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Why do boards exist?

By Stephen Howell

Boards are a fundamental component of corporate governance and exist for a myriad of reasons to operate in the legal system of society. The key roles of boards include strategy, CEO oversight, monitoring, compliance, risk management, policy, networking, stakeholder communication and to perform one specific, although very important part of corporate life—to make decisions. Boards, in my view, fundamentally exist to make decisions. Without the decisions made by boards, corporate life fails to exist. As the late James Strong said, ‘…the need for directors to fulfil their duties, work with management and make decisions in the best interest of the organisation as a whole remain at the heart of corporate governance…’1

Boards derive power to make decisions through incorporation and their constitutions, and make decisions on behalf of members or shareholders. Boards, of course, delegate authority to others, for example the CEO. However, the board and its directors are always accountable for any decision made on behalf of the legal entity. The courts have made it very clear that boards and directors have to be diligent in decision making and make what I call ‘defensible decisions’, always in the interest of the organisation (e.g. the James Hardie and Centro cases).

How then do we ensure boards are in a position to make those defensible decisions? A majority of independent directors on the board, receiving timely, correct, legal, analytical, relevant and defendable board papers is the answer. Directors have a duty to keep themselves informed about the matters put before them for decision. This duty cannot be complied with unless directors have the relevant material upon which to base their decisions. Board papers are a key source of information for board members, but are also a source of concern for many boards. The challenge for board paper writers is not to provide more data or information—a temptation with electronic board packs—but to have better informed directors, which in turn makes for better boardroom deliberations and those defensible decisions.

A board paper policy and board paper procedures, developed by the board to ensure the boards expectations for board papers is clearly articulated to management should be considered key board policy. Strict compliance with this policy and procedure is necessary and it should regularly be reviewed by the board for relevance and to test the controls in place to ensure compliance. As pointed out by Justice Middleton in the Centro judgment (ASIC v Healy (2011) FCA 717), a board can control the information it receives. If there was an information overload, it could have been prevented. If there was a huge amount of information, then more time may need to be taken to read and understand it.

Corporate and prudential regulators consistently focus on the decision-making processes and the ultimate decisions made by boards. Investigations into corporate collapses or breaches of duties by directors inevitably are focused around the quality of decisions made or not made. The continual push by government and regulators to ensure quality boards with experienced, talented and independent directors should have boards seriously considering renewal policies, director tenure and the quality of information provided for decision making. For instance, Australian Prudential Regulation Authority (APRA) has recently made it clear what it wishes to see in superannuation fund boards, to bring them in line with other APRA-regulated entities.2

APRA indicates that it:

has stepped up its engagement with boards…directors should be proactively involved in all aspects of key decision-making and contribute independently and constructively to the board’s decision-making. Prudent boards should continually evaluate the information they are receiving to ensure that it continues to support their decision-making. Boards should be able to demonstrate their strong oversight of policies and processes implemented by management and the manner in which they satisfy themselves that these are operating effectively. Where functions are outsourced, boards should insist on comprehensive reporting from their service providers to enable them to stay abreast of the key issues and take ultimate responsibility for decisions…RSE licensees should be mandated to have a majority of independent directors on the board of corporate trustees of public offer funds, including an independent chair. APRA’s experience across all regulated industries is that the inclusion of independent directors brings additional perspectives and objectivity to board processes and decision-making, enhances the range of skills available and contributes to sound governance outcomes…3

The Australian Securities and Investments Commission (ASIC), supported by the courts and governance experts, in many ways demonstrate similar views to APRA. The importance of high performing boards, displaying independent and skilled judgment through the analysis of high-quality information in order to make decisions in the best interest of their organisations are common qualities and values seen as fundamental to leading practice governance.

My argument that boards exist to make decisions may seem simplistic. However, when analysed, decisions are the final product delivered by the board after considered and robust processes which, if compliant with leading practice, provides assurance to a skilled and independent thinking board that decisions are defensible.

Notes

1 Quoted in Kiel, G., Nicholson, G., Tunny, J.A., & Beck, J., 2012, Directors at Work: A Practical Guide for Boards, Thomson Reuters, Sydney, p. iii.

2 Australian Prudential Regulation Authority (APRA) 2015, ‘Superannuation industry overview’, Insight, no. 1, pp. 1-25. Available: www.apra.gov.au/Insight/Documents/15-Insight-Issue-1.pdf.

3 ibid, pp. 20-21