Do you have a 'board code of conduct?'

Companies large and small, and everything in between, produce codes of conduct for employees, these don’t quite fit the specific role and powers of board members

By Dr M Muneer & Ralph Ward

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Published: Tue 9 Apr 2024, 12:14 AM

Last updated: Tue 9 Apr 2024, 12:15 AM

In the wake of unfolding electoral bonds and government corruption saga in India, and the lies the chairman of its largest bank paraded in the Supreme Court, a big question arises: Do enterprise boards have a code of conduct in place.

Board and committee charters... bylaws... job descriptions for chairs and board members. All these are good paperwork for ensuring a professional, smoothly functioning enterprise board. What’s missing, though, is a helpful “rules of the road” statement that helps board members know what their powers are (and aren’t) and how they should work effectively as a team — In essence, a board code of conduct.

Here are some common issues related to poor board code of conduct in enterprises:

Domination of promoters: In many companies, promoters (founders or controlling shareholders) hold significant influence on the board. This can make it difficult for independent directors to raise concerns or challenge management decisions.

Lack of independent oversight: Sometimes, independent directors may not have the necessary expertise or resources to scrutinise complex financial statements or business decisions.

Conflicts of interest: Board members might have personal or financial ties to the company or its management, creating a conflict of interest that hinders objective decision-making.

The right code of conduct may sound like a nanny issue that will make business professionals on a board roll their eyes. But the next time someone talks over someone else, “freelance” by claiming to represent company interests, or shares board info when they shouldn’t, you would wish you had a code in place. So start right away.

While companies large and small, and everything in between, produce codes of conduct for employees, these don’t quite fit the specific role and powers of board members. For starters, employees work for the company, and represent the company. Corporate directors are the company. This also means the various levels of discipline employee violations bring have fewer teeth in dealing with board misdeeds. But a board code of conduct still serves a valuable prophylactic purpose. It requires the board to openly discuss its “do”s and “don’t”s (preferably with legal counsel chipping in). Further, requiring members to sign off on knowing and accepting the rules (annually, if you please) keeps directors aware and cognizant.

Next, take a look at the items to cover in your board code of conduct, which will vary by country, industry and stage of growth. There are a number of good examples out there to borrow language from (the Singapore model code is especially useful). However, standard items include a statement of board responsibilities and duties, usually referencing charters and bylaws; due diligence by directors; preparedness; conflicts of interest (and disclosure if any); confidentiality; representing the company outside the boardroom; attendance policies; and of course, waiver policies for any of these.

As you can guess, most items on board responsibilities and duties consist of legal boilerplate (fiduciary role, duties of loyalty and of care, honesty, fair dealing, integrity, etc) that can be hard to define at the boundaries. A better approach is to spell out some examples of behaviours that are, and are not, acceptable. A business context could benefit both your personal company and that of the board you serve – what are tests to use in proceeding?

Conflict of interest matters make up most board code discussions, and should be addressed in detail. Work with counsel to tune conflicts to your specific business and sector. For example, a venture-backed company, with investors on the board will need rules to cover items like director focus on the interests of this specific company (not others in their portfolio), and talent poaching. In the financial sector, or a heavily regulated industry, conflicts, recusals and disclosure of interests should be spelled out in detail.

Devote code of conduct attention to in-the-boardroom matters as well. In researching examples, you’ll find boards tend to focus on the legal and compliance matters noted above, and mostly skimp on good governance items and board behaviour. Code of conduct writing is a valuable opportunity to spell out these matters, focusing both directors and management on what the board requires and does to function well. Meeting notification, attendance policies, quality, quantity and timeliness of board info, and board access to staff should be covered. Also, go further by covering director behaviour standards. Respectful discussion, parliamentary niceties, duty to contribute, and no personal attacks are a few items to include. Yes, these are things your board members should have learned by now, and may be hard to define. But again, spelling out such ground rules (and ensuring everyone has agreed to them) will improve any boardroom’s climate.

In the end, a company will be mostly as ethical/moral as its largest shareholders are. No wonder the State Bank of India chairman lied to the Supreme Court of India to cover up the electoral bond details this election eve.

(Muneer is a Fortune-500 adviser, startup investor and co-founder of the non-profit Medici Institute for Innovation. Ralph is global board adviser, coach and publisher. Twitter @MuneerMuh)

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