In the first article in this series, Your Board: Dynamic, Difficult or Detrimental, boards are described from the CEO perspective as either adding value, preventing the organization from optimizing opportunities or in some cases, just tiresome in their dealings. One way boards develop the difficult or detrimental characterization is created by how the board views and fulfills its role. By role we mean the big picture contribution or “fit” with the organization as a whole. In using the term role, we do not mean responsibilities, such as ensuring a succession process. The board’s responsibilities (what boards do) will be the topic of the next article.
When CEOs talk with us about how their directors view their roles, we hear things like:
- “I have several directors who are senior managers of top-flight companies. They know what it takes for an organization to perform. But what they want to do is analyze internal reports and take up my management team’s time asking questions and second-guessing their decisions. I have a first-rate management team. What I need is a strategic partner in the board.”
- “Two of my directors are descendents of the founder. Neither of them has worked in the organization or for any comparable business, and unfortunately, their interests are minimally related to our strategic issues. They seem most concerned with keeping the family name prominent.”
- “We have the notoriety of having a well-known figure from the sports world on our board. Some of our directors and shareholders think that’s a coup. He’s here the required 75% of the time, has a good sense of humor and entertains the other directors at the socials with his exploits. He’s mostly a distraction.”
- “With the best of intentions, we sought to create the perception of responsible corporate citizen. Therefore, we elected a director who is prominent in many charitable and civic organizations. This director spends most of her time here campaigning other directors on behalf of other boards on which she serves.”
- “The former Chairman and CEO is still a member of the board. He actively works to prevent any changes to things that were introduced during his tenure.”
Each of these directors probably assumed his or her role with the best of intentions and was equipped with only their experience as a guide to what contribution is needed. Unless we deliberately create an accurate picture of the role or function of the board and how it relates to the organization, individual directors will create their own picture based on individual perceptions. With the creation of a board of directors, we reap what we sow. For most CEOs, we reap what we inherit. Managers will continue to act like managers, family members and former CEOs seek to preserve the legacy, athletes perform and entertain, etc. Boards that support the organization and CEO optimally are those that have a clear picture of the role of the board and how that relates to the role of the CEO and management. That requires deliberate effort on the part of the CEO, Chairman, Governance Committee or Executive Committee to initiate developmental efforts to ensure that directors understand the role of the board.
Where is Your Shareholders’ Voice?
You have many constituencies to please, with many of them on your calendar in any given day. Your corporate attorneys are busy with the regulatory requirements, Wall Street is busy setting expectations for your returns and the local Kiwanis wants you to do a presentation for their conference on Saturday (since when have you had a Saturday “off”?), so you’re doing some preparation for that mid-week. These constituencies remain a constant part of the picture, communicating with you about their needs day in and day out. Shareholders can be more elusive and sporadic in contact. You mostly get an executive summary from your Investor Relations group that tries to convey the tide of opinion that prevails among your owners. The other votes are cast as lagging indicators, your price per share and sales revenues.
When you’re ready to work with the board, you need representatives of the owners who have the best interests of the organization, and all owners, in mind … contributors who can ask tough questions and who will “say what needs to be said” regarding organizational effectiveness. These representatives need to know who the owners are, whether institutional investors, employees and management or venture capitalists who believe in your idea because they know your industry. ROAD warriors who sleep during board meetings, trophy hunters seeking their sixth board seat, and those who seek to represent factions, geographic locales or only certain constituencies’ interests can be the source of difficulty or detriment that is the stuff of the CEO’s nightmare. Directors have the role of representing all owners.
How are Different Constituency Needs Addressed?
If it is impossible to serve two masters at once, how can one person serve eight or ten? Yet that is exactly what CEOs do that do not have a board to serve as a strategic partner who understands and helps weigh the needs and demands of multiple constituencies. CEOs who lead organizations that were blessed with a founding father, like Robert W. Johnson of Johnson and Johnson, who had the foresight to explicitly write a purpose statement or credo for the organization’s existence are fortunate. They have a decision-making tool or beacon to aid in making weighty decisions. Most CEOs are not that fortunate.
