Taking it all on board
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.
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.
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