There are four governance areas in which Board Members should operate:
- Setting the organisation’s vision and strategy,
- Appointing the Chief Executive Officer (CEO) and managing his or her performance,
- Utilising their professional networks for the benefit of the organisation, and
- Monitoring implementation of the organisation’s strategy and ensuring compliance with its policies, processes and systems and the law.
Successful Boards Focus on Governance not Operations
Board Members must clearly distinguish between governance and operations. However, it takes a skilled and knowledgeable Board Member to only focus on governance issues, and not engage in operational management duties. The highest performing Board will finely balance how it shapes each of the above four governance areas. For instance, too much focus on setting strategy without monitoring its implementation through appropriate systems may result in that strategy stalling, while utilising professional networks for philanthropic advantage to the organisation is wasted energy without appropriate policies and processes regarding the probity and application of philanthropic gifts.
Common Mistakes Made by Board Members
One of the common mistakes Board Members make is to overstep their role and involve themself in operational implementation. If the Board has set a clear vision and strategy, has a strong culture, and sound monitoring and compliance systems, yet still has concerns about the organisation’s operations, then performance management of the CEO is the correct way to address those concerns.
Another common mistake inexperienced Board Members make is to focus on excessive monitoring and compliance to the detriment of the other three governance areas. There are a myriad of laws (both legislative and court-created laws) that Board Members must adhere to, relating to corporations, charities, industrial relations, trade practices, environmental protection, fund raising, privacy, and health and safety, to name a few.
Some Board Members find their obligations regarding legal compliance and monitoring so overwhelming, and at times frightening, that they divert all their energies to ensuring compliance. This is understandable but a Board meeting that is dominated by compliance monitoring will result in an organisation without Board influence on future direction and growth.
That said, there are some duties Board Members must always keep foremost in their minds in everything they do. There will be negative impacts for any organisation where their Board Members act contrary to these duties. On a personal level, there will be reputational damage, and the possibility of criminal and civil legal sanctions, for any Board Member who does not uphold the following duties to the highest standards.
1. Not to operate if the organisation is insolvent
An organisation must NOT trade while insolvent. “Insolvent” means the organisation is unable to pay debts in full when they fall due, be they staff wages, a payment owed to the tax department or monies owed to suppliers.
The obligations on Board Members to uphold this duty extend not only to avoiding insolvency, but taking all reasonable steps to inform themselves of, and prevent, the possibility of insolvency. For example, if Board Members allow an organisation to incur a debt, when they should reasonably know that when that debt comes due, the organisation will be unable to repay it, then a breach of this very strict duty has occurred.
A Board Member stating that she did not understand the financial statements and other information provided to the Board will not be a defence if charged with breaching this duty – the duty extends to Board Members educating themselves so they can sufficiently question that financial information.
2. Act in good faith and with care and diligence
In non-legal speak this means committing sufficient time and energy to understanding the organisation and how it operates, and applying that knowledge during Board activities. It may include, meeting with the CEO to gain awareness of the organisation, properly reading Board papers and questioning anything that does not make sense or is confusing, and raising concerns at Board meetings about anything in the organisation’s operations that seems inappropriate, irregular or improper.
3. Act in the organisation’s best interests
However you gain membership of the Board, once a Board Member your alliance must ONLY be to the organisation – you must always put its interests before everything else.
In upholding this duty, you must declare any conflict of interests and then put the organisation’s interests first in your decision-making. This includes declaring and then managing situations where you, or someone you are personally close to, may be disadvantaged by a Board decision. Some Board Members find these conflicts of interest too onerous. In that case, there is only one action the Board Member can take to ensure they uphold this duty – resign from the Board.
The duty to always act in the best interests of the organisation prohibits Board Members from using their position to benefit themselves or others they are close to, without first disclosing that conflict. This is the case even if the organisation itself benefits from that potential relationship.
The obligation not to personally benefit from Board decisions also means that a Board Member cannot use confidential information they become aware of through their Board position, if it may benefit the individual Board Member or those they are close to.
Contact Faileen James for a confidential conversation if you are uncertain about your duties and obligations of being a Board Member, concerned about how your Board is operating and the impacts that may have on you personally, or need more education about your Board responsibilities.