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Board of Directors

Provided by IFC Corporate Governance


Role of the Board of Directors

The core roles of a well performing board of directors are to set the overall strategy of the firm; oversee the management performance; and ensure that an appropriate corporate governance structure is in place, including a robust control environment, sufficient disclosure levels, and an adequate minority shareholders’ protection mechanism. The amount of time and effort allocated by the board to each of these areas will depend on the size and complexity of the family business. For example, a company with a few shareholders, simple business processes, efficient internal controls, and a high level of involvement of its owners in the operations, would need its board to focus more on strategy and long-term planning issues.

The board of a family-owned company should add value to the business, and not replicate activities already handled by other bodies of the company. For example, the board should guide, but not get involved in the day-to-day management of the company as this is fundamentally the task of the company’s management. Moreover, directors should have the necessary resources and freedom to oversee and challenge the decisions and other actions performed by the management and/or family members.

In addition to strategy and oversight, some of the main tasks assigned to the board of directors include:[1]

-  Securing senior management succession.

-  Ensuring the availability of financial resources.

-  Ensuring the adequacy of the company’s internal controls and risk management systems.

-  Reporting to the owners and other interested parties.

Composition of the Board of Directors

The composition and size of the board of directors will depend on the size and complexity of the company’s operations. Although there is no simple formula for determining the proper number of directors for all family businesses, best practice recommends having a manageable board size, i.e. 5 to 9 members. The advantages of a smaller board size include: an increased efficiency as directors will have better chances for communicating, listening to each other, and keeping the discussions on track. In addition, it is easier to organize board meetings and to reach the quorum for a smaller group than a larger one.  

In selecting their directors, family-owned companies should focus on individuals who will add value to the business and supply any necessary skills in the areas of strategy and/or management and operations’ oversight. Furthermore, a successful selection of directors focuses on their potential contribution to the company rather than whether they belong to the family or not. In reality, family businesses tend to have boards that are almost entirely populated by family members. The benefits of having a board that acts independently from the management and controlling shareholders will be discussed in section III-3 further below.

The following table summarizes some of the criteria that good directors should possess:

Personal Traits

Professional Qualifications

 

- Personal integrity and accountability

- Team work ability

- Good communication skills

- Leadership skills

- Strong analytical skills

- Courage, self confidence and ability to challenge other directors, family members, and senior managers

 

 

- Industry experience

- Proper business judgment

- Expertise and skills in relevant areas (to be defined by the company). These could include: Strategy; Marketing; Law; Finance and Accounting; Risk Management and Internal Control; Human Resources; and Corporate Governance

- Useful ties and connections

 

Duties of Directors

Directors are elected by the company shareholders and are supposed to act in the best interest of the company and to exercise care in doing so. The following are the main duties of directors:[2]

- Duty of Care: Before making a decision, directors must act in a reasonable manner and make a good faith effort to analyze and consider all relevant and material information available for their consideration. Under the duty of care, directors must:

-  Carefully study any material information available to them before taking any decisions.

-  Act with diligence and competence.

-  Make decisions on an informed and deliberative basis.

-  Regularly attend the board’s meetings, come prepared to these meetings, and actively participate in them (this part of the duty of care is also referred to as the “duty of attention” or “duty of obedience”).

- Duty of Loyalty: In performing their duties, directors must be loyal to the company, putting this loyalty ahead of any other interests. Directors cannot personally benefit from any action taken on behalf of the company. Under the duty of loyalty, directors must:

-  Put the interests of the company above any personal or other interests.

-   Immediately disclose any conflicts of interest to the rest of the board.

-   Abstain from voting on matters that could involve a personal conflict of interest.


[1] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[2] NACD, “The Board of Directors in a Family-Owned Business”, Director’s Handbook Series, 2004.

Copyright © 2016 IFC Corporate Governance.  All Rights Reserved. 

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