If you search for synonyms for governance, you will find words such as rule of law, accountability, supervision, oversight, risk management, leadership, control, transparency, efficiency, and inclusiveness.
All of this is true and illustrates the responsibility that rests on the shoulders of board directors, be it in public limited companies, limited liability companies, associations, foundations or other forms of company.
Good governance stands for sound and sustainable management, a well-positioned organisation, strategic orientation, clearly defined roles and procedures as well as appropriate risk control.
The Board of Directors plays a key role in this respect. According to the Luxembourg law on commercial companies of 1915, as amended, a board of directors is the supreme governing body of a company, appointed by the shareholders or members at the general meeting. The Board of Directors is responsible for setting the strategy, defining the vision and values of the company and ensuring the long-term well-being of the organisation. The Board of Directors is also in charge of the appointment and supervision of key executives. It is collectively responsible for these tasks and duties and is the mouthpiece for the shareholders and all relevant stakeholders and acting in the best interests of the organisation.
In a nutshell, the Board of Directors and its subsidiary bodies provide direction, serve to exercise control and to issue instructions. This responsibility not only gives the Board of Directors power, but also the duty to ensure that the organisation is set up, organised and monitored in such a way as to identify and exploit opportunities and minimize risks in order to protect the company, employees and stakeholders. Hence, internal and external stakeholders are positively or negatively impacted by the good or bad, or lack thereof practices of the Board of Directors.
So how can you ensure the best possible leadership? How should an efficient and successful supervisory board be organised? What is considered best practice?
The board of directors and its composition
The right composition of Board members is a crucial aspect for the efficiency of the collective. The inclusion of broader diversity concepts comes into play here. It has been proven that the right mix of different and complementary skills, expertise and experiences, as well as the consideration of factors like age, gender, background, nationality and different networks, increases the chances that the board will fulfil its responsibilities. In addition, one has to add the right mix of executive and non-executive board members, i.e. external members of the board who are independent of the management and external to the company. This also applies to small and medium-sized companies, where ownership and management are often in the hands of one or a few people. The role of non-executive board members is to critically develop and support the strategy, its implementation and the processes within the organisation through their external perspective and market practice.
An effective board
Board effectiveness depends of course on the quality of the individuals appointed as board members, their absence of conflict of interest as well as their ability to work together as a group. The recognition that boards are groups and that therefore group processes such as conflict, teamwork and understanding are key determinants of board effectiveness, has opened up new approaches to improving effectiveness. This includes fulfilling the key role of providing advice and counsel to and monitoring CEOs and executives.
It is recognised that new board members bring fresh perspectives and new skills and are more likely than established members to challenge orthodoxy and address previously unknown issues. It can be seen that boards with no turnover and boards with high turnover perform the worst. Accordingly, there is a necessity to find the right balance when it comes to board membership terms. They need to be long enough to give new members the opportunity to settle in and familiarise themselves with the company in order to carry out their mandate in a formative way. But also limited in time to prevent individuals from accumulating too much power and to give the board the opportunity to renew itself. It is difficult to specify ideal lengths of terms. One example is ILA. The mandate of an ILA Board member elected by the General Meeting is limited to 3 years and renewable twice. The mandate of the Chair is limited to 2 years and renewable only once.
As a general rule, Boards should meet at least four times a year. Compulsory attendance is a prerequisite. To further increase efficiency, board committees are being set up. Standard committees are the Nomination and Remuneration Committees, identifiying and proposing suitable new board members and determining board members and management salaries. Contrary to what one might think this is also not limited to public limited companies. It has been found that in SMEs where owners and managing directors have their salaries set by a committee, employee commitment tends to be higher. Another important committee is the Risks & Audit Committee monitoring and challenging management reporting as well as ensuring that appropriate processes and controls are designed to minimise operational, financial, digital, legal, reputational and other relevant risks. Other committees that are increasingly being created include ESG committees, board evaluation committees and digital committees. To prevent conflicts of interest from arising and excesses of power from being concentrated in the hands of a few, the respective committees should be composed of different board members, i.e. members seating in one committee shouldn’t sit in another committee.
A sound Board of Directors should be measured not only by successes of the organisation, but also by regular assessments that measure the suitability and effectiveness of the entire board and its members. There are more and more digital « board evaluation solutions » for this purpose.
Continuous training of the members of the board
Rapidly changing and additional legislation, innovations, especially in the digital field such as artificial intelligence and cybersecurity, geopolitical risks and sustainability standards, are shaping and changing the everyday life of organisations. Diversity of competences on a board should not lead to a situation where its members are not equipped with basic knowledge of the various relevant topics. For this reason, ILA attaches great importance to including these topics in its training programs.
ILA was founded in 2005 to support boards of directors, directors, corporate governance officers as well other governance professionals. It’s overall mission is to elevate governance standards by connecting, educating and inspiring.
The Luxembourg Institute of Governance aims at defining and promoting conscious, good and sustainable governance in Luxembourg. To achieve this, ILA offers training and certification courses, produces studies on relevant topics and supports its members through networking activities, advocacy and access to relevant governance resources produced by its working committees.
Our vision is that by 2030 the highest internationally recognised governance standards exist in Luxembourg across all sectors and structures and that by then governance professionals are leading diverse, sustainable and resilient organisations that contribute to economic, environmental and social goals. We want to achieve this with our 3,000 members and in cooperation with other leading associations such as FEDIL.