Effectiveness of the Board of Directors
May 29, 2019
Mr. Isao Sakai
President and Representative Director,
ProNed Inc.
As there is a growing recognition of the importance of corporate governance, we often hear about the “effectiveness of the board of Directors”. Since the term is not clearly defined in the Corporate Governance Code, it is often misunderstood that “having a renowned external director” or “active discussions” will lead to improve a Board’s effectiveness. I must say these elements are merely a prerequisite for effectiveness. “Good business performance” again is not synonymous with enhanced Board effectiveness, as multiple factors affect the overall achievements and it is practically impossible to measure the degree of contribution made by the Board to business performance. “Deliberations made based on management judgement” also proves “legality of the Board” but not its effectiveness. Let me also highlight that “full compliance with the Corporate Governance Code” does not enhance Board effectiveness because the Code simply enumerates best practices as a tool to ensure effectiveness.
To avoid further confusion or misunderstanding, we must clarify the role of the Board and how best to improve its effectiveness. As we look back on how its role evolved over time, the Board initially served to endorse decisions made by the management meeting. Later on, external directors with extensive experiences were appointed who helped to stimulate discussions on different issues. Since they are not familiar with the background of each issue, they had to get extensive explanation and an enormous number of documents before giving any “credible suggestions”. Consequently, not a few external directors felt anxious whether they were making any concrete contribution to the company, while inside directors found the discussions redundant and meaningless.
Now, how can the Board play an instrumental role in facilitating a productive and fruitful discussion in an effective and efficient manner? I believe the Board should be directly linked to material issues that have a significant impact on business management. Should it be issues related to the growth strategy, structural reform, business succession or reinforcement of the risk management structure, there are certain issues that can lead to better decision making by tapping into external “insight”. As such, each company is encouraged to clarify various management issues to be addressed in the first place. As a next step, it is advised to clarify the role to be played by the Board in overcoming these issues. And lastly, a company ought to check whether the Board is functioning in an effective manner by setting up accountable procedures for verification. I believe such strenuous steps can ensure effectiveness of the Board.