The Board Charter: What it is and why you need one
The company Constitution (or guiding document) will detail the board legalities such as the maximum number of board members and how many board members are required to reach the quorum.
The Board Charter is a code of conduct and covers how the board runs itself on a day-to-day basis. It provides agreed guidelines for the roles, responsibilities and authority of the board of directors.
The Board Charter might outline specific rules and policies or may reference stand alone board policies.
The document is tailored to the business and is fluid; needing to be reviewed and updated on a regular basis. It is an internal document that the directors can review and amend at any time.
For a board to be effective, the Board Charter needs to be clear, current, relevant and actively followed. A quality Charter is a blueprint for leadership, excellence, and improvement.
What goes into a Board Charter?
A Charter might include:
- The individual roles that make up the board and their terms of office
- How the board and individual directors are expected to act and are protected and remunerated
- Expectations on group and individual board member performance, as well as how they are assessed
- How the board functions
- How the board interacts with the company CEO and other key stakeholder
- The board's approach to monitoring, risk management, compliance, networking and policy management
- The specifics and practicalities of how meetings run, how they are recorded, durations and frequencies, and
- how decisions are made and communicated
Why do you need a Board Charter?
Many internal situations can be pre-empted in a Board Charter; such the process for dealing with a director who constantly skips meetings or what a board member can do if they disagree with the Chair. It provides the board with a set of internal guidelines to follow in an objective manner.
If crafted well, it will provide some parameters or guidelines for the board members to refer to in their discussions and decision making. It will take emotion out of heated debates; it is less confronting to refer to a board policy than to personal opinions or ethical standpoints.
For example, many boards will need to deal with potential ‘conflict of interests’ from time to time. The Charter might clearly set out what is and isn’t conflict and how the board will manage it when it arises.
Conflicts can be emotive matters which are better driven from logical steps and frameworks, rather than in heat of the moment. Conflicts may be generally ‘murky coloured’, they are not black or white and having pre-agreed principles to help to navigate them removes the emotion. It is easier for a board to decide on ethics from a theoretical perspective in advance than from a psychological perspective in the heat of the moment.
A board will only ever know in hindsight, how well written the Charter is. The time invested in developing and implementing an effective Board Charter can repay itself in dividends by providing clearly thought out processes before conflicts and emotions arise!
The Australian Stock Exchange (‘ASX’) recommends that all Australian businesses have a Board Charter in place. While the ASX only regulate listed companies, and their guidelines are not rules or requirements, following them is more than just a very good idea.
Board Charters have uses outside of the company as well as inside. They might be viewed by investors and other interested parties such as stakeholders and director candidates who are considering joining the board. Having a Charter helps the board communicate its culture and standards.
It might even help the board out of a legal jam and could be used in defence to demonstrate the lengths and efforts of the directors to do their roles to the best of their abilities.
Conversely, if something were to go wrong, and the Board did not have a Charter in force, the absence of the policy might even incriminate the directors further in a case where their due care and diligence responsibilities are in question.
Board Charters are wonderful for setting, abiding by and painting a good picture of governance practices. When done well, they lend an air of polish and professionalism to the company’s brand, no matter the size or how long they have been in business.
Making time to create or to review a Board Charter is difficult, especially when there is already so much to do at board level that seems so much more ‘biting’. However, in the long term the Board Charter saves time, provides reassurance and aids professionalism. It could form the basis for your Board Effectiveness Evaluations and provide a framework for assessing and improving your ongoing performance.
Check out our other articles or click on the links below for more resources for existing and aspiring Company Directors: