How to Strategically Build a Board of Directors?

The formation and activity of the board of directors is a key instrument of internal corporate governance in the company. This article will explain how to build the board of directors strategically.

Basic characteristics of the strategically built board

Strategic management of the company is one of the essential functions of the board of directors. The formation of a strategic vision and strategic architecture is a necessary condition for the successful development of any company. The board of directors is a collegial management body of a company that reports and conducts the general meeting of shareholders. As a result of the reform of the corporate governance system, boards of directors became more independent and regained investors’ trust.

There are some fundamental functions that the strategic board of directors should perform:

  • Review and direct corporate strategy, major action plans, and risk management policies;
  • Monitor the effectiveness of company management practices;
  • Select key executives, assign them remuneration, and monitor their activities;
  • Set reward;
  • Control and resolve potential conflicts of interest of management, members of the board of directors, and shareholders;
  • Ensure the integrity of accounting and financial reporting systems.

Many boards of directors have policy or technology committees, and only a few have one that is responsible for formulating and revising strategy. Today, when appointing new members of the board of directors, no one thinks about whether the candidate will be able to deal with the problems of strategy. As a result, reorienting the board of directors to achieve strategic goals is difficult. To do this, a lot needs to be rethought: for example, to understand what kind of people could effectively work on the board, to determine the scope of the board’s competence accurately, to fine-tune the mechanisms for interacting with management when developing a strategic concept (although in the latter case, the initiative should come from the CEO). A competent, forward-thinking CEO, for his part, should be able to clearly state the strategy and not be afraid to invite experts to the board who know certain aspects of the industry and business better than he does.

Board diversity for strategically built board

The professional diversity of the board of directors is ensured by inviting people not associated with the corporation to the board. These outsider directors include business experts (representatives of other companies or sectors of the economy), support specialists (representatives of investment and commercial banks, audit, and law firms), and public figures (research staff, former politicians, representatives of civil society, etc.). ). Along with outsiders, the role of insider directors (CEO, CFO, etc.) is also great, as they have experience working inside the company and have a “fresh” look at the current situation. By bringing other perspectives to the board, a more diverse board of directors contributes to the increasing participation of the corporation in the implementation of social responsibility programs.

Traditionally, boards of directors require qualifications, experience, and skills in strategy, audit, finance, human capital management, risk management, and corporate governance. Recently, competencies in the field of IT have also become in demand in connection with the development of new technologies and their impact on business. People with good industry experts are always in demand on boards of directors.

However, the skills and knowledge of individual board members are not important. The challenge is to form a balanced board of directors, where the experience, knowledge, and skills of one member of the board of directors would complement the experience, knowledge, and qualifications.