Underperforming boards and directors are delivering poor company performances and too many company failures. Companies that should be doing well are doing little more than surviving. Directors’ and boards’ reputations are, in the eyes of shareholders, investors, the media, public and regulatory agencies, taking beating. The world and ways of corporate governance must change and adapt to meet new realities.
The new economic and business paradigm, for example, has landed boards of directors with principal role in delivering company performance. Their development and oversight of strategy and its execution, oversight of performance and identification and management of risk, collectively give directors unique perspective and opportunity to provide good governance and leadership. Simultaneously however, directors must meet their fiduciary, legal and regulatory obligations and perform in ways that preempt the need for increased regulation while furthering the best interests of the enterprise.
Directorships have too often been viewed as honorary positions. Directors now have real work to do. They have responsibilities and legally enforceable duties and accountabilities. Good governance is now critical to the long-term sustainable performance of organisations whether they are private sector, public sector or not-for-profit.
Governance is an active, not passive, calling. The constitution or trust deed defines the rights, powers, duties and obligations of the company, the board, each director and the shareholders. board’s activities are determined by the powers, duties, and responsibilities delegated to or conferred on it by the shareholders, through the constitution. Company performance is the directors’ and board’s responsibility. They strategise it, oversee it and are collectively accountable for it.
A company board’s fundamental purpose is to grow wealth and value. It establishes aspirational strategic goals, determines short and long-term strategies to achieve them and oversees performance. But increasingly directors and boards are failing in their duties and responsibilities. Consequently, those duties will be more robustly enforced by government agencies in future.
Despite the importance of and obligations to deliver good organisational performance, directors and boards comprise the only critical component of an organisation that is infrequently and often inadequately evaluated and, where job tenure is not performance-linked. Everyone else in the enterprise is accountable.
In the public sector, the Crown Ownership Monitoring Unit (COMU) advises the minister responsible on the performance of each of the state’s 48 boards, identifies the skills and attributes required in each board, identifies director candidates and chairman appointments and, manages the recruitment and appointment process. The private sector could learn from this process.
The sagging state of governance demands that boards and directors be held significantly more accountable for their individual and group performance. It will take important governance process and formality changes to accomplish this. I have some suggestions.
1. Board governance committees
Company constitutions should require the board to deal with non-performing directors or chairs and provide for the board to act. Boards should appoint governance committee comprised of the chair and up to three experienced independent directors. The governance committee’s responsibilities would include:
• An annual review of board composition, competency and diversity requirements. Identify the skills, experience, competencies, backgrounds, perspectives and mix of ages, gender and ethnicity required to deliver the coming year’s most effective board.
• Review the chair and individual director’s performance evaluation. Confirm with the chair or director where performance evaluations are such that the individual should not be reappointed or be asked to retire. Discuss chair’s performance when it is evaluated as “needs to improve” or “inadequate”.
• Identify potential directors to match the requirements of the board. Board composition and succession plans should be prepared annually.
• Boards should propose resignations and appointments to the next annual shareholders meeting or whoever appoints directors for approval.
2. Standards for board membership
The selection and appointment of directors should be based on strict criteria. It’s not just the personalities on board that are important. Good governance requires independence, the best possible mix of relevant skills, experience, competencies, backgrounds, perspectives and diversity at the board table. Directors must complete governance training before attending their first board meeting.
3. Greater board diversity
A growing body of evidence confirms the value of director diversity. The term embraces diversity of experience, gender, age and ethnic background. diverse board of directors provides better governance and better company performance. Different points of view bring wider approach to decision making.
The small percentage of female directors is serious problem. governance gender mix that reflects the view of wider society, customers and shareholders is important. The different thought processes, different views about risk and ways of approaching problems are critical. Women are more instinctive and intuitive and the different experiences they bring to the board table undoubtedly help deliver good governance.
Age diversity is similarly important. Boards frequently lack younger perspective and mindset at the table. Effective older directors bring wisdom, experience and an integrative perspective. Age diversity can provide the catalyst for fresh thinking and balanced view.
But prevailing board and director attitudes will need to change to deliver the advantages that come with diversity and better governance training. Constitutional changes will be required to force the issue.
4. Performance evaluation and continuous improvement
Evaluation of chief executive or other employee performance is commonplace. Boards must be required by their constitution to establish performance criteria against which the board, each director and the chair’s performance will be evaluated. Annual board performance assessments coupled with director education programmes to improve the effectiveness of the board, its committees and individual directors is best practice.
5. Deal with non-performers
Boards have historically not faced up to director non-performance. Directors and chairs are responsible for their own non-performance. They must deal with and address this reality as they would with any chief executive non-performance issues. Boards can no longer ignore poor individual director or chairman performance and failure to comprehend the depth of problems their inadequate performance causes. Boards must be required and enabled to address the problem.
Boards need the constitutional ability to terminate directors’ and chair’s terms at the table. Boards can’t function as high-performing teams without demanding high performance from all members. In many cases decisive action may require shareholder approval. That is not, in my opinion, the problem.
Directors must recognise the governance environment has changed and rules need to change to deliver new performance-focused era. Governance leadership is more important than ever. Poor performance, individual or collective, is unacceptable. Accountability must become basic requirement of everyone who aspires to occupy seat in the boardroom.
Doug Matheson is an experienced professional director and chair. He is the author of The Complete Guide to Good Governance in Organizations and Companies and Great Governance: How the Best Boards Work (www.management.co.nz). [email protected]
