The CEO is often in the role of challenging the board to fill its role and add value to the organization. This article is the third in a series intended to help the CEO think through the issues involved in developing a board to contribute meaningfully to the purpose, vision, strategy and development of the organization.
The first article, Your Board: Dynamic, Difficult or Detrimental, discussed evaluating whether the board truly adds value to strategic leadership of the organization. The second article, Your Board: Proactive Partnering or Reactive Interference, discusses the proper role of a board so its interface with the role of the CEO is properly aligned.
Once a board is clear about its role in the leadership system, it needs to be clear about the responsibilities associated with that role. In our work with CEOs and boards we hear CEOs lamenting:
- “As the business environment has changed, we need a board which provides external input and big picture thinking. They just focus on the same old maintenance, detailed and traditional issues.”
- “I don’t receive useful and substantive feedback from the board about how directors see the job I am doing. It’s just, “Good job, here’s your increase.” I would like to have an evaluation that helps me learn and grow. I don’t want any surprises”
- “Our board focuses almost exclusively on financial performance, and I need it to assure that the purpose and values of the organization are sustained for the long-term success of the organization.”
- “My board does not seem concerned about succession until someone’s retirement is imminent. Then it is too late. We need the board’s commitment to a solid succession and development process to assure attracting and retaining key talent in today’s world where intellectual capital is so mission critical. This requires an investment.”
- “The board does not seem to have the will to take responsibility for evaluating its own effectiveness and that of the directors.”
- “As a new CEO I can see that our board hired me to be a force to resolve conflicts among directors or factions within the board. They need to be responsible for evaluating and developing themselves as a board. I am supposed to work for the board, not be its caretaker.”
- “Our board is divided among its members in the support for our strategy. Directors cannot seem to get on the same page and it retards our effectiveness as an organization.”
- “Our board brought me in to “shake things up” and put us on a new course. Despite that mandate, directors lack the will to back decisions when there is resistance to change coming from the initiatives we all agreed were right.”
- The new CEO now faces the financial crisis which has become a media event with media asking, “Why didn’t the board know what was going on and, if it did, why didn’t it do anything?”
If you had an executive reporting to you with the lack of effective behavior identified in the issues mentioned above, you would probably fire the person, or at a minimum, do some serious coaching and counseling for starters. The board expects executive management to assure that a sound strategy is in place, the resources deployed to implement it, the talent is available and properly led to execute it and that objective evaluation occurs to track progress and make effective decisions. However, when it comes to the board’s own responsibilities, only relatively recently are boards seeing the need to hold themselves accountable for effective execution of their own role and responsibilities. Who is responsible for seeing that the board effectively fulfills its own responsibilities? The board itself is responsible but rarely holds itself accountable and, even more rarely, puts into play processes for evaluating its own effectiveness—until it is too late.
A 1999 Korn-Ferry survey of more than 1000 directors, outside and inside, including 215 CEOs, indicates that boards and directors are becoming more aware of the need to re-think and re-form their role and responsibilities. However, our experience and research indicates that many boards and directors have been in the “If it ain’t broke, don’t fix it” mode. CEOs are having to address considerable inertia to support boards and directors in more fully understanding their responsibilities, evaluating their effectiveness in execution of those responsibilities and being willing to take proactive steps to enhance effectiveness. As boards begin to understand the need to re-form their responsibilities, this will represent a need for change in the “institution” of the boardroom that is steeped in tradition. CEOs and the more progressive directors, as leaders, will have to address considerable inertia. It is not very likely, given this inertia, that most boards will “go there” at the pace which would be most advisable in terms of building and/or sustaining competitive advantage. Well-led boards, with the courage and know-how to do what is needed, will be ahead of the game. A central question becomes “What are the key responsibilities of today’s corporate board?”
