Eight guidelines for corporate governance
Whether you're a new or a long-time member of a board of directors, it's good to remember some basic principles of successful governance.
As a partner to over 3,000 Québec companies, the Fonds de solidarité FTQ has developed first-hand expertise in corporate governance. Liette Leduc, Senior Director of Legal Affairs, and Julie Proulx, Manager, Investment, share some best practices and frequent pitfalls.
1. Understanding the role of a board of directors
Even though many entrepreneurs already rely on mentors or an advisory committee to guide their decision-making, a Board of Directors (BOD) may be something to consider, views Liette Leduc.
"It's good for small businesses to surround themselves with experts in their sector who can provide a valuable network of operational advice. But a board of directors is more strategic and complementary. What's more, the variety of member profiles, from HR to marketing to finance, can carefully consider a company's needs."
A board's usefulness becomes increasingly evident as the volume of business grows and as shareholders and other stakeholders become involved.
"The board sets the company's strategic direction, evaluates its performance according to various operational and financial indicators and influences its culture and values. If, for example, a company wants to establish strict ethical principles, it must come from the top," explains Julie Proulx.
2. Don't confuse supervision with management
"Nose in, fingers out" is the classic rule of thumb for directors. It makes a clear distinction between the roles of a company's management and its board of directors, adds Leduc.
"Sometimes, when a board is put in place at the request of investors, managers fear that newcomers will interfere in their work and complicate processes. But the board's responsibility is more supervisory than interventionist. For example, the law requires a board to adopt financial statements but it doesn't prepare them; it supervises the managerial process. And although the board is not responsible for hiring employees—other than senior officers—it must ensure that management has a succession plan and that it is being followed."
3. Act with loyalty to the company
Each director has a "fiduciary duty" that requires them to act "honestly, in good faith and in the best interests" of the company at all times, while respecting the interests of the company's stakeholders, rather than acting in their own interests or those of the shareholder who appointed them.
"In practice, we don't often have conflicts of interest, but if, for example, a board member is also a shareholder and the CEO of the company, they must understand the difference between each of their roles," adds Proulx.
Directors are also subject to the rule of "business judgment," adds Leduc.
"When performing their duties, they must make decisions that are reasonable under the circumstances, not ones that hindsight proves best."
4. Creating value through complementarity
When considering potential members for a board of directors, shareholders should draw upon a wide range of expertise to cover the company's issues. Some boards also use a skills matrix to avoid too much expertise in one area and not enough in another.
"For example, companies—especially smaller ones—should avoid having four financial experts around the table. Complementarity creates more value for leaders," advises Leduc.
5. Fight "group think"
This psychological tendency causes individuals to create consensus rather than to examine all aspects of a problem. The antidote, according to Proulx, is diversity.
"The more people think alike, the more they create an echo chamber, and that can lead to poor decision-making. That's why it's good to have complementary skills as well as gender, social and ethnic diversity to bring different perspectives to a situation."
6. Advocate for observation and training
Before taking a seat at the table, prospective directors should review the concepts of good governance and gain a thorough understanding of the company's operations and issues.
"Leaders recognize their board's contribution when its members contribute to the company's advancement," adds Proulx. "They expect their directors to understand the issues at stake, to share their expertise, to propose solutions and to respectfully debate while keeping the interests of the company and its various stakeholders at heart. That's why members should get well informed before they sit on a board so they can be ready and rigorous."
Education will help to ensure a clear understanding of a director's role, duties and responsibilities under corporate law. Some references: the Collège des administrateurs de sociétés, the Institute of Corporate Directors and the Institute for Governance of Private and Public Organizations (IGOPP).
7. In an ideal world, aim for seven to nine members
According to the two experts, although the number of directors may vary according to a company's specific needs, the ideal size for an SME board should be between 7 and 9 directors. At this size, boards can diversify profiles, divide tasks into sub-committees, facilitate exchanges and reconcile points of view and individual agendas. It's a matter of finding the right balance in order to create a flexible decision-making body that creates value for the company.
8. Ensure member turnover
An increasing number of boards are adopting policies that limit their directors' term of office. As a general rule, it's in a company's best interest to appoint new board members after 8 to 10 years, advises Proulx.
"A person who stays on the board for many years must question their ability to maintain a certain degree of independence, address new issues and keep current. Every company must, at some point, transform and evolve, and the same goes for its board. Everyone must ask themselves whether they can still make an important contribution to benefit the company."
"On the contrary, too short a tenure may not be enough time for a director to fully grasp a company's challenges, issues and vision so they can truly create value," concludes Leduc.