When mergers, divestitures, consoli-
dations, strategic alliances and joint ventures make front-page news daily, every company must be prepared to make major changes often at short notice.
And it means the board needs to be well informed about the right issues at all times.
An uninformed board will either do too little or too much.
“They’ll either defer too much to management or they’ll fail to support the CEO in major strategic shifts, even when such action means survival of the company,” says Ram Charan in Boards at Work.
“The key is the flow of information between management and the board.” For many, opening the flow of information to the board is psychologically charged, he adds.
“Many CEOs fear the board will micro-manage. Especially when it comes to actions they are proposing but haven’t yet taken, they fear the board will second guess their decisions or recommendations or act precipitously.
“This fear comes from the inherent tension in the board’s role.
“While the board wants to help the CEO, every chief executive is keenly aware that the board ultimately can fire him or her.”
The board is essentially saying, “I want to be your helper, mentor and coach and I therefore want the discussions to be honest, open and focused on objectives. But I am also judge of your performance, which creates an implicit threat over your head.”
The board’s contribution is too great to miss. “The so-called mushroom effect of keeping the board in the dark is losing proposition,” says Charan.
CEO tactics
1. CEOs who do good job of informing their boards provide an overview of the important issues and trends in the external environment and update it continually.
2. They give directors as much direct contact with managers as those directors need to get feel for the company’s internal resources.
3. They make sure information flows both ways by being receptive to the board’s input and responsive to the board’s questions.
Boards improve the flow by:
1. Insisting on getting the information they need.
2. Investing the time to learn about key industry trends no matter how fast-changing or complex.
3. Becoming intellectually engaged in the toughest issues management faces.
4. Being in the game, all the while mindful of the distinction between governing and managing business.
Beware of “happy talk”
“Many boards receive only perfunctory information — historical financial results, decisions management has already made,” says Charan.
Other defensive means of informing the board include the “kitchen-sink method” or “happy talk”.
This is where CEO inundates the board with detailed reports designed to obscure the important issues and provide built-in defence about what was in that report, or they present only the good news.
Doing your homework
“Directors shouldn’t only ask about events or facts they don’t fully understand but also take the initiative to do some tracking of their own,” says Charan.
This includes subscribing to trade magazines, and visiting the Internet once in while.
Asking questions about particular topic has real impact says Charan. “I recall when regularly someone asked about quality results. There was ripple effect — all of sudden people at the management level were asking about consumer reports and quality standards and it became sort of side agenda. From there quality moved up in status to become more central theme on the agenda.”
The way around nit-picking
Nearly every CEO whose board works well admits to having wondered “what if I’m sharing too much information with these people”, says Charan.
But an important lesson has emerged from effective boards he adds. “Micro-managing rarely occurs if information is clear and meaningful.
“Providing information that’s relevant to the company’s most pressing issues, can help keep the board focused and energised. The important thing is to focus on where the strategy is going, not necessarily on the day-to-day tactical items.
Minnows or whales
As rule, directors want to focus on the big picture. Many take the line “don’t bring the minnows, bring the whales”, says Charan.
“A sharp focus on the company’s most important issues is the single most effective way to keep director interested.”
Boards that work have open access to wide range of information about the company and industry. That doesn’t mean they have to know everything. In fact, immersing them in all numbers and details would only add another layer of management. Boards must focus on the big picture. They should have complete mental picture of the company strategy, the context for that strategy and the organisation’s capabilities to achieve it.
Bring in the managers
Whether or not they say so, boards generally want to get to know managers below the level of the CEO’s direct reports.
They often want their questions answered by the people on the line and to get feel for the overall competence of the management team. Charan suggests inviting managers to board meetings and including them in golf outings, lunch or dinner before or after meetings.
He says some have even had retreats with the board and heads of various business units — where each gets the opportunity to understand what drives the business and how managers think they can do it better.
“Giving managers this kind of exposure to the board also gives both levels respect for the other’s goals.”
