The answer lies in whether the company is private or publicly traded and how much effort went into board selection. Another factor is whether the CEO is a founder and control freak or has challenges listening to advice, or the company has a group of yes persons on the board who rubber stamp anything management puts in front of them and are there primarily for the honorarium.
Strictly speaking, boards are in place to provide governance and management oversight to protect the interests of shareholders. The two crucial responsibilities are oversight of long-term company strategy and selection, evaluation, and compensation of top management. Duties should include approval of strategic plans, budgets, financial statements, and any other decision that could materially affect shareholder equity. Board participation does not mean interfering in the company’s day-to-day running, execution of the strategic plan, sales and marketing, personnel issues, formulation of budgets, strategic plans, or financial statements. In protecting the interests of shareholders, the board has the right to request reports from management and ask questions with the right to receive answers.
Board governance and responsibilities vary due to the company’s size, whether publicly traded or private, or a family-owned business. Securities legislation mandates that publicly traded companies’ board oversight is held to a higher standard. Board members can be liable for misrepresentation, filing misleading or false documents, and insider trading in addition to the statutory obligations related to wages and taxes. Most boards of listed companies have an audit, compensation, and governance committee that reviews the various aspects of company operations and makes recommendations to the board where action is needed. Public companies should have outside, solid independent directors. In a company where management dominates the board, shareholder interests can be negatively subjugated to the interests of management if not aligned with a strong commitment to enhancing shareholder value. Ideally, the board should function as a balanced intermediary between shareholders and company operations.
Private company board governance differs significantly in private or family-owned companies mainly because the board members are likely to be majority owners of the business. Therefore the interests of the shareholders and management align because they are the same. However, larger private companies bring outside directors to provide guidance and expertise in areas where management could be lacking.
In a recent Harvard Business Review article, Walter Salmon indicated that small and regional companies’ boards tend to be overpopulated by members of management. This uneven balance of power may indicate that the board is not operating as well as it should. Inside directors tend to be committed to tradition or their own ideas. Outside directors, without independent sources of information, are usually only capable of anemic discussion and dissent. The result: consumers, competition, technology, and the economy may change, but the company fails to keep up.
Whether boards are an asset or a nuisance depends on the quality recruitment of board members and management’s willingness to embrace the shareholder/management partnership. A board that includes experienced members that are empowered can only enhance the quality of management decisions and thwart shareholder activism and temper lousy management decisions and lack of foresight, as was demonstrated by the demise of Blackberry or Compaq computers. Shareholder influence expressed by the board can temper, for example, management’s desire for growth at all costs versus building a sustainable, profitable business. Growth feeds management ego and compensation, and profits feed shareholder value and business sustainability. Ineffectual boards are of no value to either management or the shareholders and end up wasting valuable time without protecting shareholder value or enhancing management capabilities or tenure.