29/11/2013

By Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson

There comes a time in the development of a business when it is often beneficial or deemed desirable by the shareholders, who are often the founders, for a distinction to be made between the role of the management team, which is focused on running the day to day activities of the business, and the board, a more strategic grouping which is focused on making sure that the interests of the shareholders and other stakeholders are well served. As businesses grow, this two tier structure, which is an accepted feature of the public company arena, will normally emerge.

A board of directors is elected by and accountable to the shareholders, whereas the management team is chosen and appointed by the board of directors. The board of directors will typically include senior members of the management team, for example the CEO, CFO and COO (the ‘executive directors’), and a number of external directors who are not part of the management team (the ‘non-executive directors’ or NEDs).

An important point to note from this structure is that the board is unlikely to be populated by the management team as a whole. It is only the key members of the management team that are likely to be represented.

The role of the board

There is a clear distinction between the role of the board and the role of management team. In general, the board works on the business, whilst the management team work in the business.

The board is the most senior committee of the company, being the steering group that agrees the vision and values of the business and sets its strategy. It is about adding value. Those who sit on a company’s board should be able to benefit the business through their collective expertise, experience, knowledge and contacts.

The board’s responsibilities are wide, but key areas include:

• establishing the vision for the business, guiding its operations and communicating its culture and values
• evaluating present and future opportunities, as well as identifying threats and weaknesses
• setting the strategy for the business
• ensuring that the structure of the business will enable it to pursue its strategy
• appointing and reviewing the performance of the company’s CEO
• evaluating the quality and capability of the management team and their performance in implementing and executing strategy
• monitoring the performance and liquidity of the business
• approving budgets and keeping proper accounts
• communicating with shareholders and stakeholders

The board should be proactive rather than reactive. Members should not only have a firm understanding of the core strategy and values, but should also have a good knowledge of the business KPIs, customer base, operating costs, financial and market position so that they can identify and flag up areas of vulnerability or highlight threats and opportunities.

For further information on the distinction and roles of the management team and board, please contact Guy Rigby on 020 7131 8213, or email guy.rigby@smith.williamson.co.uk.

Disclaimer
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.