Guidance In Strategy And Core Ideology
The ’99 Korn-Ferry study indicated an overwhelming response that boards will need to take a much more active role in strategic planning, implementation and appraisal, and that strategy review is one of the board’s most important responsibilities. The responsibility of the board is not to develop the strategy. Rather, it is to ensure that effective strategic processes and plans for the organization exist, to review the plans, to see that they are properly resourced, and to review the effectiveness of plans in achieving their intended outcomes. The board should bring outside perspective and ask the challenging “what if, or why not” questions to stimulate out-out-of-the-box thinking.
It is also the responsibility of the board to assure that the core ideology i.e. purpose (beyond profit) and core values of the organization are alive and well, effectively perpetuated and preserved for the future, and that key decisions are aligned with the core ideology. In high-performance organizations, attracting and retaining intellectual capital is key to long-term success and a mission-critical investment. Therefore, a commitment to developing and sustaining effective leaders steeped in the core ideology and culture is increasingly critical and a central responsibility of the board.
Assure Executive Performance And Succession
Assuring Executive Performance
A key responsibility of the board is CEO feedback and evaluation and assuring there is an effective process for evaluating executive talent. The best CEOs and executive talent want to know more fully where they stand, particularly with their boards—what are they as executives seen as doing well and how can they be more effective. The best executive talent wants to learn and grow, since they are achievers. However, typically the executive level gets a “pat on the back” and a salary review with no substantive, descriptive feedback—until things go wrong. The board needs to assure there is a high- caliber pool of senior executives inside the organization AND identify possible external candidates with strong capabilities. The board needs to see that there is an effective process for providing the key internal talent, including the CEO, with specific feedback to guide development. This process should also provide the board with insight it needs to fulfill its role in a well-informed manner.
In a knowledge and service economy, in particular, intellectual capital is needed to assure the organization’s long-term viability. Therefore, a key responsibility for the board is providing the best possible talent to achieve the organization’s strategy long after the current group of leaders are gone. This includes seeing that the key talent develops the competencies required to align with the strategy for the future.
A swimming team cannot win the meet with swimmers from the shallow end of the gene pool. Yet the 99’ Korn-Ferry survey reported that 79% of boards do not have a management succession committee, though many are critical of the management succession process. Of the 21% of boards with a Management Succession Committee, 71% indicate their committee meets regularly. At the same time, the survey indicates that 23% think that most organizations do a poor job of succession management, 27 percent believe the CEO dominates the process and 30 percent say the board gets involved too late. It is the responsibility of the board to be proactive and rigorous in seeing that an effective process is in operation and achieving the desired bench strength with competencies that align with strategy.
The National Association of Corporate Directors, in a 1998 Blue Ribbon Commission report on CEO Succession, summarizes the following warning signals that a board has not fulfilled its responsibilities in succession planning:
- Lack of internal candidates for the position.
- Continuing poor or mediocre performance by the organization.
- Departure of promising top management candidates.
- Crisis created by personal or health issues that could or should have been known to and acted upon by the board.
- Retirement of the CEO delayed because of lack of a successor.
- Time-based succession planning scheduled around planned retirements instead of performance-based succession-planning.
It is best to groom talent from within, with a stable and effective management development program that is focused on the top three layers of the organization. Development and promotion from within prepares competencies that are aligned with the business strategy for the future, and steeps rising leaders in the core ideology of the organization so they serve as effective models and reinforcers of the culture. Of course grooming talent from within also serves as a strong strategy for attracting and retaining key talent. It is important that directors have adequate and appropriate contact with key succession candidates at the senior level.
Monitor Organizational Performance
In monitoring organizational performance, one of the board’s key responsibilities is monitoring implementation of strategic initiatives including the timeline, budget and results achieved—are the initiatives moving as planned and achieving the intended outcomes? This is contrasted with a board that finds itself getting “down in the weeds” evaluating day-to-day matters, which is the role of the CEO and executive management. To the extent the board meddles in the latter, it cannot hold the CEO accountable.
