Boards around the world are struggling to redesign themselves and their relationships both within and outside corporations. They are also struggling with the changing expectations of management, shareholders and other stakeholders concerning directors’ contributions to, and involvement in, the company’s strategic affairs.
Most specifically, how is it possible to create an appropriate balance between control (monitoring) and collaboration (mentoring) approaches in board-management relationships? The former protects corporation from self-serving behaviour and, as result, reduces goal conflict. The latter encourages cooperation between board and management, thus fostering trust and goal alignment. Accepting, understanding and managing control-collaboration tensions all promote learning and improve governance.
The key aspect to improving governance is testing and building trust at various levels. This is primarily trust in management and each other, but also includes trust in commitment to the company, trust in competency to advise, and trust in caring about the welfare of the company, as well as management. While these aspects may seem obvious, many boards are ineffective simply because they are deficient in one or more of these kinds of trust.
Boards which have successfully resolved the monitoring-
mentoring paradox do this by developing trust-based relationship with their managers. For example, the pattern of board-management relationships in company I studied recently reflects balance between monitoring and mentoring efforts. The board and executive management are functioning as cohesive group. Every issue is well studied and discussed, and conflict is acceptable behaviour. The board works closely with management at various stages of the strategy-making process, but the final decision resides with the board. Consequently, the directors are more comfortable providing honest feedback, and the managers are less defensive about any negative feedback.
The importance of considering the whole management team in the development of trusting and open relationships in governance practice is particularly crucial. The board should be able to communicate with all top-level managers, not just the CEO or CFO. The role of CEO is ultimately important in enabling and nurturing this communication.
Managers’ presence at board meetings and involvement in reporting and discussing various issues with board members encourages the development of trust and increases the credibility of the directors. The board should periodically revisit this issue internally and with each board member individually. It should identify and remove impediments to developing trust.
Two aspects that help develop trust are board involvement and board knowledge. Boards need to ensure the involvement of board members internally. This is critical for building collaborative team rather than pockets of individuals. Involvement could be both in and outside the boardroom, as in meeting key customers. Without it, boards are likely to become fragmented and unproductive. very important part of this involvement is the visibility of the board to various stakeholders, including employee groups, in formal and informal settings.
In addition, board members must be knowledgeable about their corporation and its context. The board needs to develop conceptual understanding of core competencies of the corporation (including its core technologies) and understand how these competencies translate into corporate strategies, as well as how strategies deliver financial outcomes. In other words, the board’s knowledge must have as much of conceptual basis as an operational one. Thus, at the process level, boards must focus on knowledge assimilation and diffusion.
Governing corporation is an essentially cerebral activity and these knowledge systems should be used to develop common understanding of the corporation’s value-adding engine. This will lead to an engaged and collaborative board and provide better basis for monitoring in the board. Of course, boards must have multiple knowledge bases, incorporating both internal and external sources of information.
Finally, to close the loop on the governance process, an annual or biannual performance appraisal of board members is critical. Formal performance appraisal sensitises the need for accountability of individual board members.
Where both directors and managers invest significant efforts in developing their working relationships in terms of knowledge and involvement, the monitoring-mentoring tensions can be effectively worked out. Where this is not the case, the resulting mismatch and friction can compromise even the monitoring function. As suggested, internal ‘education’ of directors, their commitment to learn, and their regular exposure to various stakeholders can improve the process of knowledge acquisition, lessen competence gaps, and actively promote trust between directors and managers.
By Ljiljana Erakovic, senior lecturer at The University of Auckland Business School.
