A board charter serves a number of important functions for your board. For example, a charter:
- Serves as a reminder for the board of the legal framework within which it operates;
- Documents the policies the board has decided upon to meet its legal and other responsibilities;
- Assists the organisation’s leadership in delivering good governance;
- Is a point of reference for disputes; and
- Serves as an induction tool for new directors and senior managers.
It should also be noted that your charter leaves a legacy from today’s board to future boards. However, a board charter will only be value creating if it is carefully crafted, used and regularly updated. These 6 tips are designed to help:
- Don’t confuse a summary charter you see on the web, for a full board charter. Many organisations now publish their charters online; however, in many cases what you are seeing is summary document that does not cover the full scope of the board’s own policy requirements. For an example of a comprehensive list of topics for a board charter, see our Board Charter Table of Contents, which is derived from our well-known book on charter development, Directors at Work (Thomson Reuters, 2012).
- Document existing policies and practices: The process of documenting existing policies and current board practice is important because it can often reveal discrepancies between the formal written policies and what actually happens in practice. When developing or reviewing your charter, it is recommended that you only document what the board does or will do. While a board charter is not a legal document like a constitution or shareholders’ agreement, the courts may take a dim view of a charter that says one thing when the board does another by not following its own policy. For example, stating that the board’s oversight of compliance includes approving and reviewing the results of an annual external audit of the organisation’s compliance system when this is not the case would reflect poorly on the board if there was a major compliance breach.
- Document any ‘unwritten’ policies: Ensure your charter documents any ‘unwritten’ practices that may currently regulate corporate conduct. For example, there might be unwritten agreement that the communication of significant information from inside the organisation to the public must first be approved by the chair – which we would not recommend to remain undocumented, since it could prove an issue if a new CEO was not aware of this policy.
- Involve the whole board: While the board may choose to delegate the majority of the work when developing or reviewing its charter to a single individual such as the company secretary, a small group of directors or external advisors, the whole board must discuss and approve the charter, so that each director has ownership of the final document. This may require a special workshop or series of agenda items at board meetings to canvass all the issues related to the charter thoroughly, resolve any differences and reach agreement.
- Review your charter annually: The charter should state the timing and process for reviewing and updating the charter itself, which we recommend be done annually or when there are changes in the organisation such as a restructure or major strategic initiative. Problems can arise when policies are not updated to reflect changes in the law or regulatory environment, changes in the organisation’s operating environment and good governance practice.
- Get external advice if unsure about how to go about developing a charter: Having developed numerous charters, a common question we are asked is whether or not outside expertise is required to develop a board charter. This will depend on such factors as the size of the company and the complexity of the governance problems faced by the organisation. While hiring consultants will add to the cost of the process and may be inappropriate for small boards, the use of independent advisors can save significant amounts of time and money in the long run, as they are familiar with the variety of documentation possessed by all types of companies and can ensure that no vital source of information is overlooked. They are also experienced in preparing materials for discussion and facilitating board discussions. In cases where there is conflict on the board, or serious governance problems to be resolved, it is usually advantageous to hire an independent expert to facilitate discussions and lead the board towards a resolution of key issues.
If you would like further information on board charters and our approach to developing them, click here.