Company boards are no longer the `buddies’ clubs’ they used to
be. Among the challenges they have to contend with are
increasing shareholder activism, hypercritical media, employee
distrust, new legislation and consumerism. In today’s turbulent
environment, shareholders want an effective team of directors
that can steer the company into the future.
By Reuel Khoza
With the challenges posed by a dynamic and complex
environment, being a company director is no longer plain
sailing. Historically, shareholders tended to leave everything
to the board of directors, who either delivered or not. But
nowadays shareholders and investors are more critical and ask
more and more probing questions. So, too, do the hypercritical
media – their radar systems ready to detect any hint of
newsworthy corporate moves on the horizon. They flag
irregularities, which could lead to a drop in share prices.
Other stakeholder groups are active as well. Employees and
organized labour have become powerful constituents that are
constantly asking questions of directors. In addition, consumers
are more aware of their rights. They have become more
sophisticated and demanding, and are increasingly concerned
about societal issues and how corporates are perceived to be
involved. In response to greater public and media pressure,
government continually re-regulates and passes new legislation,
which may adversely affect a particular business or industry.
A change of course for boards
The role and emphasis of boards have changed significantly
over the years.
Until fairly recently, boards were mostly ceremonial
bodies – the `buddies’ clubs’. The old hands ruled the roost and
newcomers found it hard to make their voices heard. Management
had it all worked out for the board to rubber-stamp. Board
meetings kept to a tight agenda, and very little consultation
took place between the CEO and the board beyond board meetings.
Then came the liberated boards. In this respect the
USA’s Sarbanes-Oxley Act of 2002 – which followed in the wake of
corporate scandals like Enron and Tyco International – was a
milestone. Boards started to free themselves from CEO and Exco
domination. Newer-generation CEOs expected boards to contribute,
and directors expected to participate when they accepted their
appointments. Furthermore, the capital markets began to price
transparency and good corporate governance into their valuation
of securities.
The newest phase is the progressive board. For such a
board, the focus has become enduring company success and how to
chart the best course to attain that goal. The horizons have
changed to way beyond the present CEO’s reign, or single market
and product opportunities. Several characteristics distinguish
the spirit of progressive boards:
- Such a board complies meticulously with the law, and even
thinks beyond the mere letter of the law.
- The directors gel as a team.
- The directors maintain independence from the company. They
have neither worked for the company nor are they tied to it in a
service-level agreement. Even the length of board membership has
become a point of consideration in order to maintain
objectivity.
- There is a collaborative and constructive working relationship
between the board and the CEO. In this relationship, boards will
not refrain from confronting issues.
- Directors bring diverse environmental perspectives to the
board and they are keen to educate themselves about wider
matters in order to improve the scope of their contribution.
- Boards are increasingly becoming a competitive advantage to
companies.
- A progressive board is serious about self-evaluation. Ideally,
a board needs to be evaluated by an external person because most
people tend to do what is inspected and not what is expected,
even on this high level – this is human nature. A good number of
boards have progressed to allowing their being evaluated from
outside.
The last point raises several questions. What aspects should be
considered in evaluating the performance of a board, and how can
it be judged to be effective?Full speed ahead
Experience has taught that, for a board to be effective, its
composition – the so-called hygiene factors – should be
considered.
Size matters
The first factor that plays a role in the effectiveness of a
board is its size. There is no one-size-fits-all when it comes
to boards. They must have enough members to bring the necessary
key expertise, such as legal, financial and project management
skills to the table, while also taking diversity into account,
but at the same time be sleek and agile enough to respond and
make decisions.
Board size is also determined by the number of sub-committees
needed and the skills required to populate each of these. Banks,
for instance, would have more board members because of all the
oversight committees required in their business, say between 18
and 20 directors. An ordinary company can have far fewer. If a
board gets too big, it could wind up `carrying passengers’. For
a particular board, therefore, the key to board size is to find
an optimal balance between the important trade-offs.