Some of those CEOs decide to go it alone and bring their recommendations to the board for rubber-stamping. Others seek to use the expertise of a board which is equipped to function as a partner and who understands its role. They bring to the board decisions such as, is this offer to sell the company one that merits losing our name identity and independence? Is it better to take a hit from the “Street” this quarter from making the long-term investment that is desperately needed or to bet that we can postpone it one more quarter without losing the window of opportunity? Those CEOs have a partner who helps weigh the needs of multiple constituencies. They can then also help manage those constituencies, aiding immeasurably with public and investor relations.
In this part of the role, the board can also clarify and maintain healthy boundaries among the roles of management, the CEO and the board. Ensuring that this board role is fulfilled eliminates overlapping between board and management functions, which leads to micro-managing and robbing management of accountability for outcomes. Additionally, by clarifying boundaries, adversarial relationships are less likely to develop between management and the board. Clear boundaries between the board and management supports a partnership between the two groups in pursuit of the purpose and strategic intent of the organization.
Provide Input from a Policy Perspective
The last thing you want from your board is having your hands tied. You have to answer for the results of the organization, so you want the latitude to be nimble in your responses to the marketplace. You need the board to understand that its role is at the policy level. What does that mean? The board’s role and principle work is to provide leadership and input from the outside and to provide a perspective that is above the everyday events and activities of the organization’s operations. The board’s policies and discussions of them reflect the board’s values, beliefs and thinking. These perspectives, in order to provide guidance, focus on four major areas:
- The board’s role is to think long-term and to ensure that the organization has the discipline to think long-term. Therefore, they write broadly-defined policies to ensure that a picture of the organization’s long-term outcomes is defined. These outcomes are beyond goals and strategy. They have to do with why and how the organization justifies its existence. It answers critical questions, such as, if we receive an offer to sell the organization, what is it that would cause us to take the offer, cash out and move on? What is so compelling and unique about this organization that makes preserving our independence and identity important? These policies support the organization in its long-range planning processes.
- Similarly, the board concerns itself with the means the organization uses to reach its expected outcomes. Within this policy set, most boards remain at a global level of defining expectations about ethical and prudent limits about how outcomes are achieved. These policies describe generally what is in and out of bounds.
- Another set of policies defines the roles played by the board, the CEO and management in how the different constituency needs are addressed. They delegate accountabilities and specify measurement methods that will be used to assess performance by the CEO and management. These policies clarify the relationships among all three sets of leadership for the organization and how they will work together without usurping each other’s roles.
- Finally, the board defines policies that cover its own actions and processes used in governance. The board monitors itself for its results, practices, organization and so forth. Boards are in the unusual position of having to govern themselves as well as the organization.
Policies do not confine; instead, they free you from dealing with a board that stays “in the grass” rehashing management’s work, deals with the past instead of the future or dilutes YOUR impact by not defining the territory you are chartered to explore.
Establish and Maintain a Process for Governance
The final key role of board is the same as final area listed as covered by policy, and that is how the board does its own work. According to the 1998 Korn Ferry Board of Directors Survey, 58% of boards now have governance committees and 64% have written guidelines on corporate governance. Increasingly, boards are paying more attention to their own effectiveness, especially with pressure from large institutional investor groups like CALPERS growing. In the same survey, one-third of the boards formally evaluates their performance as a whole, while only 19% evaluate individual director performance. As constituencies continue to raise their expectations of organizations, more boards will feel the need to be explicitly accountable for their processes and outcomes. Progressive CEOs know that high performing boards are part of the equation in high performing organizations. You are telling us more and more that you want your board paying attention to how it manages itself.
A Critical First Step
You expect all job descriptions within your organization to define the function (role) or “fit” of the job into the big picture, the how and why the job makes a difference to the whole. Likewise, your board’s effectiveness is a product of a clearly defined and fulfilled role. Without that framework, the responsibilities and requirements of effective boards will almost always be awry.
The next article in this series on the emerging trends of board development will address the responsibilities of effective boards (what the best boards do). The purpose of this series is to give CEOs background in the issues to help them determine whether and how to approach the challenge of developing the board.