How do boards make decisions

These individuals are expected to maintain the company's stability and profitability. Public companies are required to have a board of directors. Private companies often have boards but they are not required to do so. Boards of directors usually have between seven and 15 members, but can have up to 31 members. Yet, many boards have never had an explicit conversation about or developed multiple approaches to this most critical of governance functions — their decision making.

As a result, the vast majority of boards have a very limited tool kit of processes and techniques for making effective decisions. There are two very common foundational problems with board decision making: a culture of unanimity and having only one decision-making process. A review of the meeting minutes of a variety of boards will demonstrate this: the overwhelming majority of board votes are unanimous.

Many board members cannot remember ever having a non-unanimous vote. What is wrong with dissenting votes? Why must every board member agree?

Disagreement provides alternatives and makes you think more deeply about the issue. The second foundational problem with board decision making both flows from and supports the culture of unanimity: having one dominant, if not exclusive, approach to making decisions.

This common decision-making process involves two characteristics: 1 binary decisions and 2 simple majority rule. Like the brake lights on a car, the vast majority of decisions boards make are binary: they vote yes or no, approving or rejecting the motion before them. Boards derive power to make decisions through incorporation and their constitutions, and make decisions on behalf of members or shareholders.

Boards, of course, delegate authority to others, for example the CEO. However, the board and its directors are always accountable for any decision made on behalf of the legal entity. How then do we ensure boards are in a position to make those defensible decisions? A majority of independent directors on the board, receiving timely, correct, legal, analytical, relevant and defendable board papers is the answer.

Directors have a duty to keep themselves informed about the matters put before them for decision. This duty cannot be complied with unless directors have the relevant material upon which to base their decisions. Minutes are one way that a board can demonstrate its accountability for its decisions. For significant decisions, it is a good idea to briefly outline any factors that were considered in decision and the amount of time allocated for discussion.

This can help to establish that directors have exercised proper care and diligence in the exercise of their authority. It is important to note that minutes can be used as evidence in legal proceedings and as such it is important to take care in the preparation of board minutes. Directors are responsible for ensuring they have access to the information they need to make their decisions.

This is part of their duty to act with care in diligence which is discussed in greater detail in Principle 2: Roles and responsibilities.

One of the ways they do this is through requesting and receiving information in the form of board papers. Information in board papers should be consistent, coherent and complete. It is the responsibility of directors to read and understand the information contained in board papers.

If directors feel they need more information to perform their roles, it is their responsibility to seek it out. In some circumstances, directors may also need to access the independent advice of external experts such as legal practitioners, for example in relation to the exercise of their legal duties. Board calendars help directors to govern effectively by aligning the focus of the board to its priorities and obligations for the year.

Board calendars can also help prevent items from being overlooked and assist directors to take a more long-term view of their work. One way to develop a board calendar is to list the key issues that a board will need to consider throughout the year and allocate them to a particular meeting.

Directors have all the responsibilities that come with their roles from the moment they are appointed. As such, it is important that they are prepared to fulfil their responsibilities.

A thorough induction process can assist with this. It is a good idea for new directors to receive a letter of appointment that sets out what their responsibilities are and any other information relevant to their appointment. This letter should also outline the process for induction. The induction process should be tailored to reflect the circumstances of the organisation as well as the skills and experience of the new director.

Generally, induction processes will include:. After a board member has been inducted, seeking their feedback about the process is a good way to identify any additional learning needs, and to improve the process for future inductees.

The role of the chair is critical in supporting effective meetings. Inside the boardroom the chair facilitates discussion so that all agenda items are dealt with appropriately.

Board meetings should be collegiate, and the chair facilitates this by setting the example of behaviour and by providing clarity of purpose to decision-making. The chair should provide opportunity for all directors to be heard, and facilitate and enforce respectful conduct between directors. An effective relationship between the board and management contributes significantly to the effective operation of the organisation.