Finding the Balance Between Board and Management

Corporate governance is a set of mechanisms used to maintain an adequate balance between the rights of shareholders and the needs of the board of directors and management in managing a company. So, what are the ways to find this balance?

Board and management in corporate governance

The main obstacle in organizing the interaction between top managers and the board of directors in many companies is the lack of a clear separation of the competencies of the board of directors and the general director, which entails a decrease in the efficiency of the functioning of both corporate governance bodies. It is essential to understand that there are no universal solutions and answers for all occasions in such a delicate area as company management. Company executives can be advised to carefully study the best international practices in creating corporate governance systems, but at the same time, do not forget about the specifics of their companies, industries, and countries. At the same time, the effectiveness of corporate governance is not a constant value. Once built and adjusted, the corporate governance system must be constantly improved.

An effective management system should ensure that the board of directors and management fulfill their primary responsibility – to ensure that the interests of all shareholders are observed during critical decision-making. The traditional way to solve the “agency problem” is to create a system of checks and balances in the company. Such a system can be based on 3 fundamental principles:

  1. The presence on the board of directors of independent members who are not executive directors of the company. Ideally, there should be a majority on the board of directors.
  2. The maximum possible financial and managerial transparency of the company.
  3. Orientation of the motivation of members of the board of directors and top managers of the company to the observance of the interests of shareholders. This motivation is based on compensation packages based on the company’s stock options.

Numerous contradictions and conflicts of interest that arise during the company’s activities require a constant search for compromises. One of these difficult moments is the corporation’s degree of transparency and informational openness. Excessive openness can lead to the dissemination of strategically important information. On the other hand, closeness may allow managers to act against the interests of shareholders.

Organization of interaction between board and management: best practices

In the world, there is no single standard for building relationships between the board of directors and senior management, and almost any company can share its recipe for success. Nevertheless, here are some examples of effective forms of such interaction.

  • In an American pharmaceutical company, committees of board members and managers were formed to solve key problems. As a result, the board of directors has become much faster at making critical decisions, and its members have a better understanding of the company’s current problems.
  • Top managers of a large international industrial company took turns participating in board meetings, and each of them learned from his example what it means to be in the place of a board member. As a result, mutual understanding and interaction between the board of directors and management improved.
  • Before the main meeting, all promising middle managers of a European commercial bank were required to make a short (10-15 minute) pre-presentation to several board members. Discussion of the presentation by the relevant manager and board members helped improve the quality of the elaboration of issues submitted to the central meetings. Also, it became a good training for the most promising managers of the company.
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