The action of turning the calendar to welcome a new year generally sees commentators spring into print, creating lists of trends, predictions and recommendations for their field of interest. This year has been no exception, with many contributions in the areas of boards, board practice and corporate governance including by the CEO of Diligent Corporation, EY, KPMG, the Institute of Directors and Martin Lipton, amongst others. Some of the suggestions are specific to a jurisdiction or an operating context and some, when read together, are contradictory. How should boards and directors decide what is important and how their time should be allocated? Which commentaries are most relevant, and what issues do boards need to pay closest attention to?
Rightly understood, the role of the board is to govern: to provide steerage and guidance to ensure desired company goals (purpose) are achieved (i.e., to practice corporate governance). The board needs to give its full attention to this demanding task, lest it become a cost centre—simply monitoring management—or, worse, subservient to management. The following suggestions provide a starting point for boards wishing to improve effectiveness in 2017:
The pursuit of value (embrace a performance orientation): The board of directors carries the ultimate responsibility for business performance. This is understood in law, but what of practice? When surveyed or interviewed, many directors say that business performance is a high priority of the board. However, a quick review of how boards actually spend their time reveals a slightly different story: most boards seem to be more concerned with compliance, monitoring and control activities—the avoidance of corporate and reputational risk. If the board is to fulfil its responsibilities well, it needs to become a source of value creation (cf. value protection or risk avoidance). This means allocating sufficient time to the consideration of corporate purpose and strategy, and ensuring that all strategic decisions are taken, explicitly, in the context of the agreed purpose and strategy. (This is not to say that performance monitoring should be ignored. Rather, boards need to ask management to report actual performance against agreed strategy and strategic priorities, so that the board can determine whether desired outcomes are being achieved or not. If the CEO's report is written in this way, the board can take it as read, rather than waste time interrogating each section.)
Understand and respond to the complex risk landscape: In recent years, many correspondents have encouraged boards and directors to become more savvy in specific risk areas. These have included climate change, cybersecurity and disruptive technologies, amongst others. While calls for specific expertise to be added to the board are not inappropriate per se, the more pressing challenge for boards in 2017 is to embrace an increasingly complex risk landscape holistically. Directors, collectively, need to be able to identify major risks to the business (i.e., the achievement of strategy and desired performance goals) on an on-going basis and, having understood them, make informed decisions to maximise the chance of achieving the agreed strategy and goals. This is not to ask directors to be experts on all emerging risks in a dynamic landscape. That is wasteful and, probably, futile. Boards need to stay focussed on the big picture—the determination and achievement of strategy. In so doing, boards should seek out experts (notice the plural) from outside the company (this is important, otherwise, the board risks being captured by management), to address the board directly and debate the likelihood and appropriate response options to emergent risks. This additional source of information should enhance both the board's consideration of strategic options and the quality of the strategic decisions that follow.
Accountability: Many companies have suffered at the hands of sanguine and, sometimes, fraudulent managers and ineffective boards (because they are not sufficiently engaged or informed) in the past. Sadly, more examples emerged in 2016 to suggest that some boards continue to flout their responsibilities: Wynyard Group and Wells Fargo being two of them. It is little wonder that 2016 saw further rises in shareholder activism. At the core, the problem is social; one of behaviour and expectation. If boards are to contribute effectively, to minimise the chance of corporate failure, one or both of two accountabilities—the board holding management to account and the board providing an account to shareholders—must be addressed. Directors are appointed by shareholders, and boards are responsible for both ensuring the on-going performance of the company they are charged with governing and providing an account to shareholders. While a strategic mindset is crucial (the value creation imperative), the underlying attribute needs to be one of service: the board and management working harmoniously together, as a team in service of the company.
These suggestions are offered for the consideration of boards seeking to make effective contributions in 2017 and beyond. While this short list is neither exhaustive nor intended to replace any other list, it may provide a useful basis for debate at a board meeting. The three suggestions—drawn from personal observations of boards in action, interactions with directors and readings—seek to establish an overall context to assist boards consider emerging trends and strategic opportunities, and so govern effectively in an increasingly complex world. If you would like to discuss the applicability of these suggestions to your situation, please get in touch.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.