The reputation of directors, boards and their governance performance has taken beating in the eyes of shareholders, investors, media, regulatory agencies and the public at large. Yes – the environment is tough, volatile and challenging. But many companies have survived, just, when they should have done better.
It is key governance responsibility to anticipate poor performance and ensure strategies are in place and carried out by high performing managers. And on that point, the important question of the effectiveness of executive directors has been raised with respect to the performance of number of boards.
Boards must be independent and hold management accountable. Directors must be able to address poor management performance or non-performance, effectively and promptly. And boards with executive directors do not oversee or scrutinise management to the extent independent boards do.
Management dominated boards inevitably increase risk. The entire culture and effectiveness of board’s management oversight is watered down when executives are also directors. The culture becomes more collegiate. The judge and judged are on the same side. Executive directors reduce transparency and accountability when what shareholders want, and need, is effective leadership and monitoring of management performance.
Monitoring the chief executive’s performance is downplayed when he or she becomes board member. Boards with executive members don’t scrutinise management to the extent independent boards do. Executive directors commonly support the chief executive and inhibit open debate in front of independent directors.
Managers who report to the chief executive have an understandably strong alignment to their CEO – as they should. It is therefore difficult, if not impossible, for them to function independently as directors, monitoring and reviewing the performance of their leader, or of themselves as managers. The board’s examination of management performance is seriously compromised.
It is particularly difficult when the chief executive or other senior executives on board are not performing as they should. When the chief executive is also the chairperson, the executive directors have subordinate management relationship that inevitably has strong influence on their independence and effectiveness as directors.
Good practice governance must be independent of management to ‘get the best from management’. To ensure robust oversight, performance scrutiny and good decision-making boards need to be totally independent, entirely objective and removed from the ‘hype’ of what’s going on inside the organisation.
Directors must be able to raise concerns spontaneously and discuss them openly, frankly and constructively. They must also be able to review individual shortcomings in the context of the company’s performance, and decide on course of action there and then. Executive directors make this impossible.
To have to ask fellow director or chairperson or chief executive to leave the meeting during an important discussion creates divisiveness, confuses and weakens the discussion. Any decisions are not truly board decisions.
Only healthy and robust contention between board and chief executive can ensure optimum management performance, ensure accountabilities are exercised on behalf of the shareholders, and also ensure that fiduciary and other legal obligations are met. Directors must always be in position to ask management the hard questions.
Chief executives, or other managers for that matter, don’t need to be directors to provide management perspectives on matters taken to board. Indeed, it is their job to do so. Keeping the independent directors informed is management responsibility, not governance function. Boards need formal, robust, verifiable and auditable information. However, while managers should not be directors, they must be members of the governance team.
Problems also arise when executive directors resign from or are terminated from their management positions. The individual is often able to remain an independent director until voted off or dismissed by shareholders or decides to resign. This is clearly problematic and not good practice governance. Getting on the board shouldn’t be seen as promotional step for managers. Governance is different role requiring different competencies, backgrounds, perspectives, personal attributes, and independence.
And chief executives or other senior managers shouldn’t be made directors when they retire. Managers can’t be considered independent until some considerable time has passed. directorship for an immediate past CEO makes life difficult, if not impossible, for the new chief executive. It might seem to provide some continuity, but it compromises change and new thinking.
Chief executives need every opportunity to provide new leadership unfettered by the past. When strong-minded former CEO sits at the board table looking over the successor’s shoulder, it can only complicate an already tough job. Invariably, the new CEO is second guessed or undermined. If new CEOs want to tap their predecessor’s wisdom, they are only phone call or private meeting away.
And executives don’t necessarily make good directors. Boards don’t need management expertise – they don’t manage. Director selection based on sound board composition and competencies inevitably delivers better boards.
Separation of responsibilities and accountabilities at the top of the organisation is essential. It ensures balance of authority and prevents unfettered decision-making powers ending up with an individual. Chief executives should not be chairs. There is an inherent conflict of interest when the two positions are combined. An independent chairperson and board are fundamental to ensuring chief executive accountability. Combining the roles creates an unacceptable concentration of authority and lack of accountability.
The board needs an effective chairperson and the company needs an effective CEO.
Doug Matheson is professional director and the author of The Complete Guide to Good Governance in Organisations and Companies and Great Governance: how the best boards work. Email [email protected]
