In a previous article, we have indicated that a governance diagnostic is made to determine the level of risk associated with the governance of an organization. The governance diagnostic covers these 7 aspects: 1) the board of directors and its committees, 2) independence, 3) the directors, 4) the auditors, 5) the compensation, 6) accountability at the annual general meeting, 7) the financial performance. In this article, we will cover the first aspect: the board of directors and its committees. The first diagnostic information is the mandates of the chairman of the board of directors and the of the chief executive officer (CEO).

When we think about it, the financial results do not fall from the sky. They rather reflect decisions that have been taken by the directors and executives. When it comes to the chairman of the board of directors and the chief executive officer, we are at the heart of the governance of an organization. Therefore, there is a direct correlation between financial performance and governance.

For public companies, mainly big corporations, there is a regulatory and legal framework forcing them to disclose specific information on their governance. Globally, the securities commissions and stock exchange are responsible for the legal and regulatory framework related to the governance of public companies. There are various organizations worldwide promoting good governance practices. When it comes to SMEs and NPOs, there is no regulatory and legal framework forcing them to disclose specific information on their governance. We have therefore listed standards that would be essential to the good governance of SMEs and NPOs.

In order to allow the Board of Directors to be more independent in the exercise of its oversight role, it is proposed to separate the positions of Chairman of the Board and Chief Executive Officer. Every Board of directors should be able to evaluate the work and the personal contribution of the Chairman of the Board as well as the contribution of the CEO to the company’s results. The evaluations must be periodic and be, among other things, based on the mandate as well as the skills and abilities demonstrated by the chairman of the board and the CEO.

The role of the chairman of the board is to oversee the work of the board and its various committees, as well as to assess the executives’ and CEO’s performance. As for the Chief Executive Officer, his role is to ensure the good functioning of the management and the day-to-day activities of the company. Therefore, the combination of these functions presents a significant risk of conflict of interest, including in reviewing the performance and setting the remuneration of the chief executive officer.

The first step in the move towards good governance practices begins with clear and distinct mandates for the directors, the executives, the Board of Directors and its committees.