Microscope or Rubber Stamp – Finding the Balance

For company to be successful in the dynamic and demanding times that characterise modern business, strong and competent leadership from management and the board of directors is critical.
Achieving this imperative involves boards in considerably more effort than what historically passed as mere fiduciary oversight. To do this effective governance structures are essential. They must be founded on unalterable fundamentals but allow responsiveness and flexibility to move with the times.

Monitor not manage
Failure to implement such structures or attempting to achieve them by micro managing invariably stifles growth and produces suboptimal results.
Boards, therefore, should avoid the pitfalls of meddling in the managerial process because good managers demand (and deserve) operating autonomy. All other factors being equal the central proposition consistently adhered to by successful companies and their boards is “that managers be left to manage”. Setting policies, establishing performance benchmarks and monitoring results are board’s key functions.
Directors should contribute additional skills and independent perspectives, not operational effort nor day-to-day micro management. If board needs to micro manage it has already failed in one of its other key responsibilities – to assemble and support competent and trustworthy management team. Successful interaction between the board and management in micro-management regime becomes extremely difficult and more function of luck than the workings of an effective or sustainable governance framework.

Building from the top
Many of the past and present instances of corporate dysfunction and underper-formance are due as much to fundamental flaws in company’s corporate governance structure as to the inadequacies of the individuals charged with providing governance within the structure. No matter how much effort and how much time board or individual director may contribute, if the company’s corporate governance is fundamentally deficient then so will be the outcomes. New Zealand has many past and current examples of this but too few directors capable of identifying, let alone signalling, this – former Fonterra director, Mike Smith, being an exception that proves the rule.
Although establishing and maintaining the right balance and structure to achieve an effective and sustainable relationship between management and the board requires skill and constant vigilance, it isn’t impossible.
Characteristically, companies that achieve this have number of common qualities and bedrock values operating within robust and transparent governance structure. These are always understood, acknowledged and agreed to by boards and management. Each uses these as commitments and touchstones to guide their performance and conduct. They provide the basis for managing the relationship between executive and board and for discharging their duties to the company and its stakeholders.

Substance not form
An effective structure establishes strategic and operational objectives and encourages constructive and objective communication. Crucially it also facilitates and demands measurement and monitoring of performance in predefined and understood way. Importantly the structure also incorporates mechanisms and measures to identify and correct any corporate underperformance or managerial failure.
Formulation, implementation and execution of strategies along with achievement of constructive and meaningful communication are dependent on the personal qualities and skills of management. The board needs to contribute these same skills but from monitoring and supporting dimension rather than coal-face operational perspective. If these are present they should be built on and translated into operational results. Neither formulae nor prescriptive procedures can replace an effective and cohesive partnership of competent management and an effective board.

Performance measurement
What can be instituted as clearly defined and understood formulae and prescriptive procedures are the quantitative measures and control standards the board uses to assess and monitor corporate and management performance. These are ongoing scorecards and evaluation criteria that facilitate analysis, identify under or over performance and hopefully alert the board to any major operational discrepancies, financial or strategic direction requiring attention and rectification.
Strong financial reporting disciplines that produce high quality, timely, accurate and relevant management information are vital. These disciplines produce one of the board’s key decision-making tools – hard factual information and data. Without quality, accurate, timely and relevant information the board is placed in the same position as blind man piloting jumbo jet in fog.
Corporate history shows that the unique defining difference and competitive advantage that two of the world’s greatest wealth creators had was keen sense of financial control. The young John D Rockfeller in part beat all other oil operators in the early stages of building the Standard Oil empire because of the management information that he, as bookkeeper turned oilman, religiously kept and analysed. And as good Scotsman steel baron Andrew Carnegie observed “watch the costs and the profits will take care of themselves”. Sound financial controls and the value of appropriate management information is therefore not new management or value-creation concept. Yet it is interesting, but hardly surprising to note, that when the quality of information flowing from management to board and from board to external stakeholders is unsatisfactory so invariably is company’s ability to function effectively, create value and in some cases survive.

What really matters
Even if the information is satisfactory perhaps the final test of governance structure and its effectiveness lies less in the quality or amount of information provided to interested parties, and more in the ability of directors to interpret, analyse and judge the relevance of the information.
The value of the information may therefore be function of the ability of the user to act on it appropriately. Here the director should promote adequate investor communication, awareness and education strategies.
If this is achieved, the emphasis turns to the other stakeholders including regulators and professional bodies, the ratings agencies, the business media, brokers analysts, bankers and every investor and stakeholder to accept their own accountability.

For those wishing to consider further some of the issues raised, or comments made in this column Badger recommends the writings of George P Baker, Professor of Business Administration at Harvard Business School. Baker has written extensively on the topics of organisational economics and particularly the relationship between firm’s ownership structure and its management and performance. His recent book, co-authored with George David Smith of NYU’s Stern Business School, The New Financial Capitalists is both insightful and thought provoking. It may also promote reconsideration of the role of the LBO, firms such as the misunderstood Kravis Kohlberg & Roberts and the value of debt as governance and management tool. This column draws extensively from the book.

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