Independence from management
The independence of a board is the next vital factor that
influences effectiveness. It has already been pointed out that
progressive boards have a majority of directors that are not
connected to the operations of the company. But independence of
the board also requires that the positions of CEO and board
chair be separated. Of even greater importance is the aspect of
independence of mind, with attendant objectivity and strict
adherence to fiduciary duty.
Governance factors
While board composition is important, it is not enough. What are
the causal factors that will lead to sound governance? There are
three main themes of board functioning that should be evaluated,
namely:
- The dynamics of the group as a functioning unit
- The architecture of information presented to the board by
management
- The focus the board maintains on substantive rather than
peripheral issues.
The table below provides a sample of questions in each category
that should form a basis for board evaluation:
| Group dynamics |
Information architecture |
Focus on substantive issues |
| Does the board bring dialogue on vital issues to
clear closure, or does it remain fragmented? |
Is information presented in a way that leads to
useful insights that facilitate productive discussion? |
How clear is each director on the strategy going
forward? |
| Do all directors speak their minds freely on key
points? |
Does the board go out on its own to learn about the
company (e.g. by visiting plants) and the industry? Is
sufficient time given for discussion in the boardroom?
Or are presentations scripted to the second, with no
time left for dialogue? |
How well has the board bought into the company’s
strategy? |
| Do directors respond to each other in meetings,
particularly when they disagree? Or do members direct
standpoints solely to the chair? |
Does the CEO feel comfortable discussing bad news
and uncertainties with the board? |
Has the board discussed with management the
potential risks inherent in its strategy? Or has it left
risk management to management? |
| Does the board feel that the company gets a return
on the time the board invests in corporate affairs? Or
does the board feel its time is not productive? |
|
Does the board explicitly monitor financial health
and operating performance relative to the competition by
focusing on causal factors? |
| Are the dynamics between the board and the CEO
adversarial or constructive? |
|
Has the board discussed succession in depth during
recent meetings? Or is it waiting until succession
nears? |
| Do directors individually feel that they get
something out of board meetings? Or is attending
meetings a chore and a burden? |
|
How familiar is the board with the leadership gene
pool and efforts to develop up-and-coming managers? |
| Have directors acted on feedback that emerged from a
real and constructive self-evaluation? |
|
Do all directors fully understand the philosophy
underlying their CEO compensation plan? |
Questions adapted from the book Boards that deliver by Ram
Charan (2005)
The right chair at the helm
Good governance starts with having the right person chairing the
board. The role of the chairperson is not that of a ruler, but
of `the first among equals’. Chairpersons should set the tone
for corporate leadership by ensuring that the board is well run
and performs its functions effectively. Ideal chairs keep up
effective relationships with key stakeholders, notably the
shareholders. In a regulated environment, a sound professional
relationship with the regulator is vital. They also concern
themselves with corporate sustainability and make sure that
succession planning within the company is charted well in
advance.
Competent chairs will also run effective meetings that focus on
the key issues. Contribution from members is optimised, and
diverse and opposing views are welcomed equally. An effective
chair will even encourage the less vocal to speak out and make
sure that the board draws on the collective strength of all its
directors.The right chairperson will bridge the gap between
the board and management effectively, acting as mentor and coach
to both management and the CEO. Meaningful time is spent with
the CEO and with reports outside of meetings to ensure that
meetings stay focused on strategic issues and do not get bogged
down by operational detail.
The chairperson is pivotal in making sure that the boundaries
between the role of management and that of the board are
understood and respected without isolating the contribution each
party is able to make towards achieving the company’s goals.
By submitting themselves to evaluation of their effectiveness
as a board and acting on the results in order to improve their
performance, directors would be better equipped to steer the
company on a course of sustainable success.
This is a synopsis of a talk by Prof Reuel Khoza,
professor extraordinaire of the University of Stellenbosch
Business School, presented at the Leader’s Angle event hosted by
the USB, in association with Finweek. For more details about the
USB’s monthly talk series, visit www.usb.ac.za/leadersangle.
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