A harmonious and effective relationship between the board of directors and management is fundamental for successful corporate governance and organisational success. Despite their shared goal of achieving the company’s vision and objectives, challenges often arise due to the inherent tension between governance oversight and day-to-day management and responsibilities.
In this article, we look at what constitutes a healthy board of directors and management relationship, as well as common challenges faced, and the crucial role of annual board effectiveness reviews in assessing and enhancing this partnership.
The foundation of a successful board of directors and management relationship
While the board is responsible for management oversight, a successful board/management relationship shouldn’t necessarily be based on a traditional boss/subordinate dynamic. Instead, it thrives on a team approach grounded in trust, respect, and a clear mutual understanding of roles, responsibilities and boundaries. While the formalities are often outlined in the organisation’s governance charter, it’s the translation of these principles into the organisational culture that truly defines the health of the relationship.
Critical elements of the board of directors and management relationship
The relationship between the board of directors and management relies not only on collective interaction, but on the communication between individuals. Some of these relationships include the following:
Chair-CEO relationship
The relationship between the Chair and CEO is pivotal, acting as the primary link between the board and management. It should be characterised by engaged business interactions, professional trust and respect. This relationship serves as a mentorship and sounding board for the CEO, where the Chair can provide constructive feedback and performance assessments, while offering unity and support in both public and private interactions.
Individual board members and executive management
When individual board members interact with executive management, it’s recommended that clear communication protocols are established. Typically information exchanges should be channelled through the Chair and CEO. If there is a need for direct contact between individual board members and members of the executive management team, this should be communicated to the Chair and CEO in order to maintain transparency.
Board committees and management team
When board committees work closely with key executives, communication channels should be defined in the respective committee charters. This promotes efficient collaboration while maintaining a structured framework for interaction.
The importance of board evaluations for the board of directors and management relationship
The Royal Commission into Banking, Superannuation and Financial Services Industry in Australia emphasised in its report in 2019 that “boards cannot, and must not, involve themselves in the day-to-day management of the corporation.”
This isn’t reflective only of the financial services industry, but of all organisations. Conducting a thorough board evaluation is paramount in assessing the relationship between the board of directors and management team. BoardOutlook’s purpose-built board evaluation software supports this with reporting that helps to understand board/management sentiment and alignment on key performance areas.
Should you include management in board evaluations?
A good board of directors and management relationship thrives on a team approach. At BoardOutlook, we’ve found that clients who include management in the board evaluation process find their relationship improves. This is because the confidential nature of the review ensures feedback is constructive and aimed at the collective improvement of both the board and management. The results foster openness and joint responsibility for driving positive outcomes.
What does a good board of directors and management relationship look like?
The board of directors and management relationship shouldn’t be an ‘easy’ one. While they should work together with respect and candour, board members have high expectations and demands of management. This ensures timely and relevant reporting so there are no surprises.
Another statement from the Financial Services Industry Royal Commission was, “boards cannot operate properly without having the right information. And boards do not operate effectively if they do not challenge management.” Essentially, boards fail to spot emerging or recurrent risks when management only provide good news or oversimplified board reports.
Essentially, the board of directors need to stay curious and make proper enquiries when reading information presented by management. They should challenge management and ask hard questions in order to achieve the following:
- Test the validity of assumptions made
- Stress test opportunity/risk analysis
- Test depth and breadth of management’s knowledge, understanding and analysis
- Help foster trust and confidence in management
- Stimulate innovative and creative thinking
On the other side of the coin, the board must also courteously and respectfully listen to management with an open mind to allow management to make its contribution with confidence and clarity of viewpoint, and without undue interference, constraint or trepidation.
Building a positive foundation for the board and management relationship
Ultimately, the success of corporate governance hinges on a strong relationship between an organisation’s board of directors and management team. This relationship should be built on trust, open communication and shared goals. The interactions among various board and management members are crucial, as are annual board evaluations that assess the strength and effectiveness of this relationship. Encouraging a dynamic where tough questions are asked and innovative thinking is fostered is equally important.