Remember this quote: “It’s not hard to find qualified candidates to serve on a public company board … Getting them to function as an effective team—and bringing value to management and shareholders—is another story!” For many years, this adage (which is an offshoot of a famous Casey Stengel quote) has characterized what an effective board is and should be. This quote still reflects the foundational attributes of a great board today, as I outline the four building blocks of effective board governance looking forward into the remainder of 2016.
Maybe the most important building block of an effective board is the presence of board leadership, in some form. This holds true whether we are talking about a non-executive chairperson, lead director or an informally anointed spokesperson who commands the respect of the other directors and ensures critical board processes are in place and running smoothly. Board leaders’ duties run the gamut, from fostering constructive CEO/board relations to confirming that crisis plans are in place. They also oversee the key processes I’ll address throughout the rest of this article, particularly board chemistry and accountability to shareholders. The list of duties, both formal and informal, is too long to recite here, but rest assured, effective boards have effective leadership. Boards need to have a strategic plan for what they want to accomplish that will bring value to the CEO and shareholders, and it just won’t happen unless someone organizes the board into a functional team.
As stated above, these steps and attributes don’t just happen. Creating an effective board with the needed skill sets and diversity unique to each company is an art. Finding independent, strong-willed and talented board members is only half of the challenge. Coordinating them into a functioning team that provides oversight while also bringing value to all constituencies—that is the quest. Does the board contribute to setting the right tone at the top? Is there the right chemistry and board culture to challenge management and each other constructively without concern or fear of repercussions? Does the board have the commitment to evaluate others’ performance and provide feedback or make changes if necessary? All these questions address the chemistry and culture of a board. The better the chemistry and the more defined the foundational principles by which the board operates, the more effective the board.
In the past, this key foundation was set by a legal responsibility outlined in a corporate director’s duty of loyalty and duty of care. This, along with the responsibility to operate in good faith, framed how board members should evaluate their decision-making with respect to representing shareholders. Today, accountability to shareholders and the rise in the institutional shareholder’s voice have expanded this responsibility. Proxies are growing in length, and activists want more transparency than ever before. For the last three years, the focus has been on shareholder engagement beyond management’s typical quarterly earnings announcement or meeting with a company’s largest investors. Shareholders, particularly institutional shareholders, want to hear from board leadership and committee chairs themselves. This paradigm shift will affect the future skill sets of board committee chairs and director recruitment. Boards that grasp this ever-changing environment and constructively engage with shareholders will feel little pressure from this rising trend, which will ultimately allow them more time to spend on strategy and value-building tasks.
Much like a personal trainer who stresses the value of building one’s core, the same is true for a board. If you boil down all of a board’s responsibilities, there are three core areas that, when addressed prudently, can provide a board the core strength to be effective.
The first core responsibility is to recruit, reward, and retain the right CEO. Experts argue that this is the most important core duty, and it’s hard to argue with that. CEO succession has repeatedly been identified by corporate directors as one of the two most challenging tasks a board faces.
The second core responsibility is overseeing enterprise risk management. This is the other most challenging board task identified by directors themselves. Let’s face it, shareholders have invested in the company to grow their stake, so, at the least, directors should be protecting that value, if not growing it. Getting one’s arms around all of the risk that companies face today, let alone the onslaught of cyber and big data security, is no small task. Good companies have a process to identify potential black swan events and risks within the business’s operating plans, which mitigates surprises in operation and bottom-line performances—always a good thing.
The final core responsibility is confirming the organization has a good direction and plan for building value. Strategic planning and budgeting is the blocking and tackling of any good company. The board should play an oversight role in the situational analysis and goal-setting and then approve final plans and budgets. Effective boards are tapped by management for their expertise when appropriate, and most directors yearn to spend more time on strategy and less time on compliance and regulations. So far compliance is winning, but effective boards find a way to minimize board time on non-strategic issues.
In the end, there is no magic formula for ensuring that a group of qualified individuals can be an effective board. Leadership sometimes emerges from some unlikely places and even lack of leadership can sometimes be counterbalanced by a sharp CEO, who fills the void without conducting him or herself like an imperial chief executive. I believe you can increase your chances by building a good foundation of committed practices. Just remember: “You can’t control the winds and tides, but you can adjust the sail and rudder to get to where you want to go!”