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What is a board charter?
What is a board charter? It’s a pivotal document in corporate governance, guiding how a company’s board of directors should operate.
It’s essential for any corporation aiming to establish transparent, effective, and accountable governance practices.
What is a board charter?
A board charter is a document describing the roles, responsibilities, and processes of the board of directors of an organisation. This applies to both each individual on a board and the board as a whole
A board charter is a crucial governance tool. It outlines:
- The board’s composition
- The duties of the entire board and each member
- The extent of authority of the whole board and each member
- The procedures the board must follow as it carries out its duties
Think of a board charter as a roadmap for directors. And make no mistake: each director must be familiar with their board charters to ensure they do their job correctly.
What does a board charter contain?
The answer always varies because each company will require different things from their board. But there are a few general pieces of information that you’re likely to find in almost every charter:
The board composition
This includes size, the expertise required for each director, the process for choosing them, and the balance between independent and executive directors.
The roles and responsibilities
It’s vital to define the role of the chair in this section. It helps to lay out the source of authority and a structure for how the board interacts both internally and externally.
The structure of board meetings
How often should they be? Who sets the agenda, and what should it contain? If the board needs a special meeting, how should it be called? All these questions and more are answered in this section.
Appointing new directors
This includes a detailed process for recruitment and any term limits.
Evaluation
A pre-defined process for evaluating the individual and collective performance of the board.
One of the most critical factors governing the success of a business is risk profile, and the board should play an active role in that. That’s why the charter needs a dedicated section on how this will work.
Ethical guidelines and provision for conflicts of interest
The board and directors can quickly get tangled in unnecessary complications if they don’t properly handle the above two issues.
Procedures for amending the charter
It’s an important document; any amendment should always be structured and approved through a pre-defined process.
What if my company doesn’t have a board charter?
This should sound alarm bells for any mature company with an established board of directors. For younger companies and startups, remember that you will need a board charter as soon as a board begins to take shape.
Without a board charter, you don’t have many keystone elements that boards frequently depend on. These include officially documented policies, a useful induction tool for new directors, and a reference point for disputes or other challenging situations.
As with any aspect of governance, you can’t ensure success without the proper foundations in place. For boards, that foundation is the charter – a rulebook that answers the most basic questions and ensures consistency in leadership.