The annual deluge of articles summarising on the year gone and predicting (promoting?) future priorities is in full swing. Examples include diversity surveys, lists of board priorities and cybersecurity predictions, amongst many others. While these articles make interesting reading, most of the 'predictor' ones should be taken with a grain of salt; the summaries of past practice and current thinking are more helpful.
The recently published PwC Annual Corporate Directors Survey (2017 edition) is an example of the former. It offers helpful insights about what US-based directors of large companies currently think about various board and corporate governance matters. The survey results suggest that levels of awareness amongst directors—in relation to gender diversity on boards, working relationships (both between directors and with shareholders), accountability and alignment in particular—are increasing. That the trend line is moving upwards and to the right is good news. However, demonstrable progress, in the form of better business outcomes remains resolutely elusive. This begs a rather awkward question: Why?
One possibility is that boards are spending precious time on the 'wrong' things. Little if any focus on company performance and strategy is apparent in PwC analysis; the inherent implication being that those surveyed assign responsibility for strategy to management. What's worse, a significant percentage of directors accept what is put in front of them. Critical assessment and vigorous debate is rare.
The PwC results cast a dark pall over the performance of US-based directors and boards. They suggest that many have lost sight of their statutory obligation, which is that responsibility for company performance lies with them. This assessment is consistent with first-hand observations of boards in action, including my own, which reveal that the dominant focus of many boards is compliance (monitoring historical performance and checking regulatory requirements are satisfied). The protection of professional and personal reputation is a very powerful motivation for many directors, more so than ensuring the performance of the company it seems.
If boards are to become more effective in fulfilling their value-creation mandate, directors need to hold tight to their core responsibility and concentrate on what actually matters—which is to govern in accordance with prescribed duties, and with the long-term purpose and performance of the company to the fore. Necessarily, effective steerage and guidance requires the board to be discerning and committed to the task, using reliable governance practices in pursuit of better outcomes, lest they be diverted by spurious (and often discordant) recommendations that appeal to symptoms or populist ideals. How might this be achieved?
Returning to first principles, one option is to re-conceptualise corporate governance; as a multi-faceted mechanism that is activated by competent, functional boards. The mechanism itself is straightforward: an integrative assembly comprised of strategic management tasks (the board's responsibility to influence the performance of the business places it at the epicentre of strategic decision-making and accountability), relationships (with the executive, shareholders and legitimate stakeholders) and five behavioural characteristics of directors (details). The harmonious exercise of the five behavioural characteristics in particular provides a platform for motivated directors to interact well, and for the board to make forward looking, informed, strategically-relevant decisions in a timely manner.
A mechanism-based understanding of corporate governance provides an alternative pathway to achieve more effective outcomes from those promoted by conventional wisdom. Specifically, it provides a framework to focus the board's attention on what actually matters; outlining the tasks, interactions and behavioural characteristics that are conducive to effective contributions. Significantly, those aspects of corporate governance orthodoxy that have demonstrably failed to have a beneficial impact are challenged. For example, board structure and composition recommendations are set to one side, as well as any notional separation between the board and management; an uncomfortable consequence for some.
If you would like to know more, including how to deploy such a proposal in practice, please get in touch.
Thoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention.