The second most important governance document in a company is the Board Charter, the first being the company’s Memorandum of Incorporation.
It defines the director’s duties, sets out responsibilities and liabilities, but above all it is a tool for the board and directors.
The reasons for having a Board Charter include:
1. A Solid Appointment and Removals Process
A solid appointment and removals process to appoint good directors who match the applicable scorecard and remove directors who are not participating or performing to the agreed expectations.
2. Set Expectations
Clearly defined expectations is the first step of building the road to success. The Company must communicate to the board and directors what they expect and need them to do.
The induction process has two legs, firstly the operations of the company and secondly the requirements, rules and expectations of Directors in the Company. The Board Charter is in essence a handbook for the newly appointed Director that is the backbone for the induction process.
4. Supports Inexperienced Directors
Support inexperienced directors by providing them with a framework of the tasks of the Board as a unit and the director as an individual. This Charter assists the Chairman and Company Secretary to groom inexperienced directors.
5. Set the Limits of Authority
Set the limits of authority so that directors and especially executive directors have a clear understanding of which decisions they can make and in turn which decisions need to be made by multiple directors or the Board as a whole. Having this document protects the company and the director as an individual from possible disputes and unnecessary litigation.
6. Performance Evaluations
Performance evaluations should be a gap analysis on where the directors or the Board as a whole need to improve. The charter should set the framework for future professional development and it should set the director at ease that the evaluations will not be a criteria for nominating directors.
The key issue to understand is that no matter how small or large a company’s board is that the same issues need to be resolved. Further to that a Board needs to approve the terms of reference of sub-committees and each sub-committee whether it is a statutory committee or not needs to be approved by the Board.