To facilitate monitoring and appropriate compliance with legal, regulatory and accounting practices, the board’s role is to assure that relevant and accurate information systems are in operation and that control and audit processes are in position to meet business objectives.
Maintaining Legal And Ethical Standards
Over the past few years boards have been blindsided by unprofessional, unethical or illegal actions by inside management. This can represent significant liabilities, affect shareholder value, influence customer confidence and good will, and significantly affect employee confidence in top management. Thereby, the organization’s ability to attract and retain critical talent is damaged.
The board has a key responsibility to assure legal and ethical standards are established and maintained. It also needs to model these standards in its own behavior and decisions.
Risk Management And Self Management
It is the responsibility of the board to ensure a return on extraordinary capital investments, when they are made. This means the board should have some sort of review process to see that those resources are deployed and to provide accurate monitoring of progress toward intended outcomes for which the resources were deployed.
Organizations face potential threats to their viability every day. Prevention and management of crises is a key responsibility of a board. A board must be attuned to significant threats to the organization and assure plans are developed and implemented to prevent those threats or at least minimize their effects should they occur. When a significant crisis does occur, it is the responsibility of a board to see that an effective strategy is developed and implemented—one which aligns with the core ideology and strategy of the organization for long-term performance and credibility with key constituencies. Johnson and Johnson’s Tylenol contamination crisis is a good “case in point” of this approach when it pulled its product nation-wide after deaths occurred from product found to be contaminated only in Chicago. It cost $100 million. But the Washington Post wrote, “J & J has succeeded in portraying itself as a company willing to do what’s right, regardless of the cost. The incident, as handled, built public trust. By contrast Bristol-Myers, only a few days later, faced a very similar situation and did a market-limited product withdrawal, focusing on cost. Comparisons have been made frequently in the press and other publications and in a manner which reflects very differently on the reputation of the two companies. Dealing with a crisis in a manner that undermines the core ideology has significant consequences well beyond the short-term crisis.
In terms of self-management, the board must establish objectives for its own development and evaluate board and CEO performance.
Progressive boards recognize they have an obligation to all constituencies to effectively fulfill their responsibilities in preparing the organization for the future. This requires evolving their own competencies and practices to align with strategy. The most progressive boards recognize this requires reflection and evaluation of how well they do their own job and a commitment to develop proactively and continuously the competencies and practices needed for optimal effectiveness instead of operating with a “business as usual” paradigm. Therefore, they have a process to evaluate their collective effectiveness as a board. The most progressive boards also evaluate directors to provide them with feedback to help enhance director contribution. The latter serves as a foundation for making the tough decisions of asking weak directors to resign so strong directors can be added. Our experience indicates that the strongest directors want to be on a strong board to be worth their time. Being a part of a strong board feeds their own development by working with other strong directors.
A key responsibility of the board is evaluation of CEO performance. Stories abound about boards who fell asleep at the wheel only to discover that a CEO was creating effects that came to light and had a significant negative effect on organizational performance and shareholder value. When these effects come to light, investor confidence is eroded and is difficult to rebuild. On the other hand, strong CEOs and boards have developed a CEO evaluation process that is driven by the board and provides good, descriptive feedback which guides the CEO in continuous improvement of his/her own performance. It sets expectations that address ineffective behavior before it becomes a crisis. An effective CEO evaluation process also tends to enhance significantly CEO/board communication.
Is Your Board Fulfilling Its Responsibilities?
As CEO you are likely to have your view regarding the extent to which your board is effectively fulfilling its responsibilities. What also matters is whether your board has a model for understanding its role in today’s world rather than operating based on old paradigms of board responsibilities. Can your organization achieve what it is capable of achieving with your board functioning as it does? If your board is not functioning as a clear value-added asset with true intellectual capital working through effective processes, you may need to initiate a board development process that helps the board learn its responsibilities and the extent to which it is having the effects it intends to have. An effective board evaluation process with a follow-up retreat that explores the “best practices” of boards of high performance organizations is a good place to start.