The Subtle Art Of Holding The Board Of Directors Accountable - iBabs

The Subtle Art Of Holding The Board Of Directors Accountable

“The board’s role is to pull management out of the trees to see the forest” 

— Pearl Zhu

Directors should have their eyes on the organisation’s strategy. They should oversee the execution of that strategy and make sure that managers can see the bigger picture. 

But how do you hold the board of directors accountable?

And how do you quantify what they have achieved?

With managers, it’s easy. There are concrete targets to meet and specific projects to carry out. But directors’ to-do lists are much more fluid and their achievements are sometimes realised in the long term, making it difficult to know how productive they were on a particular day and even in a particular month or quarter.

Generally speaking, members of the board are expected to:

  • Attend and participate in meetings, including voting
  • Remain up-to-date and properly informed on company business and affairs
  • Rely on others including professional and third-party or outsiders input as needed
  • Make enquiries and reasonably follow up on these.

But this list isn’t exhaustive. Accountability is much more nuanced and understanding the output of a board of directors varies by organisation. 

So, what is the subtle art of holding the board of directors accountable? Let’s explore…

What does accountability mean for the board of directors?

The Oxford Languages Dictionary defines accountability as “the fact or condition of being accountable; responsibility”. It’s all about making individuals or groups responsible for their actions. This means praise and acknowledgement when things go well, and liability, ownership and consequences when things don’t go so well.

When it comes to the role of the board of directors, they should take responsibility for the company’s activities, whether the business is for-profit, non-profit or a public company. Another core element of this is presenting fair, accurate and honest information to stakeholders. Each board member has a responsibility and the entire board should be answerable for all company activity. 

To whom are the board of directors accountable?

Now that we have a better understanding of accountability, let’s take a look at who the board of directors are accountable to. 

Regulators, police and the courts

As with all of us, boards are accountable to legislative bodies, sector regulators and government agencies. Further rules, regulations and corporate law apply to certain industries such as financial services, healthcare providers and food and drink suppliers. 

In the UK, companies are, at minimum, accountable to The Companies Act. This includes an entire section on directors’ duties which include regulations on:

  • Exercising their powers for “proper purpose”
  • Unfettered discretion
  • Conflicts of duty or interests
  • Company transactions
  • Use of corporate property, opportunity or information
  • Competition
  • Common legal obligations and duties of care and skill.

Accreditation bodies

Many businesses will seek accreditation to legitimise and create trust around their company. As such, they’ll often be subject to the rules and regulations of the accreditation bodies. While not (necessarily) legally binding, contracts may be in place between businesses and such bodies.

Clients and customers

Of course, corporate directors are accountable to clients and customers. This includes oversight of operations to ensure safe products and excellent customer service. In times of dispute resolution or conflict, boards may have to step in as these escalate. For example, if there is a PR crisis due to a customers’ experience. 

Company

Boards are also accountable to the company they work for and responsible for fulfilling its mission. Companies will have a code of conduct for board members (and all employees), which will often contain rules for:

  • Confidentiality
  • Fair dealing
  • Compliance procedures
  • Reporting illegal behaviour
  • Ethics
  • Remaining informed
  • Attending regular meetings.

Financial institutions, investors and other stakeholders

Stakeholders include anyone with an interest in the business, a specific project or a product. It goes without saying that directors are responsible for defending shareholders’ interests. But they should also do the same for employees and community members. 

It’s not often that businesses grow to great heights without funding from banks, loan providers and/or investors. This goes back to presenting fair and accurate reports about the business to potential investors or loan advisors. Directors are responsible for delivering this information from the right perspective and including relevant metrics such as revenue, profits, turnover, client bases, market share and more. 

How are the board of directors held accountable?

There are plenty of ways in which director performance can be reviewed and discussed. 

TypeFrequencyNotes
Annual reportingOnce a yearAn annual audit and report where a company documents activities, progress and finances in the previous financial year.
Financial reportingOnce a quarterOnce every three months, a financial report is put together with key metrics to demonstrate business activities and related financial performance.
General meetings or AGMsOnce a yearAn annual meeting including the board, the executive directors and the shareholders of an organisation.
Disclosing remuneration and other benefitsOnce a yearTables showing remuneration, pay, bonuses and other benefits received per director. This can include insights from a compensation committee as needed.
Board evaluationsOnce a yearAnnual reviews of members, positions, performance evaluations and strategy.
Corporate governance committeesOnce every two yearsOverseeing audits, remuneration, compliance, risks and governance. 

