Board-Management Dynamics: The Key to a Better Corporate Governance

A healthy relationship between the Board and Management is crucial in driving good corporate governance and effectiveness of the organization. As the leader in charge of driving the organization, the Board must perform governance roles to ensure the organization achieve its objectives and goals. Since such achievements could only derive from collaboration between the Board and Management, efficiency of the Board’s performance is inevitably related to the Management.

The key to enhance positive relationships between the Board and Management so as to ensure smooth collaboration and build trust is to understand expectations of one another as shown in the table below.

After understanding each other’s expectations, an important thing that could lift collaboration and fulfill expectations for both sides is the clear division of board and management’s responsibilities. It provides greater operation flexibility, understanding of working directions, as well as Check and Balance mechanism that will accommodate the Board in governing the Management more freely and fully. According to the IOD’s Corporate Governance Report of Thai Listed Companies (CGR), the majority of Thai companies have clearly disclosed responsibilities of the Board and Management with the number rising from 75% of surveyed companies in 2015 to 83% in 2019. This statistics reflect that the Board of Thai listed companies recognize the significance of this matter.

Corporate Governance Report of Thai Listed Companies (CGR) 2019:
83% of 677 Thai listed companies have clear division of Board and Management responsibilities.

Despite clear division of Board and Management’s responsibilities into matters for which the board has primary responsibility, matters involving shared responsibility of the board and management, and matters that the board should not get involved with, both parties also need to understand the working mechanism between the Board and Management to perform their roles in accordance with their respective responsibilities. This mechanism comprises of two key elements including:

1. Making the decision: In matters that the Board should delegate or matters that it have to collaborate with the Management, the Management is usually assigned to propose plan, policy, alternatives and etc to the Board for consideration before implementing them accordingly. Therefore, the Management must report issues that need to be considered by the Board and the Board must decide whether to approve the proposed issues.

2. Monitoring: After granting approval, the Board must monitor the Management to follow up on progress so that it can fix problems and keep situation under control in case it does not go as planned. In principle, the Board must monitor if the implementation by Management is in line with the Board’s resolution and the work plan’s objectives. The Management is obliged to submit progress report to the Board while the Board must provide control and guidance to the Management.

However, the effectiveness of working mechanism between the Board and the Management require understanding and significant drivers that include:

1. Information proposed by the Management to the Board

Information screened and proposed by the Management must be quality information that will allow the Board to make right decision and appropriate monitoring. Information used in decision making and monitoring by the Board are different. Information used in decision making should base on appropriate assumption that link historical data with present condition and future prospect. It should give a clear picture and trend for the Board to use in making decision. For instances, statistics and track record, operating plan or operating results of the company and comparison with external organizations, business trend, overall changes in the industry. Besides, this type of information should also present opportunities, threats, and anticipated outcome of each alternative proposed. These are considered key substances for the Board to make decision. To perform their duties properly, the Board must contribute more time to study the information prior to the meeting, discuss, and provide suggestions and alternatives to the Management.

On the other hand, information used in Board monitoring will consist mainly of progress report from past to present. The operating result will be reflected by various key performance indices, both monetary and non-monetary, i.e. earnings, market share, customer satisfaction, staff engagement, performance in environmental impact reduction, and responses from stakeholders. Upon receiving information used in monitoring, the Board is obliged to study and prepare queries for Management. The Board should consider if information reported by the Management made sense and if any parts need to be fixed. The Board should also provide further suggestions for the Management to ponder and change the way they operate to improve performance further and not stick with past success.

2. Questions from the Board to the Management

In case there is inadequate information for the Board to perform its duties or should there be queries that require more clarity, another key tool for the Board is to ask. Questions for decision making and for monitoring are different. The first is usually to test assumptions of the Management to ensure comprehensiveness of the Management’s plan. It is also meant to consider possibilities of all alternatives proposed by the Management. The Board should ask questions to ensure that the Management’s proposal already took into account internal and external factors and how it would affect stakeholders. Questions for monitoring are meant to ensure that ongoing implementation is in line with targets. Should there be anything that fails to meet the targets, the Board is obliged to ask the Management to jointly fix the issue.

In conclusion, effective collaboration between the Board and Management requires understanding of expectations toward each other, clear division of responsibilities, understanding of working mechanism with each other, and able to use key tools like information and questions. Recognizing the significance of these issues will lead to smooth collaboration between the Board and Management, create trust in one another, and upgrade quality of corporate governance.

Reference
1) Thai Institute of Directors Association (2020), Guideline on Division of Responsibilities between Board and Management
2) The Securities and Exchange Commission (2017), Thai Corporate Governance Code 2017
3) Thai Institute of Directors Association (2019), Corporate Governance Report of Thai Listed Companies 2019
4) AICD (2017), Relationship between board and management

Waratnarn Ratchamusikpat 
Senior CG Analyst– Training and Facilitators
Thai Institute of Directors Association (IOD)