Impact of CEO’s Influence Over the Board on Risk Management

“A focused board concentrates on strategy, oversight, and governance practices, to avoid getting lost in the forest”.

“Group thinking” or lack of courage to ask the tough and strategic questions is the chief weakness of boards today. The board’s role is to pull management out of the trees to see the forest, Pearl Zhu

In modern economies, the management and control of companies  are increasingly separated from ownership. This is in line with the Agency Theory that points out the importance of separating day to day corporate management from the owners to managers. The purpose of the separation system is to create efficiency and effectiveness by hiring professional agents managing the company.

It is here where the Chief Executive Officer shoulders the agency responsibility, to run the company’s day to day affairs for the owners.

Corporate Governance refers to the framework of rules and practices by which the board of directors ensures accountability, fairness, and transparency in a company’s relationship with all its stakeholders (financiers, customers, suppliers, employees, government, regulators, rating agencies, external auditors, and the community). Corporate Governance framework consists of explicit and implicit contracts between the company and its stakeholders for distribution of responsibilities, rights, and rewards; procedures for reconciling the sometimes conflicting interests of the stakeholders in accordance with their duties, privileges, and roles; and procedures for proper supervision, control, and information flow to serve as a system of checks and balances.

In terms of corporate governance structure, shareholders appoint a board of directors and external auditors, the board of directors, the board of directors appoints committees as well as the management team led by the Chief Executive Officer.

A board of directors is a body elected or appointed by members who jointly oversee the activities of a company. It is a college of corporate stewards performing a fiduciary duty. The board’s activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These are matters typically outlined in the company bylaws. However, powers and limitations of the board are enshrined in the legislations in a jurisdiction where a company conducts its business.

“Leadership is individual and collective. The chairman leads the board, collectively the board leads the company and management translates that leadership, demonstrably, into operation”.

The board’s primary role is to provide leadership for the organisation enabling it to meet its strategic aims and fulfil its responsibilities to all its stakeholders. This leadership should be clear and run through all layers of the organisation, supported and given structure by clear lines of responsibility, reporting, and accountability. This leadership entails assessing and taking risks so that the company can grow and be entrepreneurial, as well as being prudent, controlling risks, and minimizing shocks or damage to the system.

Board’s leadership encompasses setting direction, with goals and milestones, and determining the values and standards of the company by which it intends to operate and be known. Leadership is individual and collective. The chairman leads the board, collectively the board leads the company and management translates that leadership, demonstrably, into operation.

“A board is thus elected by the shareholders and has the highest delegated authority in the management of the company”.

This concept of leadership is logically followed by a concept of independence, where no one individual and no decision should be influenced inappropriately and no one person or group or interest should influence the company disproportionately. This points to a degree of healthy challenge and honed or balanced judgements, and not autocratic direction.

In an organisation with vetting members, the board acts on behalf of and is subordinate to the company’s full group, which usually elects members of the board. A board is thus elected by the shareholders and has the highest delegated authority in the management of the company. In a non-stock company (private company) however, the board is the supreme governing body of the company, its members are sometimes chosen by the board itself.

The board of directors is supposed to exercise its powers and carry out its stewardship duties with a sense of objective judgement and independence in the best interest of the company.

The primary role of the board of directors is to enhance long term value in the interest of all stakeholders by establishing and reviewing strategies and goals of the company, significant policies, overseeing the business and affairs of the company in light of emerging risks and opportunities, selecting and maintaining a succession plan for the position of the Chief Executive Officer and key members of the management team, ensuring a sound, effective system of internal controls is in place and working and maintained at all levels in the organisation.

That is nevertheless not the end of the cardinal duties and responsibilities of the board. A board has to put in place a mechanism for independent assurance and to make sure it is working to monitor how well thorny issues relating to bookkeeping and financial reporting authenticity, operational controls, and compliance as well as sustainability matters are at the level of comfort. Conversely, the board has to take corrective actions as soon as it is made aware of warning signs. This way, the board is enabled to monitor the performance and business conduct of the Chief Executive Officer and his team on a balance scorecard.

“It is very important to note that the Chief Executive Officer works and executes his duties under the direction and leading of the board. He is never his own authority”.

Typically, a board chooses one of its members to be chairman, elected from the independent non-executive directors. The chairman is responsible for the leadership of the board and should ensure that company leadership is collectively executed. It is of paramount importance that the board clearly defines the respective roles and responsibilities of the board chairman and the Chief Executive Officer.

The Chief Executive Officer is responsible for leading the development and execution of the company’s long term strategy with a view to creating long term stakeholders’ value. The Chief Executive Officer’s leadership role also entails being ultimately responsible for all day to day management decisions and for implementing the company’s long and short term plans. The Chief Executive also acts as a direct liaison between the board and the management of the company and communicates to the board on behalf of the management team.

The Chief Executive also communicates on behalf of the company to shareholders, employees, government authorities, and the other stakeholders and the public. The Chief Executive also is duty bound to assess the principal risks of the company and to ensure that these risks are treated and monitored and ensure effective internal controls are in place and working. It is very important to note that the Chief Executive Officer works and executes his duties under the direction and leading of the board. The Chief Executive is never his own authority. He acts on a delegated authority from the board.

by Amani Mbuja Tuntufye, ERMCP, CERG
Part 2