Tak­ing it all on board

The Courier-Mail - Career One - - News -

WHAT do you get when you put CEOs from dif­fer­ent in­dus­tries to­gether in a cor­po­rate board­room and ask them to gov­ern a com­pany?

Sev­eral an­swers could ap­ply, but what ac­com­pa­nied the fi­nan­cial cri­sis was a break­down in risk man­age­ment at the top.

A com­mon thread was that the boards of these fi­nan­cial firms were obliv­i­ous to the risk build-up.

Boards of su­per­vis­ing di­rec­tors have two pri­mary func­tions: sup­port­ing the cre­ation of long-term eco­nomic value, while at the same time con­trol­ling the con­duct of busi­ness in the in­ter­est of share­hold­ers and other stake­hold­ers.

On the In­sti­tute of Man­age­ment and Devel­op­ment’s High Per­for­mance Boards Pro­gram, we ex­am­ine the ten­sion be­tween these two roles with board mem­bers.

Many

com- pa­nies come to the re­al­i­sa­tion that their re­spec­tive boards are not bal­anc­ing these two es­sen­tial func­tions. In­deed, prior to the cri­sis, many bank boards failed to per­form their pri­mary fidu­ciary func­tion of con­trol­ling the con­duct of the busi­ness.

Look­ing at the com­po­si­tion of boards, it should come as no sur­prise that so many boards fail to per­form.

Boards typ­i­cally are made up of CEOs and top ex­ec­u­tives from dif­fer­ent in­dus­tries. They can pro­vide strong lead­er­ship in­put, but of­ten do not have enough spe­cific in­dus­try ex­per­tise and be­come far too sup­port­ive of man­age­ment to ex­er­cise their con­trol­ling man­date, par­tic­u­larly when it comes to risk as­sess­ment.

There

has been some re­form, but com­pa­nies across dif­fer­ent in­dus­tries need to con­tinue ad­dress­ing their boards’s com­po­si­tion with the fol­low­ing re­quire­ments in mind: 1. A crit­i­cal mass of in­dus­try ex­per­tise, as well as ex­per­tise for spe­cialised com­mit­tee work, such as au­dit and com­pli­ance.

Board di­rec­tors must have rel­e­vant in­dus­try ex­per­tise to ad­vise man­age­ment on ma­jor busi­ness is­sues and the ap­pro­pri­ate de­gree of risk to take. 2. Sen­si­tiv­ity to in­ter­ests of both share­hold­ers and other stake­hold­ers crit­i­cal for long-term value cre­ation.

The boards of com­pa­nies with widely dis­persed own­er­ship are con­tin­u­ally at risk of be­ing dom­i­nated by the con­cerns of ei­ther man­age­ment or board mem­bers to the detri­ment of the share­hold­ers’ in­ter­est.

Boards have to be con­tin­u­ally open to in­put from the own­ers. And in to­day’s en­vi­ron­ment, where cor­po­rate rep­u­ta­tions can quickly be bro­ken, boards also have to be open to the col­lec­tive opin­ions of other stake­hold­ers such as cus­tomers, who are crit­i­cal for longterm value cre­ation. 3. Board mem­bers will­ing and able to de­vote the time needed for the board’s work. There is still a wide­spread ten­dency to fill the board with high­pro­file ex­ec­u­tives of­ten run­ning large cor­po­ra­tions or di­vi­sions of their own.

The role of a CEO is more than a full-time job. 4. Board mem­bers with a broad enough per­spec­tive to ro­tate roles and take on com­mit­tee work.

With chang­ing con­di­tions in­side and out­side the com­pany, the board has to change the al­lo­ca­tion of its time and en­ergy. 5. Strong spar­ring part­ners will­ing to raise the red flag.

The moment of truth for a board comes when man­age­ment

starts de­stroy- ing long-term value be­cause it can no longer adapt to the chang­ing con­di­tions, or makes de­ci­sions that in­volve tak­ing large risk, or en­gages in be­hav­ior caus­ing crit­i­cal stake­hold­ers to with­draw their sup­port. It is at these times that board mem­bers have to be will­ing to raise the red flag.

In brief, we need boards with enough in­dus­try ex­per­tise to make mean­ing­ful judg­ments about strat­egy and risk, with mem­bers who can take on the spe­cialised com­mit­tee tasks, and rep­re­sent the

own­ers’ views.

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