Developing Effective Board Charters

The Foundational Documents for a Board: Board Charters

You have likely heard about board charters, but what are they? For private companies, these are the foundational documents that specify the board’s purpose, operations, member qualifications, and expectations.

Fiduciary boards have their requirements spelled out in the by-laws. For advisory boards, the charter is likely the only document that governs their operations.

You can see a sample of a board charter document here.¹ Thank you to Dennis Kessler, of Midwest Family Business Advisors, for sharing his content.

Principles for Private Company Boards

Since 1978 the Business Roundtable has issued statements on corporate governance, with the 1997 Statement on Corporate Governance being the seminal work. The most recent version is from 2016.

These 3 quotes are the most striking takeaways from the principles that apply to private companies:

“…the substance of corporate governance is more important than its form; adoption of a set of rules or principles or of any particular practice or policy is not a substitute for, and does not itself assure, good corporate governance.”

Having formed several private company boards, and been on several de novo boards, private companies vary widely on what they want their boards to accomplish. Discussions about formalities that are unknown or unfamiliar distract from the more valuable work of oversight, strategy, capital structure, management readiness, and risk.

Board work is intended to solve long-term issues, which is best done through active discussion. The best advice I received was to focus board discussions on a handful of existential questions that will impact the enterprise over the next 3–5 years.

Boards should minimize listening to reports and non-productive group activities. Hopefully, the board will not need to manage a crisis.

If you are forming your first board, how do you know if you made the right decision? By measuring results! If you don’t know the results you want and need, it will be difficult to know if you made the right decision.

“Good corporate governance is not a “one size fits all” proposition…”

This is the second issue that stumps newer boards. No two boards are alike, nor should they be. Like a bespoke suit, it is designed and made for only one client. When designing a board, each seat should serve a specific need: marketing, finance, HR, M&A, etc. “Don’t buy what you can rent” is the best mindset when selecting directors. For example, technology changes quickly, but directors don’t. You can change consultants as technology changes. It is better to use board seats for knowledge and judgment that will apply over a 3–5-year horizon.

“Providing advice and counsel to management is a key element of the board’s role.”

This is the punchline on what boards should do best. Where do you want and need advice and counsel? When do you want it? How do you best take advice on difficult and sensitive matters?

This leads to the question of fit. A successful board is a matter of chemistry and fit. The airplane test still applies: If you would not want to fly across the country sitting next to these people, don’t put them on your board.

Key Elements of a Board Charter

The charter is meant to embody the principles of good governance.

The charter is often used as a solicitation to recruit board members. The topics addressed are likely to include company history (anonymous or not), required qualifications, necessary personal characteristics, term of service, time commitment, compensation, and direction on how interested parties can apply.

This is often a synopsis of a larger piece of work on board design. A well-designed board will assign seats to specific functions or areas of expertise. These assignments are the result of vigorous discussions on priorities, and what would complement the existing board members. This analysis should be based on input from ownership, and to the extent practical, the management team.

Below is an example of how this may be accomplished:

The sample charter assumes this document will be posted to a public forum to solicit candidates. If the company hires a search firm, the process is similar but there may or may not be a public posting. This communication will be more sophisticated, in the form of a prospectus or brief. A prospectus is typically a 15–20-page descriptive document that only be received after executing a Non-Disclosure Agreement. This initiates the selection process.

Before the first board meeting, new members should receive a copy of the charter. These are the “rules of the road” and set expectations for how the board will operate. The sections include:

• Board Roles & Responsibilities
• Primary Duties
• Board Composition and Size
• Qualification Standards & Selection
• Board Committees
• Frequency of Board and Committee Meetings
• Content and Process of Board Meetings
• Attendance
• Term and Turnover
• Evaluation Processes
• Role of Chairman and CEO
• Board Commitment
• Independence
• Change in Status and Conflicts of Interest
• Whistleblower Policy

If the company has a well-established HR policy manual, other relevant policies will be provided as well. Conflicts of Interest and Whistleblower policies are the most common examples.

Why is there so much formality? Because it helps to onboard individuals who are new to the organization and creates efficiency in governance processes.

Developing Charters for Your Company’s Board of Directors

So where do you start? Read as much as you can, and talk to people who have the experience to provide an informed opinion. Good governance is about form over substance, and one size does not fit all.

Try something intelligent, and if it doesn’t work, adapt based on the data the test produces. It is reasonable to have one board meeting to understand how it works, and then change things up. That may mean changing outside advisors, refocusing the agenda, or bringing professional help so everything runs smoothly.

Good governance is a marathon, not a sprint. Be mindful to make adjustments to stay on pace.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

• The Effective Board
• Roles & Responsibilities: a Primer
• The Effective Director]

©2022. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.

Article Footnotes:

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  Thank you to Dennis Kessler, of Midwest Family Business Advisors, for sharing his content.