Corporate governance is about how to point a company in the right direction and make sure it stays on the right track to achieve its long-term goals.
This maximises the value of the company to its shareholders, employees, creditors and the economy at large. For companies to achieve long-term success, they must take care of all the stakeholders they deal with. And, while management is busy with the day-to-day operations, the board is responsible for corporate governance.
Therefore, if the company does not have the right board, then it cannot do well in corporate governance.
Governance of the public sector is more tricky than in the corporate world. Companies ultimately have profit as their key benchmark. Of course there are other objectives, but in the long term, profit is the key indicator of the company’s success.
If it is owned by the state, then it may have developmental, social and political roles to play. This makes it more difficult for boards to develop good key performance indicators (KPIs) for the management and for the owner to develop KPIs to assess the success of the board.
Some of the public-sector organisations do not even have boards of directors, which means that the classical set up of governance is missing. In such cases, we need to create a non-traditional governance structure and benchmarking system.
For companies, having the right board is in the heart of corporate governance. That means two things: first, board members must collectively possess the right mixture of knowledge and skills relevant for the specific company on which they serve as board members. Second, each board member must be committed and have enough time to do his or her job as a member of the company’s governing body.
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When selecting board members, we do not usually select individual board members in isolation from the rest of the board – we select the entire board. There is a minimum knowledge that must be possessed by the board, topmost of which is financial knowledge.
Probably one of the most important responsibilities of the board is to ensure the integrity of financial statements. The board, therefore, must be able to read, understand and thoroughly analyse and review financial statements.
The board is also made up of the key governing bodies of the company, therefore some of the board members must have deep knowledge of corporate governance, including the functioning of the board and its committees.
The board is also responsible for discussing and approving company strategy, so some board members must have good knowledge of strategy. Furthermore, regulators now place the function of risk oversight as one of the key responsibilities of boards. Hence, some board members must have good knowledge of risk in general and of the specific business risks facing t he company.
It goes without saying that some of the board members must have good knowledge of the industry in which the company is operating. Knowledge of other disciplines may be needed as per specific company needs.
But a board is not only about knowledge and expertise, it is also about the culture and attitude.
But what if the board member is knowledgeable and experienced but does not have enough time to devote to the company? If the board member cannot read the board packs well, then they cannot add much value to board meetings and to the company itself. The same goes for board committees, which are key tools in the function of any good board.
Despite that, we usually suggest that board members should not sit on more than three to five boards. In some cases, one or two companies are enough, if they are going through crises or restructuring. Serving on more boards may be possible if the companies are operating in stable environments.
Ashraf Gamal El Din is the chief executive of Hawkamah, the Institute for Corporate Governance.
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