“We all owe the shareholder activists, accountants, lawyers, and analysts who study corporate governance a debt: In the 1980s and 1990s, they alerted us to the importance of independent directors, audit committees, ethical guidelines, and other structural elements that can help ensure that a corporate board does its job. Without a doubt, these good-governance guidelines have helped companies avoid problems, big and small. But they’re not the whole story or even the longest chapter in the story. If a board is to truly fulfil its mission—to monitor performance, advise the CEO, and provide connections with a broader world—it must become a robust team—one whose members know how to ferret out the truth, challenge one another, and even have a good fight now and then.” Jeffery Sonnenfied, Yale School of Management.
In reviewing the high-profile governance failures in the recent past, typical questions that arise include the following – were Directors asleep at the wheel? Were they in cahoots with corrupt management teams? Simply incompetent? Negligent? Clearly, we cannot establish a broad pattern of incompetence or corruption. The Boards of those companies followed most of the accepted standards for board operations – members showed up for meetings, Directors had lots of personal money invested in the enterprise (so there was sufficient ownership alignment), many had the appropriate Board Committees, most Directors had financial competence, Codes of Ethics were in place, the Boards weren’t too small, too large, too old, or too young and many had independent Directors as prescribed by the Codes.
It will then appear that following good-governance regulatory recipes doesn’t produce good Boards. The most involved, diligent, value-adding Boards may or may not follow every recommendation in the good-governance handbook. What distinguishes exemplary Boards is that they are robust, effective social systems. Drawing on individual Directors’ collective experience, insights and intellect, Boards operating as high-performance teams, can partner with Management in an environment of constructive contention to produce better decisions and run the company more effectively than it would if left to its own devices.
The nagging question then is – can the Board function as a team given that it meets infrequently and consists of a group of powerful people accustomed to leading their own teams? How can the Board transform from a “ritualistic appendage” to a real team?
It has been suggested (Nadler, Behan & Nadler – Building Better Boards) that the value adding Board should answer these three challenges: (a)How do you create a Board that is truly effective – one that not only meets the minimum legal obligations but also becomes a source of added value to the company? (b)How do you design the work of the Board so that it achieves an appropriate level of engagement without overstepping its proper role, which is to ensure that the company is managed effectively rather than manage the company? and (c) How do you build an effective relationship between the Board and the CEO, one that empowers the Board without hampering the CEO’s ability to lead?
According to Jefferry Sonnefeld (Harvard Business Review), the first step is to create a climate of respect, trust and candor. It is imperative that the CEO provides timely and accurate reports to Directors as well as share difficult information openly. He/she should also give Directors access to members of the Management team who can answer questions, thus obviating the need for Directors to develop back channels to line Managers. The atmosphere of trust can also be broken where the CEO sees the Board as an obstacle to be managed, encourages factions to develop, and then plays them against one another. The Chairman can break such factions by assigning members to different Board Committees.
Breach of confidentiality can also affect trust and candor on the Board. It is imperative that the boardroom gives Directors the assurance of an atmosphere of candor and free expression. The fabric of trust that such an atmosphere engenders, may be damaged irrevocably when sensitive deliberations are disclosed.
The Board should strive to foster a culture of open dissent. Respect and trust do not imply endless affability or absence of disagreement which inevitably manifests as groupthink. They imply bonds among Board members that are strong enough to withstand clashing viewpoints and challenging questions. Directors should understand that dissent is not the same thing as disloyalty and the Chairman should probe silent Board members for their opinions, and ask them to justify their positions.
Individual accountability tends to dissolve in large groups. Thus, conscious effort should be made to give Directors tasks that require them to inform the rest of the Board about strategic and operational issues the company faces. This may involve collecting external data, meeting with customers, anonymously visiting branches, and cultivating links to outside parties critical to the company.
The final step is to periodically evaluate the Board’s performance. Lack of feedback is self-destructive – organizational learning experts agree that people and organizations cannot learn without feedback. No matter how good a Board is, it is bound to get better if it’s performance is reviewed intelligently. The review will amongst other objectives examine Directors’ confidence in the integrity of the enterprise, quality of the discussions at Board meetings, credibility of reports, level of interpersonal cohesion and the degree of knowledge and skills.