Heightened pressure to deliver solid
returns to shareholders and liability issues are driving many boards away from their strictly strategic role to become more involved in the day to day tactical affairs of the business.
In fact, Colin Coverdale, management strategy consultant with KPMG, believes five in every 10 CEOs may have difficulty keeping the board’s nose out of the day to day running of the company.
While not new phenomenon, Coverdale says growing number of boards are now raising their game.
“Growing market competitiveness, drive to reduce operating costs and e-commerce dynamics means boards now expect greater stake in strategic development. But the board’s desire to drill down into profit, cost and performance areas and be given detailed reports on new appointments is sufficient proof they’re over-stepping the mark between board and senior management,” says Coverdale.
Management and operations have long been regarded as the CEO’s responsibility. Whereas long-term strategic direction and safeguarding shareholders’ interests is generally considered the board’s domain. The trouble is, boards can become so preoccupied with their own personal liability, they’re often wanting to drill down well below the divisional level.
Resolving this dilemma
A growing number of boards find themselves seeking independent third party guidance on who should do what and why? Coverdale says boardroom reviews are most likely to occur:
* When board member or chairman requests an evaluation process.
* If there’s new CEO and the board hasn’t formalised expectations.
* Where board members perceive new issues are being raised.
* Where the CEO is completing fixed-term contract.
* Where there’s significant drop in company earnings.
“In years past, governance reviews with boards generally covered advice on paralleling best practice. Now boards want clear guidance on what’s an acceptable demarcation between the CEO and the board’s role. Amendments to numerous Acts impose liabilities on CEOs whether they’re directors or not. Hence, we recommend flexibility in sharing responsibility. Where the CEO is totally dominating the strategic direction the board will feel shut out and the opposite is also true.”
The ultimate solution? Coverdale says the CEO should clearly drive the strategic direction. But it’s up to the board to listen, ask questions and only endorse strategic direction once they’re satisfied it’s taking the company where they want it to go. To do this, growing number of CEOs are now leading their management teams into the boardroom to keep directors abreast of divisional developments within the company.
“With much greater legal responsibility, boards can no longer be passive followers of CEO-led initiatives. But boards that get far too involved in running the business are typically dealing in policy vacuum. This usually arises when CEOs are given insufficient lead on what they’re expected to deliver,” says Graham Nahkies, managing director with Wellington-based consultancy Boardworks International.
Nahkies spends most of his time as boardroom coach. He estimates that up to 60 percent of board’s time is diverted onto issues that don’t add value. He says poor corporate performance invariably arises when the role the board has decided to play is grossly inadequate. Nahkies spends lot of his time helping boards articulate clearly where they want the CEO to steer the company and how this will be measured.
He says boards that don’t provide CEOs with key deliverables are in most danger of meddling in the company’s business. “The board is where the buck stops for organisational performance. It’s impossible for CEOs to do their job properly unless the board holds them directly accountable for clearly stated deliverables. Boards that get too involved in management decisions undermine their ability to hold the CEO directly accountable for running the day to day business,” says Nahkies.
As group, boards have difficulty getting the company’s strategic “rubber on the road”. But Nahkies says growing number of directors now realise they must spend more time in strategic thinking and less time reviewing historical information.
Graham Gilmour, former deputy chairman of Cavalier Bremworth and Enerco Gas, says it’s perfectly legitimate for the board to raise its strategic stake. But how the board goes about it will determine whether or not it’s able to add value.
“Boards still spend excessive amounts of time examining historicals because it’s been easier than managing the company’s aspirations for the future. Instead of simply rubber-stamping management recommendations, boards need to have their own input on formulating future direction,” says Gilmour.
At face value the convergence towards shared responsibility and flexibility in formulating strategy had turned the relationship between board and CEO 180 degrees. Nevertheless, Nahkies says while “demarcation” conjures up negative connotations of them and us, stringent guidelines on board and CEO responsibilities are needed now more than ever.
“Tailoring responsibilities to the needs of the organisation is less about applying boundaries and has more to do with effective teamwork. Boards must clearly define the direction in which they want the CEO to take the company. They also need to scrutinise the CEO’s chosen tactics for taking the company there.”
So exactly how do boards become more effective? If you subscribe to Nahkies view, then corporate improvement results from boards and CEOs understanding the true nature of their partnership. He adds, often this leads to realisation that the definition of what should be complementary jobs is simply inadequate.
“It’s all about awareness raising. Boards must establish where they can add real value and what’s best delegated to the CEO. Ultimately, it’s the board’s job to deal with ends, they should leave the CEO to focus on the means needed to achieve that purpose,” says Nahkies. The end result? He says boards that fully understand their primary reason for being are:
• Less likely to drill down into areas where they don’t belong.
• More likely to effectively monitor critical performance measures.
• More likely to harmonise strategic direction with senior management.
• More likely to be strong and active than weak and passive.
• More likely to understand their governance role.
• More likely to hold the CEO directly accountable.
An advocate of boardroom coaching, Gilmour says it helps to establish clear guidelines where there have never been set boardroom protocols. “Once the board interferes in the day to day business the company is in real trouble. Often board’s biggest downfall is not what it does but how it goes about things. This is where the chairman should add real value. What the board expects from its CEO depends largely on the relationship dictated by the personality of the chairman,” says Gilmour.
Contrary to popular opinion, Gilmour believes board and management can only truly harmonise when the CEO is also director. He says when this happens the board and the CEO can align their expectations in areas where there is often lingering uncertainty, these include:
• The impact of IT and especially e-commerce on future business.
• Reports required to comply with legislation.
• Appropriate disclosure to external stakeholders.
• Aspirations for the future.
“CEOs have divided loyalties between the staff and the board. But where the two are in conflict, the board’s view will prevail if the CEO is also director. When CEOs sit around the board they need the authority of director, otherwise they’re more likely to put the loyalties of staff above those of the board.”
