Author: Seitek Dushenaliev — corporate governance expert, President of the Chamber of Independent Directors of the Kyrgyz Republic.
In corporate governance, you often hear a blanket statement: "The board of directors should not interfere in operational activity." That is broadly true, but it needs an important qualification.
The board indeed should not substitute for the executive body or take over the company's day-to-day management. Yet in certain circumstances the board is not only entitled but obliged to dig deeper into operational matters. At the same time, an individual board member cannot on their own instruct management, interfere in the work of departments, or make decisions on behalf of the whole board.
The key distinction is this: the board of directors acts as a collegial body, while an individual director is only a participant in that body.
Between strategy and operations, there is no impermeable wall
The board of directors is a body of strategic governance. It sets the company's core direction, approves strategy, oversees the executive body, monitors key risks and safeguards the business's long-term sustainability.
The CEO or the management board is responsible for executing the strategy and running the company's day-to-day operations.
In practice, however, it is impossible to draw an absolutely rigid line between strategic and operational matters. Any strategy is implemented through specific budgets, investment projects, sales, procurement, production, personnel decisions and the internal control system.
That is why the board cannot limit itself to approving strategic documents and formally hearing management's reports. To assess whether the strategy is actually being implemented, it must understand what is happening inside the business.
The G20/OECD Principles of Corporate Governance provide that the board should ensure the strategic guidance of the company and effective oversight of management. Board members must act on a fully informed basis, in good faith, with due diligence and care. Consequently, the board is entitled to go as deep into operational matters as is necessary to make well-founded decisions and fulfil its oversight function. (G20/OECD Principles 2023)
When the board may step into operations
When an operational matter becomes strategic
A large investment project, the launch of a new business line, an acquisition, entry into a new market or the closure of a production facility may look like operational decisions. But if they materially affect the company's value, financial stability or future, they move up to board level.
In that case the board is entitled to examine in detail the project's business model, sources of financing, implementation timeline, key risks and possible scenarios.
But the board should not itself choose an equipment supplier, approve the daily work schedule or run the project team. Its job is to set the framework, make the fundamental decision and monitor the result.
During a crisis
Under normal conditions, the board should keep a reasonable distance from day-to-day management. But in a financial crisis, a serious legal breach, a major operational failure, a corporate conflict or a threat to business continuity, the degree of its involvement inevitably increases.
The board may meet more often, demand additional reporting, approve a crisis-response plan, set control metrics and hear from management on a regular basis.
Even in a crisis, however, the board should not turn into a "collective CEO." The executive body continues to run the company, while the board tightens oversight, sets the boundaries of acceptable risk and assesses whether management is capable of handling the situation.
If management is systematically failing to cope, the board's job is not to do the work for them but to make a personnel decision.
On a material deviation from strategy and budget
If sales, profit, liquidity, construction timelines, product quality or other key indicators deviate significantly from the approved plan, the board cannot be satisfied with the explanation: "That's an operational matter."
It is entitled to demand an analysis of the causes, a corrective action plan, an updated forecast and an assessment of possible consequences.
In doing so, the board should ask: "Why did this deviation occur, what measures is management taking, and when will performance be restored?" — not give direct instructions to department heads on how to do their daily work.
On oversight of key risks
Some operational processes carry critical risks for the whole company — lending, construction, industrial safety, procurement, financial reporting, information systems or compliance, among others. That is why the board is entitled to examine such processes in depth without taking on management's function.
The Wells Fargo case is instructive. An aggressive system of sales targets and incentives led to the mass opening of unauthorized customer accounts. According to the bank's independent directors' report, information reached the board only in fragments, and management understated the scale of the problem.
After the violations came to light, the independent directors set up a special committee, launched an investigation with outside advisers, overhauled the control and incentive system, replaced a number of executives, and applied compensation clawback mechanisms. The total amount of executive compensation withheld and clawed back exceeded $180 million. (Wells Fargo independent directors' report)
This case shows where the acceptable limit of involvement lies: the board dug deep into the causes of the operational failures and made systemic and personnel decisions, but it did not start running the bank's sales operations and branches itself.
To get a real picture of the company
I am convinced that board members should visit the company's production sites, branches, points of sale and operational offices.
Such visits are not interference in day-to-day management. On the contrary, they let directors check management's reports against the situation on the ground and assess the state of assets, the efficiency of processes, working conditions and the corporate culture.
But visiting a site does not give a board member the right to overturn a manager's decisions on the spot, give instructions to employees, or publicly evaluate their work. Any problems identified should be brought to the board or the relevant committee. Once a collective decision has been made, a formal instruction is issued to the executive body.
Why an individual director cannot interfere in operations
The board of directors exercises its powers through joint deliberation and voting. Its will is expressed in decisions adopted in accordance with established procedure and recorded in the minutes.
An individual board member — including an independent director, the board chair or a committee chair — generally has no independent authority to direct the company.
A board member is entitled to:
- request information through the established procedure;
- ask management questions;
- initiate the board's consideration of an issue;
- record a dissenting opinion;
- take part in the work of committees;
- visit the company's sites;
- require that their position be recorded in the minutes;
- vote for or against a proposed decision.
But they are not entitled to:
- give binding instructions to the CEO or employees;
- interfere in management's personnel, procurement or commercial decisions;
- overturn the executive body's orders;
- approve transactions outside the established procedure;
- present a personal position as a decision of the whole board;
- create a parallel center of control over the company.
Even the chair of the board is, first and foremost, the organizer of the collegial body's work — not the CEO's direct superior. The status of chair does not by itself turn that person into an executive officer.
An exception is possible if specific powers have been expressly granted by law, the charter, or a properly adopted board resolution. But such a delegation must be clearly limited in scope and duration and must not undermine the system of allocated responsibility.
Why individual interference is dangerous
In practice, I see that direct instructions from individual board members create several serious risks for a company at once.
First, dual subordination arises. Managers and employees stop understanding whose instructions they are supposed to follow — the CEO's or the director's.
Second, accountability is blurred. Management can explain poor results by pointing to the board's interference, while the director can claim that the final decision was management's to make.
Third, the principle of collegiality is violated. One board member is effectively appropriating the powers of the whole body.
Fourth, the risk of conflicts of interest increases. This is especially dangerous when a director is promoting a particular supplier, job candidate or business partner.
Finally, the CEO loses managerial authority, and the company ends up with competing centers of decision-making. That inevitably leads to management chaos.
How the right model should work
The correct sequence of actions looks like this:
- The board identifies a material problem or risk.
- Management presents an analysis of the causes and options for a solution.
- The board collectively adopts a decision within its authority.
- The decision is formally issued to the executive body.
- The CEO organizes its implementation.
- The board monitors timelines, metrics and the result achieved.
It is precisely this model that preserves the balance between board involvement and the executive body's managerial autonomy.
The key criterion is not the depth of involvement, but the nature of the actions
I do not consider a deep examination of operational activity to be a violation of corporate governance principles. The violation begins when the board stops overseeing and starts managing in place of the executive body, and when individual board members start issuing binding instructions.
That is why it matters to assess:
- for what purpose the board is stepping into an operational matter;
- whether it is acting collectively;
- whether it is making decisions within its authority;
- whether the executive body's accountability is preserved;
- whether decisions and instructions are properly documented.
The board of directors is entitled to step into operations in order to obtain reliable information, assess risks, make a strategic decision and monitor the result. But an individual board member is not entitled to turn that involvement into personal control over the company.
A strong board is not distant from the business. It understands well what is happening inside the company — but it does not take over from those it has itself appointed to run day-to-day operations.