Point of view
The effective board
Policymakers are emphasizing the important role that boards play in guiding the strategic direction of businesses while overseeing the management of risks. In this way, well-run
and effective boards contribute to the strength of our capital markets and long-term economic stability.
Well-governed companies are better positioned to identify and manage significant risks … and promote a more stable capital market environment.
An effective board develops the policies, processes and procedures necessary to carry out its responsibilities, including oversight of strategic planning, crisis management and shareholder communication. This sets the foundation for good corporate governance and sound risk management.
Well-governed companies are better positioned to identify and manage significant risks. They are therefore more likely to operate effectively, drive long-term value creation (rather than encourage short-termism), and promote a more stable capital market environment.
Factors for reform
While specific initiatives vary in different jurisdictions, policymakers are highlighting the following operational factors for reform:
- Setting the company’s risk tolerance in the context of strategy
This is currently a major focus of policymakers, particularly but not exclusively, with respect to financial institutions. Boards not only need to set the company’s tolerance for risk, they also have to make sure that it is reflected in the company operations (including compensation practices), and that appropriate controls and monitoring procedures are in place to manage the risk.
To help achieve these objectives, many regulators are encouraging financial institutions and other companies to strengthen their risk management practices, including the creation of specialized risk committees if they have not already done so. However, as boards move to implement or strengthen these committees, some are struggling to determine how they should operate alongside their other committees and responsibilities.
- Information access and flow
Board members should be provided, on an on-going and timely basis, the necessary resources and information to carry out their responsibilities. They should receive regular reports concerning identified risks and performance issues, and have the ability to obtain information from external sources, as necessary.
- Ability of independent non-executive directors to meet separately
Independent non-executive directors bring an outside perspective to a board’s deliberations. They should have the opportunity to meet separately from the rest of the board. This will enhance their ability to represent the interests of shareholders and ask the difficult questions. In some countries this is already required.
- Engagement with shareholders
In some parts of the world, policymakers are encouraging boards of public companies to engage more regularly with shareholders. While this can be challenging and difficult to operationalize effectively, it may give directors additional insight into shareholder concerns.
- Providing information that shareholders and other stakeholders need
A lack of transparency magnified the effects of the financial crisis. Consequently, policy-makers are asking whether shareholders and other stakeholders receive the information they need and can reasonably expect. Boards need to consider the complexity, volume and relevance of the information their companies provide.
Information should be transparent, relevant and timely, and not obscured by too much detail or volume.
About this Point of view
- In Ernst & Young’s Point of view series we express our view on current public policy and regulatory matters of importance to our stakeholders, our profession and the capital markets. In this edition we focus on adjusting to new public policy demands on corporate boards.