The chair has been described as first among equals within the board of directors and is usually appointed to the position of chair by fellow board members, rather than directly by the organisation’s members or shareholders.
The chair acts as an important link between the board and the organisation’s management via the CEO. The AICD Director Tool Role of the Chair says the position is not defined in the Corporations Act 2001 (Cth) and therefore many functions of the chair are customary rather than formalised by law.
The chair is responsible for the leadership of the board, including facilitating proper information flow to the board, facilitating effective functioning of the board and managing the conduct, frequency and length of board meetings. The chair also communicates the board’s views — in conjunction with the CEO — to the organisation’s security holders, broader stakeholders and the public.
Subject to the terms of the constitution, the chair is appointed by the board from among its members and holds office at the discretion of the board until removed from office by the board or until the chair resigns from office, or is no longer a board member.
In the absence of the chair, the deputy chair — if one has been appointed by the board — or the senior or lead independent director, should assume the role that otherwise would be performed by the chair if the chair was not absent.
In and out of the boardroom
An important link between the board and management, this position doesn’t necessarily prevent the direct access of fellow directors to the board. Its core responsibilities involve establishing and maintaining a constructive working relationship with the CEO. Additionally, the role is central in setting the tone for the board. This includes laying down a common purpose, solidifying values and defining a code of behaviour for all board members.
Moreover, efficient chairing of board meetings falls under this domain. The chair is instrumental in shaping the board’s agenda, particularly concerning the organisation’s goals, strategy, budget and the performance of the executive team. Beyond the confines of these meetings, there is a duty to report to board members on vital corporate issues. Such matters often include those discussed with the CEO outside regular board meetings. It’s worth noting that these reports can sometimes take place in the absence of the CEO, as seen in in-camera sessions.
Furthermore, the role encompasses obtaining pertinent information, both financial and non- financial, to present to the board. It is pivotal for the chair to foster an environment where all board members feel empowered to contribute. This ensures that decisions are reached through consensus. Chairs are also responsible for motivating board members and addressing any instances of underperformance. Overseeing the appraisal process, both for individual board members and the board collectively, falls under their purview. This role extends to overseeing negotiations concerning the CEO’s employment, assessing the CEO’s performance, planning for their succession and assisting in the selection of board committee members.
Outside the boardroom, the responsibilities continue to be vast. Chairs play a crucial role in acting as the bridge between the board and management, ensuring board decisions and instructions are communicated to management via the CEO. The individual offers guidance to the CEO without delving into the intricacies of day-to- day operations. Regular meetings with the CEO are a norm and updates from these interactions are subsequently shared with board members. A significant aspect of the role is being visible to both management and the broader employee base, which includes attending key company events.
Communication is a large part of the position. This includes liaising with shareholders and members on behalf of the board, particularly on matters of corporate governance. This individual chairs both shareholder or member meetings, as well as AGMs and EGMs. In a growing trend, they are also available to engage in discussions with institutional investors and significant stakeholders.
An ineffective chair
A chair can only be effective while they retain the confidence and respect of their fellow board members. An underperforming chair may be asked to step down by other directors (or be required to step down by resolution of the board, unless the chair is appointed directly by the organisation’s members — or perhaps a government minister, in the case of a public sector organisation).
In respect of most organisations, the chair can only be removed as a director from the board by a vote of shareholders or members. Therefore, it is suggested that organisations consider conducting a chair performance assessment as part of the annual board evaluation so directors can provide feedback on the chair’s performance.
It’s important to note that recent examples demonstrate that the chair’s performance may be judged by those outside of an organisation. The resignations of the chair of both AMP and NAB were as a direct result of the Financial Services Royal Commission.
Should the chair be independent?
Accepted good corporate governance practice in Australia recommends that the chair should be an independent director, although there are differing schools of thought on this topic. In the US, for instance, the concept of a combined chair/CEO continues to have reasonable appeal. Independence means the chair is free from potentially conflicting relationships with the organisation — for example, being an executive or professional adviser within the past few years, being a substantial shareholder or supplier, and having no material contractual relationships with the organisation.
Australian good corporate governance practice also recommends that, where the chair is not an independent director, it may be beneficial to consider the appointment of a lead independent director. This person can act as a conduit for any material issues that independent directors on the board may wish to raise with the CEO or executive management team. For more information, see Recommendation 2.5 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.
Important personal traits
A balance of desirable personal traits for a chair include strength and clarity of purpose; tact, diplomacy/sensitivity; ability to reconcile opposing views; excellent communication skills; ability to lead, including by example; ability/willingness to constructively challenge and encourage directors to do the same of each other and management; ability to encourage and get the best from all team members; and power to influence.
A higher standard
Court cases have created debate on the role and responsibilities of the chair. Public scrutiny of the role of the chair has increased due to high-profile cases. The resulting court decisions suggest that there is an argument that the chair’s role is one that at least carries additional responsibilities.
ASIC has argued the chair has responsibilities beyond those of other directors, at least in the following respects: general performance of the board; flow of financial information to the board; establishment and maintenance of systems for information flow to the board; public announcement of information; and making recommendations to the board as to prudent management of the group. So far, there is no legally binding precedent.
In performing this role, the chair’s responsibilities also include (in consultation with the CEO and company secretary):
Setting the agenda for the matters to be considered by the board
Seeking to ensure that the information (financial and non-financial) provided to the board is relevant, accurate, timely and sufficient to keep the board appropriately informed of the performance of the organisation and of any developments that may have a material impact on the organisation or its performance
Seeking to ensure that communications with stakeholders and the public are accurate and effective
Seeking to ensure that the board as a whole has the opportunity to maintain adequate understanding of the organisation’s financial position, strategic performance, operations and affairs generally, and the opportunities and challenges facing the organisation
Facilitating open and constructive communications among board members and encouraging their contribution to board deliberations
Overseeing and facilitating board, committee and board member evaluation reviews and succession planning
Liaising and interfacing with the CEO as the primary contact between the board and management
Liaising with and counselling, as appropriate, board members.
This article first appeared under the headline 'Bridging the Gap: The Chair’s Role’ in the December 2023 / January 2024 issue of Company Director magazine.
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