The board’s role is one of oversight, while management should assess risks and opportunities, says Torys lawyer
In light of the current business environment, marked as it is by “growing business uncertainty,” a board has the responsibility of performing oversight functions, says a corporate lawyer from Torys LLP.
According to a news release, Cornell Wright, partner and chairperson of Torys’ corporate department, has helped to elucidate the board’s role of oversight compared with the management’s role, particularly during a time when there is a risk of recession. Wright states that the board’s role may get tougher in a challenging economic climate and that board members should make sure that the company’s management team possesses “the skills and experience to deal with a changing business environment.”
On the other hand, he says that the role of the management in such a situation is to assess the risks and opportunities and “stress-test them against realistic scenarios.” He adds that the management has the responsibility of aligning its own financial incentives with the long-term interests of the corporation.
Wright is quoted in a column written by Heather Wilson, director of research services at the Institute of Corporate Directors, for Director Journal, which seeks to provide a solution for a situation in which the board is trying to assert itself in matters which are in the management’s wheelhouse.
In the column, Wilson wrote that, while board members may feel hesitant to hold back from involving themselves in operations, they should remember that straying into management’s territory could “undermine the confidence of managers and lead to organizational ineffectiveness or dysfunction.”
However, Wilson also recognized that “there is no simple rule book.” A board should decide for itself how to draw the line between its responsibilities and the management’s responsibilities.
Terry Henderson, who is described in the column as “an experienced director on private company boards,” suggests that writing up a formal board charter, validated with the chief executive officer or some other important stakeholder, could help in delineating these roles. He likewise recommends periodic check-ins or reviews, so that subsequent adjustments can be made to the charter.