Setting The Boundary Between Board And Executive Management

"The business of a company shall be managed by its directors."

Section 158, Companies Act 2014

In today's increasingly complex regulatory and operating environment, clarity around the roles and responsibilities of those leading the organisation are essential. Yet the terminology used in legislation and regulations regarding the board's role in 'managing' the organisation can create a certain level of opaqueness. When coupled with the regulatory and media scrutiny of the actions of the board in the wake of a material issue, this can also create uncertainty about how far the directors should insert themselves into the day-to-day management process.

This article explores the distinct roles of the board and the executive management team, unpacking why the boundaries between the role of the board and the executive management team can become blurred. We also examine the risks that can arise if the directors continuously overstep into operational management, or worse, if the executive team expand into strategic management.

Defining 'management'

Regardless of the industry or sector the organisation operates within, the core responsibilities of both the board and the executive management team should be consistent:

The board is responsible for the strategic management of the organisation, including the approval of corporate strategy, the monitoring of financial performance and approval of major decisions.

The executive management team is responsible for operational management, running the organisation on a day-to-day basis and translating corporate strategy into action.

The clear delineation of roles allows each group to focus on its respective responsibilities while contributing to the success of the organisation in achieving its strategic goals and objectives. It strengthens accountability, improves decision-making, and enhances stakeholder confidence.

The table below contrasts the roles of the board and the executive management team:

Setting the boundary

Given that the core responsibilities of the board and executive team are standardised, how can the boundary between the role of the board and the executive team become blurred?

Lack of trust

Due to past issues or the personality traits of those involved, there may be a lack of trust between members of the board and the executive team.

Board experience

First-time or less experienced directors often find the transition to the boardroom quite challenging and may be more used to being hands-on and involved.

Maintaining a misguided view of 'independence'

In allowing the executive team to run the organisation on a day-to-day basis, the board members may inappropriately remove themselves from making certain strategic decisions.

Meeting management

Too many members of the executive team in the boardroom can lead to a lack of clarity around who is making decisions. A comparable situation can occur if members of the executive team seek to engage with directors outside of the boardroom with the aim of reducing challenge in the boardroom.

Dominant individuals

An overly dominant CEO or board chair may result in an overstepping of boundary lines.

Poor documentation

The lack of clearly documented terms of reference, job specifications and management responsibility maps can contribute to confusion.

Pet projects

If a topic is of specific interest to a director, e.g. if it relates to the area where they specialised professionally; they may seek more information and materials than is required at board-level to satisfy a personal curiosity.

Any blurring the lines between strategic and operational management can lead to numerous unintended consequences including inefficiencies, conflicts, and even regulatory breaches. It is vital that roles and responsibilities are formally documented and understood to ensure that the board continues to robustly challenge and interrogate the information provided by the executive team whilst still recognising their operational authority. Simply put, the board should keep their 'Noses In, Fingers Out', as according to The Imperfect Board Member author Jim Brown.

Striking a balance

In our experience, there are two potential extremes in how non-executive directors can operate:

The "plausible deniability" director

A director considers that they can manage their own reputational risk by not getting 'too involved' in the organisation. They leave key decisions for formulation and decision making to executive management in an effort not to get their 'hands dirty'. They hope that if anything goes wrong, they can point the finger at others and claim ignorance/passivity/lack of involvement to manage their own reputation.

This approach is futile as, if an organisation gets into difficulties, all directors will need to answer questions and account for their actions. Regardless of behaviour, the reputation of any director is comingled with that of the organisation that they serve.

Volunteer board members, particularly in the not-for-profit and public sectors, often bring distinguished executive experience and leadership credentials. Yet, some adopt a posture of deference to the organisation's full-time executive team. Legally and reputationally this stance is untenable. Directors carry statutory and fiduciary responsibilities that cannot be delegated or diluted; full engagement with these obligations is essential to safeguard governance integrity and public trust.

This is why it is so important for individuals considering joining any board to carry out appropriate due diligence over the organisation and its leadership.

The shadow executive

At the other extreme is the non-executive director who has never quite moved on from how they operated in their previous executive roles. They like to engage with executives individually and frequently between board meetings and be 'kept up to speed' on a day-to-day basis.

Boards are tasked with strategic management, and the operating rhythm of most boards is designed to facilitate this. Periodic meetings, with timely distribution of meeting packs, allow directors to take a holistic and strategic view of activities to enable better long-term decision making. Having individual non-executive directors spending considerable time engaging with the executive between meetings can lead to them losing perspective and being "lost in the weeds".

It can be challenging to remediate this behaviour, and the key to course correct is a good relationship between CEO and chair to identify this issue and then help the non-executive moderate their approach.

What next?

No board operates perfectly, and any that think they do have misunderstood the question. Boards should be open to a process of continually challenging themselves to improve their performance. Key to this is self-awareness and an ability to learn and adapt.

Key considerations to help boards with continuous improvement include:

• Managing tenure and ensuring the right mix of experienced and fresh voices around the boardroom table.
• Educating board members on the organisation, its activities, and its industry – both as part of induction but also throughout the tenure of directors.
• Regular review of board standing documents, including terms of reference, governance manuals and matters reserved.
• Getting an external perspective – many boards are required to have an external performance review every three years. boards should take this as an opportunity to take stock and have their assumptions challenged.

The role of non-executive director is challenging and involves balancing competing demands and interests. However, understanding the delineation between executive management and the board, and their complementary roles, can be key to the ongoing strategic success of organisations.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.