Redesign your board to suit your company’s strategic circumstances
The new management series by Sunny Bindra continues. This week: Part 2 of an article on corporate governance arguing that in redesigning the board of directors, we need to throw tradition out of the window.
The traditional board of directors has had its day. The original concept was elegantly simple and eminently successful. It belonged to an era where a group of wise men could take an occasional and, of necessity, superficial interest in a business and still guide its development. It was conceived at a time when managers could be trusted to align their decision-making with the interests of shareholders. It was nurtured during an age in which the incentives to commit fraud and larceny were not as huge as they are today. And it saw its golden years during the time of predictable change and stable profits.
Today, the need for change is recognised across the world. But the recommendations for reform appear to believe that the basic idea is fine; all that is needed is a layer of good conduct enforced by codes of behaviour. Reform also focuses on putting in more and more ‘independent’ directors on the board – those who have no material interest in the company other than the directorship, and who can therefore be trusted to exercise independent judgement. Laws are coming into place in many countries to ensure that better behaviour is not just left to voluntary mechanisms.
To understand why these reforms are not enough, we need to take a look at the fundamental functions of the board of directors. Governance expert Bob Tricker thinks there are two types of role involved in ‘directing’. The first concerns providing supervision of executives and ensuring accountability to shareholders – conformance. The second is about setting strategic direction and policymaking – performance.
Most of the reforms being suggested across the world are focused on the conformance part of the spectrum. The reforms are driven by the worrying ease with which executives seem willing to play games with shareholders’ assets, as well as by the numerous scandals involving outright theft of shareholders’ funds. That is all well and good, and there is no doubt that executive excess must reigned in. But it still leaves us with a basic question: who’s worrying about the performance side of the equation?
Independence comes at a cost. If directors have no other relationship with the company, one thing is certain: they’ll have a lot to learn about the business, its customers and the strategic forces at play in its industry. Their role as watchdogs may be strengthened, but their role in providing strategic guidance is invariably weaker. Independent directors have other demands on their time. How much time can they devote to understanding the strategic complexities of any one company?
Two specialists, Prof. Jay Lorsch of Harvard Business School, and Colin Carter of Boston Consulting Group, propose a radical new agenda. They are convinced that all boards face different circumstances – in terms of company complexity and strategic situation. It therefore makes no sense to assume that each board must be structured in the same way, follow the same processes or undertake the same activities. One size and shape does not fit all.
Once we shed the assumption of board homogeneity, life becomes interesting. Boards can start looking at the specific situation of their company, and explicitly choose the role that they must play and the value that they must provide. They can purposefully choose where the balance lies between the ‘watchdog’ and ‘pilot’ roles in their particular board – or for particular directors. In creating a bespoke board, directors have three variables to play with: structure, composition and processes.
Let’s look at structure first. How large should the board be? How many independent directors, how many executives? How many committees? The answer lies in the particular circumstances of the company, not in habit or tradition. We must learn to emphasise the idea of expertise in the board, just as we do in management. A board needs as many directors as are necessary to provide the mix of skills needed to guide the company – and no more. A blend of legal, financial and strategic skills will be needed in most cases – but the precise mix must vary from company to company.
A large, established cement producer in Kenya, for example, can function with a fairly traditional structure that focuses on checks and balances; a small, fast-growing start-up media production company in Tanzania, looking to provide digital content to the region and facing erratic demand and unpredictable competition, would look to having a smaller team of directors contributing to the ‘pilot’ role in the company rather than emphasising their ‘watchdog’ side.
Let’s move to board composition – calibre and abilities. How does a company assemble the right team in the board? Deadwood persists in boards. There is a convention of tolerating under-performing peers in the best tradition of gentlemanly conduct. In today’s companies this tradition can prove very expensive. All boards must meet certain challenges: widening the talent pool to include younger and less conventional executives; raising the performance bar and setting exacting standards; and providing a formal education and induction process for new directors.
Our Tanzanian media production house, for example, will need to understand its buyers very well, and could well benefit from having a director with senior experience in leading broadcasters. It may face regulatory hurdles, and could usefully include a legal specialist or former civil servant with regulatory skills. It may find that its key markets are likely to be in Kenya or South Africa – and will need to have directors who understand the peculiarities of those countries’ media markets very well. Finally it must identify the major risks facing its business – and identify a director who can mitigate those. Assembling a board of directors, in short, should be little different from composing a management team.
The third area of board design concerns the processes through which the board receives information and does its work. The traditional model of infrequent meetings following a rigid agenda and ploughing through selective information provided by management must go out of the window. Too many directors see the company only from the boardroom window- a highly limited perspective. Tomorrow’s boards must take advantage of the new developments in application systems to access company intranets, independently and electronically, where they will find that rich information can be assembled at the touch of a button. Information gathering must stop being a hide-and-seek game with management.
The number and variety of board meetings should, again, depend on the nature of the company and its circumstances. Our media start-up, facing a frenetic growth phase, will require much more time input by directors, who should be selected on their ability and willingness to provide this time. They will also need to be rewarded accordingly. Three months is a long time in the life of an e-business venture. The market battle can be won or lost between quarterly board meetings.
Directors also, crucially, need to be moved outside the boardroom. Currently, hardly any directors I have come across spend any meaningful time visiting activity centres or key customers, conversing with junior employees, or meeting industry experts – until a crisis hits. It is indeed true that management must be left to managers, and an over-zealous board can do more harm than good. But it is equally true that ex-boardroom activities like these can provide the deeper, more nuanced information that is invaluable to the truly effective director.
Lastly, there are two key processes that are very much in the remit of boards of directors: strategy setting and executive compensation. Boards must be very active participants in these processes. They must bring their wider experience base and ‘birds-eye’ view to strategy, and their independence of outlook to the thorny question of compensation. They must participate fully in strategy formulation, not just shoot down proposals at meetings. They must recognise that strategy is an ongoing process, not something done solely at annual retreats in Mombasa.
In these turbulent times, asking a group of part-timers to spend very limited time together, yet do enough to understand the business deeply and protect shareholders against disasters is, as The Economist put it recently, the job from hell. Yet it need not be. If companies rethink from first principles and break away from the assumptions that bind them, they will find that the matter can be addressed intelligently. Boards can be tailor-made to perform the duties most important to their companies.
What will the reinvented board look like? It will have defined the correct (and unique) balance between its conformance and performance roles. It will have as many directors as it needs, full stop. It will contain the blend of skills that suits its current strategic needs. It will be a dynamic animal, one that changes its size, shape and features at different times in its life span and in response to changes in its environment. It will have access to a wide range of real-time information, not be spoon-fed by management.
A modern board, like a modern business, will also have embraced the idea of outsourcing – that no one corporation can keep all the skill-sets it needs in-house. Many local companies, rather than recruiting new directors and constructing unwieldy boards, now appoint specialist advisors to technical committees. This introduces greater flexibility and ensures access to the best available expertise.
In short, whilst the fundamentals of board architecture may remain the same, the style and substance of boards will change radically. The high-performance board of the future will focus on making the best use of scarce time to build the deepest possible knowledge of the company. To achieve this, all the parameters – size, shape, composition and processes – will be up for redesign.
History and tradition need no longer shackle the best East African companies. Getting there from here is not difficult. All that is needed is a healthy dose of imagination.
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