Key Responsibilities of Private Companies’ Boards

Private companies know how important the role their Board of Directors plays in their financial growth and operational performance. The Board acts in an oversight position, holding the organization’s leadership team accountable for making sound business decisions that benefit the company and its stakeholders. Board members provide guidance on key strategies and initiatives of the company – from succession planning to raising capital – and give direction on challenges and significant risks, such as cybersecurity. A Board also contributes to the company’s overall direction and long-term goals, while providing an independent assessment of the company’s performance.

In short, a well-structured and high-performing Board can bring expertise and guidance to remain competitive all in the best interest of the company’s stakeholders. Let’s dig in:

Importance of Having Outside Board Members

Currently, an increasing number of private enterprises are integrating independent directors into their Boards. These directors bring an outside perspective that can be beneficial – a viewpoint that is often overlooked by those involved in the company’s day-to-day operations. Many of these outside directors possess leadership experience in their own companies or within the industry, rendering their insights invaluable to the company’s leadership.

Stakeholders (lenders, investors, business partners, etc.) perceive the inclusion of external directors as a favorable governance practice, enhancing the company’s reputation. However, without clear direction, a Board can be ineffective. That is why it is important to clearly define the Board’s responsibilities so the company can be successful.

Responsibilities of Board Members over Financial Oversight

Think of a company’s financial statements like a gas gauge for a car. They help reveal how far a company has gone in the past and how much is left for future travel. The financial health of a company is fundamental in determining strategic goals, both long and short term. Due to the sheer importance, Board members are obligated to financial oversight to review and challenge significant financial transactions or strategic investments. Most importantly, Board members are responsible for reviewing key financial reports, such as the balance sheet and income statement for integrity.

The Board should also challenge management with new accounting standards, financial reporting requirements and industry best practices. Board members are responsible for reviewing the company’s annual budget and key financial policies. While these steps are a mere starting point, by fulfilling these responsibilities, Board members can help ensure the company’s financial integrity, stability and long-term success.

To achieve all of this, an independent director with financial expertise is critical. They bring specialized knowledge and experience in financial matters, which is essential for making informed decisions about the company’s finances, investments and overall fiscal health. Their expertise enables them to pose crucial, albeit occasionally challenging, inquiries to management, aiding in navigating intricate financial obstacles, evaluating risks and pinpointing avenues for expansion.

Responsibilities of Board Members over Governance and Risk Management

In a corporate structure, the Board of Directors typically holds the highest authority. For this reason, the Board members support executive leadership’s tone at the top, which communicates a culture of ethical behavior, fair business practices and compliance; shown through example. The Board reviews management’s risk tolerance, significant risk exposures and reviews the risk management procedures to ensure appropriate mitigation measures are in place. The Board is responsible for evaluating the company’s governance framework. This includes reviewing essential documents, such as the company’s code of conduct and the status of the risk management program, while also addressing emerging risks that may have an impact on the company’s operations.

Independent directors provide a governance perspective that is separate from management, necessitating a range of essential skills. They must have the knowledge and ability to engage in discussions concerning critical matters, such as a company’s code of ethics, risk management program, compliance program effectiveness, Corporate Social Responsibility and Sustainability, cybersecurity, and other governance topics.

Responsibilities of the Board over Internal Controls

Board members are pivotal in reviewing the effectiveness of the internal controls program. Internal controls are processes, reviews, limitations and checks in place designed to provide reasonable assurance on the reliability of financial reporting, compliance with laws and regulations, and the efficiency of operations. The Board is responsible for challenging management to have an effective internal control system in place to mitigate identified risks and achieve stated objectives. To do this, the Board should periodically review management’s internal control reports and assessments to understand the current control environment and make inquiries into any significant internal control deficiencies.

By providing objective scrutiny and guidance, independent directors help to enhance transparency, mitigate risks and promote accountability throughout the organization. Their oversight role contributes to the company’s long-term sustainability and the protection of stakeholders’ interests.

Reports to Provide to the Board

The main purpose of reporting to the Board is to provide an independent evaluation of how effectively resources are used, measure progress on the achievement of strategic goals and understand significant changes in the company’s operations.

The exact nature of the communication to be provided varies based on the company and demands of the Board. Most importantly, the Board must be able to rely on the reports provided, therefore they need to be accurate, timely and relevant. The Board must have faith in the data provided, as it is essential to providing oversight and strategic decisions. As the presentation of key reports are on the agenda, the following are typically reviewed:

• Financial statements
• Reports from internal auditors, external auditors and regulators
• Key insurance and loan documents
• Updates on key performance indicators and other benchmarks
• Updates on strategic initiatives
• Applicable compliance and risk management updates
• Legal updates
• Cybersecurity and key information technology updates

The type of information shared varies significantly based on industry regulation, company structure and the company’s maturity. Several of these reports may go to designated committees made up of select Board members.

Questions for Board Members to Ask

Board member success hinges on being knowledgeable about the company’s affairs. The key to this is posing insightful questions – ones that look not only at the current operations but also encompass the future trajectory of both the company and industry. Board members should work to gain a deeper understanding of the root cause of any deviation from expectations or historical performance. Asking thoughtful questions and having direct conversations with management will provide the Board members with the information needed to fulfill their obligation to the company and its stakeholders.

Additional Considerations and Next Steps

Having an independent assessment of your company’s governance structure can help you better achieve your mission and strategic goals in the best interest of the company’s stakeholders. This fresh perspective, along with additional industry insights, can be utilized to ensure the risks your company experiences are appropriately addressed and monitored. Additionally, an internal controls assessment scrutinizes the design of internal controls governing financial reporting and other critical management functions. This evaluation ensures that robust systems are in place to safeguard the accuracy, reliability and integrity of financial information. This assessment helps identify potential weaknesses or gaps that could compromise financial integrity or regulatory compliance.

If your company and Board need assistance identifying risks and generating mitigation strategies, the team at Sikich specializes in supporting organizations do just that. Please contact us to start the conversation, and we’ll be in touch.