long and filled with opinions. New board members will bring fresh perspectives to the table, and those with a long tenure can offer continuity and know-how of the institution.
The board is also responsible for understanding, evaluating and directing the annual operating budgets and plans of management. Furthermore, the board through its corporate governance committee and nominating committee, must be conducting regular shareholder outreach in order to identify and understand the opinions of shareholders who are major and communicate regularly with them regarding significant issues relevant to the company.