Monday, April 16, 2018

A “Powerful” Board: How to Exercise “Supervisory” Power Effectively

Ultimately, the board takes the praise or the blame depending largely on their ability to influence corporate governance which has a direct link to each business and their processes.

The board of directors is typically central to corporate governance. Governance is a process for a group of people governing with an organized process. Its relationship to the other primary participants, typically shareholders, and management, is critical for effective governance. A “powerful” board can exercise supervisory power and co-determine of which powers are retained by the governing body and which are delegated to management, along with constraints that may apply. Power is a great thing if you can use it wisely to make a positive influence and empower others to do the same!

The “supervisory” power: The Board exercises the supervisory power in organizing the corporate assets toward the achievement of the corporate vision and mission. They are the stewardship of the organization’s resources, which typically include financial, human, intellectual and physical assets, relationships, and the organization’s business design, systems and capabilities. This power safeguards the evolution and sustainability of the company preserves the company for possible deviation or risk and informs the shareholders on a regular basis on those subjects. The governing body (BoD) must define the management’s job, which is embraced in the purpose, objectives, strategy, and policy of the organization, and must monitor the management’s performance and conformance in order to verify that what was specified is what is actually happening. So, the governing body needs to develop a good sense of the appropriate scope of decisions, and what is pertinent to its role versus what is really the purview of management. The "possible governance methods, techniques, structures, etc" is base on the design of management system which generally has a strong process element and the manner in which those management systems mesh with the governance arrangements.

The “executive” power: The “executive” power is responsible for the implementation of the strategy. The executive power is entrusted to managers who share responsibility as an executive management team. Boards need to understand how to delegate, which means articulate what is delegated and then monitor, not micro-manage what is delegated. In its supervisory role on behalf of the sovereign power, the Board of Directors delegates the operational management of the company to the executive power on the one hand but needs to define clear milestones or Performance Indicators to control the behavior of the progress made by the executive power on the other hand; ultimate accountability to shareholders and the courts for the performance and conformance of the organization, for the effectiveness of the direction. In most of the organizations, there are quite clear processes for the interaction between management and the board; oversight, supervision, development and mentoring of management, typically at the higher executive levels. Validate, organize and control the proper implementation of the strategy by the executive power. Set objectives, strategy, and policies of the organization, either directly, or through some levels of delegation to management; the ability to strike a balance, ability to identify the root cause of the issues on hand, encourage organizational cultural changes and rock the boat when necessary, constantly question the status-quo. Good leaders have to be able to give people what they need when they need it, to move the follower's needle. As leaders, you can only do one of two things, either give direction or support. Great leaders can identify which is necessary and when, whether it be to individuals or groups, thus creating the motivating environment which people gladly follow and execute strategy relentlessly.

The “sovereign” power: Generally, the shareholders of the company exercise this third power. Vote a motion of confidence in the supervisory power and legitimize the proposals and conclusions of the supervisory power related to the start-up or continuation of operations. Optimization could be a term applied to good governance. Governance is the structure and processes of authority, responsibility, and accountability in a business or organization, the ability of boards to oversee and advise management so as to ensure the best fit between (short term) profitability (shareholders) and long-term sustainability (stakeholders: employees, government, society). Governance is a neutral term which is useful in having the ability to discuss bad governance with terms such as waste, corruption, inefficiency, etc. BoDs should be focused on the maximization of (1) Capital allocation, (2) Company performance and (3) Shareholder value. What are the possible governance methods, techniques, structures, etc.? Three things are in concert: (a) Oversight of assessment - gauging conditions and choices. (b) Oversight of appropriation - matching priorities and resource. (c) Oversight of accountability - scoring activity and net results.

In a world of well-defined problems, directors are required to exercise supervisory power and leadership influence over volatility, manage uncertainty, simplify complexity, resolve ambiguity, and direct the organization skillfully. Ultimately, the board takes the praise or the blame depending largely on their ability to influence corporate governance which has a direct link to each business and their processes; not only from the financial results, but also from the involvement and signs being displayed inside the organization, about what guidance, values, and principles governing the company's commercial activities as well as the business outcomes.


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