What’s a Board Charter?

Written by on January 28, 2016 in Governance with 0 Comments

B&W photo Blackwood River - Board Charter illustrationBoard Charter: What and Why

A board charter is one of the most useful governance documents you can have.  The constitution of your company or organisation should bring the board into existence, and give it authority to govern.  Often, it also sets out how the board is appointed and gives it size limits.  There may be special provisions such as the right of certain parties to nominate directors.

But none of this tells us what the board is going to do, and how it’s going to do it.  Why does this matter?  The law gives clear guidance on director duties and responsibilities, but it does not tell us how to do our job day to day.  There may be a shareholder agreement or, for a family business, a written family agreement, but this still doesn’t get to the nitty-gritty.  Within the framework of these other agreements, and the law, the board charter is the place to set up how the board will function.

The charter may be two pages or 52, and the subject matter may range over:

  • The functions of the board, such as
    • reviewing and approving strategy, budgets and business plans
    • monitoring financial performance and working with the auditor
    • appointing and reviewing the CEO (or equivalent)
    • approving and monitoring major capital expenditure
    • reviewing, ratifying and monitoring policies, systems and procedures
    • safeguarding the reputation of the organisation
    • reporting to, and communicating with, shareholders or members.
  • The intended composition of the board, and any tenure restrictions
  • The cycle of board meetings
  • Committees of the board
  • The role of the chairman
  • The role of the CEO (or equivalent)
  • The rights of directors, such as access to information, independent advice, and ongoing professional development
  • The process for reviewing and updating the charter itself.

I don’t mean this for an exhaustive list — it’s a starting point for thinking about the board charter.  Some of the topics are already accepted in law or custom, but it’s still better to have them explicit.  Some of them may be covered in the constitution, but bear in mind that the charter is easier to amend as times change.  It’s good practice for the board charter to explicitly reference, and defer to, the appropriate law and the constitution.  And of course, the charter is the board’s own document, to which it commits itself and by which it governs itself.

The board charter may also include, or reference, the board’s delegation of certain authorities to the CEO and the converse list of powers reserved to the board.  Some also set out requirements for the board agenda, minutes and other board papers.  You need to judge how comprehensive and complex the document needs to be to serve the interests of your company or organisation at its current stage of development.

Clarity

So what have you got when you’ve done this?  In a word: clarity.  Instead of supposition and customary best practice, you’ve got a document that states in black and white what the board is going to do, and how.  It’s the top-level policy document, and serves to remind the board of the framework of obligations within which it operates, as well as its responsibilities.  Many an awkward disagreement has been avoided by a clear statement in a board charter.

Other Resources

You may find it helpful to consider What Should Your Board Agenda Look Like?, and The 5.5 Core Board Tasks.

Enjoy.



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