Individual board member accountability

Besides acting together as a board, each individual member will have their own responsibilities. Often, board members are happy to act as individuals if there are financial incentives (such as shares, stocks or pay) at play based on performance. If there are no consequences or sanctions for actions, or there is a culture of secrecy, board members can ‘get away’ with poor or illegal behaviour.

For a nonprofit organisation, this is even trickier. As many of them are available on a volunteer basis, it’s difficult to encourage board accountability and meeting attendance from busy volunteers. 

You can encourage individual board member activity by:

  • Being transparent about the % of meetings attended
  • Being clear on the role of the board as a whole and each person’s contribution to this
  • Disclosing remuneration 
  • Giving individual responsibilities and goals for each member to hit
  • Demonstrating that participation is ‘monitored’
  • Sharing successes and contributions from all board members
  • Creating a strong board culture with alignment between all members.

How to address conflict 

Conflict resolution is a key component of a successful board of directors. But how can you do this in a way that is constructive to the future of your organisation? The below information applies to both nonprofits and for-profit organisations. Conflicts such as those listed below should be a direct breach of your company’s Code of Conduct, giving you a leg to stand on.

Ethics violations

Unethical conduct can include plenty of illicit actions, such as:

  • Unwelcome written or verbal sexual advances
  • Inappropriate behaviour
  • Fraud
  • Conspiracy to commit fraud
  • Money laundering
  • Insider training
  • Theft of money or property
  • Misuse of funds (including expenses)
  • Dishonest accounting practices.  

If a company’s board member is subject to any kind of investigation or evidence of the above, they need to be dismissed from duties and responsibilities until cleared. 

Loss of confidence and/or lack of development

This could include:

  • Lack of participation or attendance at meetings
  • Not delivering on promises or responsibilities as required
  • Loss of trust in this person by other members of the board
  • Rude, disruptive or inappropriate behaviour in meetings
  • Poor communication
  • Weak board performance 
  • Lack of collaboration with other members.

Depending on the severity of a loss of confidence or lack of development, there are four key ways to address this issue. 

Personal intervention

A one-on-one discussion can be had informally between the chairperson of the board and the board member. The board chair can request a resignation or ask the member to consider leaving the board.

Leave of absence

If there are underlying reasons for a lack of development or loss of confidence, the chair of the board can give a member a leave of absence. This could include medical conditions, busy work projects, disabilities, family responsibilities or more. A leave of absence lets them take a break without scrutiny and allows the board to continue and re-allocate their responsibilities.

Term limits

Giving each member a term limit of one or two years means that they can be ‘let go’ from their position at the end of their term if there is a confrontation or any issues. 

Impeachment 

In the worst-case scenario, your organisation’s bylaws should allow board members to be removed by board or shareholder vote if voted by a majority of the other members. This could be either 51% of the vote or a two-thirds vote. Make sure your bylaws and contracts include provisions for this.

FAQ

Can the CEO hold board members accountable?

The Chief Executive Officer (CEO) is often held accountable by the board, rather than the other way around. However, if there are serious issues or concerns, the chairperson and other board members are able to step in and intervene. This could be after a conversation with the CEO.

Should boards be held accountable for ESG issues?

With the exponential growth of ESG investing, it’s a good idea to include ESG in your accountability practices. Recent research by Harvard found that investors are looking to broaden the definition of corporate governance, expecting companies to reflect social and environmental impact in their proxy statements:  

“Our research indicates that the linkage between ESG management and corporate governance is becoming more pronounced not only in investor stewardship policies and communications, but also in company disclosures and company practices.”   

Conclusion 

With so many laws, regulations and external parties involved, the board of directors are accountable to a wide range of stakeholders. And there are a number of nuances to it, too. The board can be evaluated as a whole but also as individual members. Board performance can refer to financial performance but also to sustainability.  

In the end, the board’s ultimate responsibility is to drive the company forward in a positive, law-abiding and ethical direction. Annual reports, regular meetings and financial statements can help to demonstrate improvements and keep the board on track. 

References and further reading