Improving Corporate Boards
The press continues to focus attention on dysfunctional corporate boards and scandals resulting from poor board supervision and performance. It is particularly distressing to see these issues arising after so many reforms have been instituted over the last two decades. Some of these criticisms have been fair and some are just not true. Many boards have just plain failed to guide strategy effectively, oversee risk management, structure executive pay, manage succession planning, and carry out other essential tasks. More focus needs to be put on improving board supervision and accountability. For compliance officers, this issue is especially critical as they incorporate great board supervision and reporting responsibilities in their anti-corruption compliance programs.
Too much time is spent on the appropriate board size and not enough time is spent on how to ensure effective function committees and proper board membership and operation. Some of the most important concerns are:
1. Board member commitment – when board members feel vested in the company, akin to an ownership interest in the company, they are more successful. Too often board members are too passive and ask only a few questions of management. They view their role as stewards and not as active participants in the business. I am not advocating micro-management but I am advocating a more responsible anad activist approach. Management has its job but they are not beyond questioning or direction from the board.
2. Knowledge of the industry – when recruiting independent directors it is difficult to find those knowledgeable of the industry and sufficiently independent to add value to the board. It is important to find board members who have familiarity with the industry. If not, they need to be quick studies. Learning about a company and the industry requires high-quality and timely information. Unfortunately, board members frequently suffer from a lack of information about the company and the industry.
3. Macro versus micro-management – there is a fine line between effective macro management and micro management. Too many board members retreat from making inquiries and/or seeking to change a company’s direction for fear of rocking the boat. Directors need to act but do so in a delicate manner. However, the board needs to be focused on strategy development and risk management. In addition, they have to be vigilant in areas where management suffers conflicts of interest, such as CEO succession planning and executive remuneration.
Effective macro management means leading on corporate priorities. While boards meet on average once a month, they need to take a more active role in setting the priorities. They need to prioritize their activities and manage their time efficiently. Boards need to set their own priorities in consultation with management. They should avoid rubber-stamping management’s priorities without conducting an intense review and consideration of alternatives.
4. Pick the right CEO – Boards are too shy and dependent on management for information. They need to require – and even demand – more information. Not detailed information but a greater amount of subject areas for review. This is how boards learn about their companies. In operation, the CEO and the board have to work together collaboratively. If the board has any doubts on this issue and the CEO’s commitment to such a relationship, they need to address it and do so quickly.
All too often we hear that CEOs are ousted because they failed to inform their boards about critical issues, such as merger discussions or new, significant ventures. There is no excuse for such behavior and CEOs have rightly been dismissed for such a breach. Executives are more sensitive to their boards and this trend must continue. It is too easy for management to manipulate the board and a collaborative CEO is a must for effective corporate governance.
5. Ensuring independence – boards must be independent from management and must have authority. It is a mistake of the first order for CEOs to sit as Chairman of a Board. Such an arrangement undermines the board’s functions and role to oversee a company.