All directors will eventually face the need to handle a crisis, regardless of its specific nature. When such a situation arises, the time and effort needed to address business issues significantly escalate. Hence, it is crucial for every director to comprehend the meaning, scope, and potential impact of directorship on an organization’s success, along with the corresponding risks and liabilities involved.

Boards are notoriously difficult to study. Of all the major institutes in society, they are probably the most closed. Few board meetings, if any, are ever open to the public and it is very rare when outsiders are invited to join a board meeting. When does the Board fall short and why? What are the factors that lead to good or bad decision-making? Is a function of the various competencies and behavioural characteristics of individual directors and how they fit together. It’s difficult to address every aspect, but let’s give it a shot.

Appointing versus becoming a director

No longer is the appointment of a director solely a formality, nor is it limited to a position of authority and prestige. Authorities have recently acknowledged corporate governance as a fundamental element of the contemporary business environment. After effectively overcoming the repercussions of greylisting, the regulator is actively pursuing improved governance by introducing numerous amended corporate governance regulatory initiatives that provide a framework for accountability, efficiency, and overall directorship substance. However, a framework alone will not produce positive results; the surroundings and behaviours of board members are essential.

Competencies and their impact on performance

Securing directorships can be perceived as a competitive endeavour. Furthermore, while some skills from senior management can be transferred to the directorship level, a thorough understanding of good governance is necessary. Compliance, risk management, financial reporting, and overall board performance are all critical factors to consider. Boards could be significantly more effective if directors were chosen based on their competencies as well as their ability to meet specific professional and structural requirements. This can lead to more effective decision-making, which has a significant impact on actual performance.

Only competent and professional individuals on the Board can truly make a difference

Malta is witnessing increasing accessibility to various forms of development through internal organization Learning and Development. The availability of relevant training is being facilitated by local regulators like the Malta Financial Services Authority (MFSA), while other local institutions provide a range of domestic and international programs. Additionally, the Financial Times Board Director Programme is introducing the FT Non-Executive Director Diploma, which is presently offered in the UK and Asia. These initiatives play a crucial role in encouraging aspiring and current directors to excel at the board level, contribute value, and ensure sustainable growth. A comprehensive understanding of the behavioural traits and skills of board members is indispensable for the establishment of effective boards.

Governance should be dynamic rather than static

The focus of corporate governance lies in overseeing the actions of executive management and ensuring the organization is following the correct path. Recently, MFSA released a new Corporate Governance Code, referred to as the Code. This Code consists

of a set of guiding principles accompanied by supplementary provisions, and its implementation follows the principle of proportionality. The decision to apply the Code on a “best-effort” basis was primarily made to ensure a balanced approach, considering its wide-ranging scope. Entities are expected to make earnest efforts to adhere to the Code in a manner that aligns with the nature, size, and complexity of the specific entity in question.

Although the Code is aimed at listed companies, many other types of organizations should adopt it to demonstrate their commitment to good corporate governance. It recognizes the board’s collective responsibility for overall performance, which includes financial performance, board quality, strategy, management, and effectiveness. The concept of board governance must be dynamic rather than static, with the positive belief that the professional performance of boards must be evaluated in terms of results.

Lack of awareness does not absolve responsibility

In most circumstances, a member of the board of directors of a limited liability company does not risk losing private assets if the business fails. A limited liability concept typically exempts its shareholders from liabilities while also shielding its board members’ private assets.

This is not, however, the universal norm, and there may be occasions where a director is judged to be acting against the best interests of the firm. For instance, when a company is insolvent, its board is bound not to incur further liabilities that such a company will be unable to pay and not to favour any of its creditors. In such instances, the board may refuse to pay dividends to the company’s shareholders and may dispose of the company’s assets at a loss. A director may be held directly accountable for failing to meet the aforementioned requirements and may be disqualified from future appointments.

Given all of these factors, it is crucial to thoroughly contemplate and grasp the notion that only competent and professional individuals on the board can truly make a difference. Consequently, it is essential to choose such individuals based on their competencies, professional qualifications, and the specific structural demands that directly influence the success of a business. For boards to be effective, they should go through appropriate performance evaluation programs that encompass aspects such as emotional intelligence and resilience.

Andrzej Tabero, Senior Manager, Head of Legal and Company Secretary Services at Alter Domus Malta