22/01/2020

Three Guidelines for Board Membership: Get Interested, Get Informed and Get an Opinion

With power comes responsibility—though a cliché, this proverb does hold true for a company’s board of directors. Board membership is a position of trust, and each member bears personal responsibility for their work. This responsibility can manifest as liability for damages or even criminal liability. What should you do to prevent things from getting to that point?

According to the Finnish Limited Liability Companies Act, ‘the management of the company shall act with due care and promote the interests of the company’. Though short and superficially simple, this requirement actually encompasses a huge variety of case-by-case obligations, but you can get quite far with three key guidelines will get you far: get interested, get informed and get an opinion.

Get Interested

One of the key duties of the board of directors is defining the company’s strategy. This work requires that the board’s focus is squarely on the future and that the board has a comprehensive understanding of the company and its business. Without such an understanding, the board will not be able to have sufficiently in-depth conversations with the company’s operative management or challenge the management’s views. The board also needs to be familiar with the company’s business environment and the changes taking place in it. It is also important to keep abreast of societal developments. Going through the motions will not cut it, true understanding takes genuine interest.

Routine tasks naturally take time, but it is the board’s own responsibility to make sure it has the necessary time to devote to strategy work. Finnish boards have been good at reaching this goal, at least according to a recent survey commissioned by Directors’ Institute Finland (DIF) and institutional investors Solidium, Ilmarinen, Varma and Elo and carried out by the Nordic Institute of Business & Society (NIBS). According to the survey, the boards of large Finnish corporations use about 32% of their time for strategy work or strategic discussions, making this the largest single type of board work.

The results of the survey also show that the boards of Finnish companies focus the vast majority of their attention in their strategic discussions on changes to their business environment as well as on known and potential disruptors. Intellectual property and capital structure are on the bottom of the list of priorities, and somewhat surprisingly, it seems that boards spend relatively little time discussing competitors.

Get Informed

While board members are expected to have a comprehensive understanding of the company and its business, not every member can necessarily be required to have specialised knowledge of all of the facets of the company’s operations. Nevertheless, it is worth getting to know the key areas of the company’s business, even if they are outside your core competence.

This principle was thrown into sharp relief by the Finnish Supreme Court in a fairly recent precedent (KKO 2016:58), which concerned whether the board members of a manufacturer of potato flakes were guilty of impairment of the environment and neglected their obligations as board members due to the company’s plant contaminating the environment by emitting potato soil sludge. The Supreme Court found that the board members were liable for the decisions made by the company that were in violation of its environmental permit and the law. This liability was not reduced by the fact that the board members’ tasks on the board were focused on commercial law and financial consulting or by the fact that the company’s managing director had, in practice, seen to the company’s operations.

The board must familiarise itself with the key matters of the company and its business, otherwise the board will not have a clear understanding, among other things, of what risks the company’s operations involve. If necessary, the board must delegate tasks and follow up on them.

Get an Opinion

From time to time, the actions of a board member can have consequences for the underlying organisation that appointed them. In its decision on the bus cartel (KHO:2019:98), the Finnish Supreme Administrative Court deemed that a certain bus company had participated in a competition restriction based on the fact that a representative of that company had participated in a meeting of the board of the Finnish Bus and Coach Association. The meeting had noted for information purposes and de facto approved a policy presented by the members of a joint venture’s board concerning the processing of certain routes in that joint venture’s information system.

This decision highlights the fact that matters discussed in board meetings can come in for scrutiny. This is true not only of actual resolutions, but of everything on the board’s desk, including matters that the board is only informed of. It is important to present your own opinion and, if necessary, record a dissenting position in the minutes of the meeting.

‘Groupthink is one of the biggest risks for board members. This happens when you align your opinion with the thinking of the rest of the board, even when you know that the decision being made is not the best one. Reasons why this happens could be, for example, an entrenched board habit where one member is quick to take a position that everyone else falls in line with,’ warns DIF Secretary General Leena Linnainmaa in connection with the publication of DIF’s 2019 survey.