The Board of Directors – Their Role

The crisis of the chief executive concept may be due to the gradual erosion of the Board of directors as a functioning organ of the enterprise.

To the law, the Board of Directors is the only organ of the enterprise. And in one form or another such a “Board” exists in every industrial country – even in Soviet Russian law. Legally it is considered the representatives of the owners having all the power.

In reality the Board as conceived by the lawmaker is at best a tired fiction. It is perhaps not too much to say that it has become a shadow king. In most of the large companies, it has in effect been deposed and its place taken by executive management. This may have been achieved in the form of the “inside” Board, that is, one composed exclusively of executive management men who meet the first Monday in every month to supervise and to approve what they themselves have been doing the other twenty-nine days of the month. Or the Board may have become a mere showcase, a place to inject distinguished names, without information, influence or desire for power. Or a typical pattern in the smaller company, the Board may be simply another name for the meeting of the family members, usually the ones actively engaged in the business, plus a few widows of former partners.

Since this has happened not only in India or U.S but in every other country if our information is accurate, even in Russia, it suggests that the erosion of the Board of Directors is not an accident but rooted in profound causes. Some of these are: the much publicized divorce of ownership from control which makes it absurd that the business enterprise be directed by the representatives of the share holders; the complexity of Modern business operations; and perhaps most important, the difficulty of finding good men with the time to sit on boards and to take their membership seriously.

But there are real functions which only a board of Directors can discharge. Somebody has to approve the decision what the company’s business is and what it should be. Somebody has to give final approval to the objectives the company has set for itself and the measurements it has developed to judge its progress toward these objectives. Somebody has to look critically at the profit planning of the company, its capital investment policy and its managed-expenditures budget. Somebody has to discharge the final judicial function in respect to organization problems, has to be the “Supreme Court”. Somebody has to watch the spirit of the organization and has to make sure that it succeeds in utilizing the strengths of people and in neutralizing their weakness, that it develops tomorrow’s managers and that its rewards to managers, its management tools and management methods strengthen the organization and direct it toward its objectives.

The Board cannot and must not be the governing organ that the law considers it to be. It is an organ of review, of appraisal, of appeal. Only in a crisis does it become an organ of action and then only to remove existing executives that have failed, or to replace executives who have resigned, retired or died. Once the replacement has been made, the Board again becomes an organ of review.

Those members of the chief executive team who are charged with responsibility for company objectives must work directly with the Board. One way to achieve this in the large company (applied in several of our large businesses with good results) is the formation of Board committees in each major area of objectives, with the company officer charged with primary responsibility in that area, acting as the committee’s secretary or Chairman. But no matter how organized in concrete detail, the Board should have direct access to the top executives charged with objective with objective determination in all key areas.

The Board must also be detached from operations. It must view the company as a whole. This means that working executives of the company should not dominate the Board. In fact, the Board will be stronger and more effective if it is genuinely an “outside” Board, the bulk of whose members have never served as full-time officers of the company.

However, to obtain real benefit from the Board its membership must be carefully selected. Both the large and the small business need Board members whose experience, outlook and interest are different from those of the management. This cannot be obtained by getting representatives of the company’s bankers, suppliers or customers. It requires people whose entire background is different from management’s. In this respect, the British practice if inviting distinguished public servants to join a Board at the end of their public career is a major improvement over our practice of confining the Board to the small “Business family.” What are needed on a Board are not people who agree with management anyhow, but people who are likely to see things differently, to disagree and to question, especially to question the assumptions on which the chief executive team acts without, usually, knowing that it is making them.

  • As long as there is no dispute between the members of the board, there would not be any problem. However, today in most of the private limited companies, there is infighting among the members resulting in chaotic situation.