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    Is a functional board of directors always necessary?

    Governance Leadership Performance
    This muse is the second in an occasional series: to ask some potentially provocative questions about the prevailing assumptions that surround boards and corporate governance. (The case for diversity was the first.)​
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    The concept of a board of directors, and the practice of (typically absentee) company owners nominating representatives to look after their interests is not new. Indeed, the motivation for the concept—to protect and represent owners when ownership and control were separated—is well over a century old. However, an underlying assumption has developed alongside the core motivation, whereby a functional board (i.e., one meeting regularly and conducting 'corporate governance') is considered to be necessary if company is to grow and develop. Many consultants have successfully traded on this assumption in recent years; making a lot of money helping owners set up boards and governance practices—even though many of the boards and related practices they helped establish add little except cost.
    The statutes of most Western countries require companies to have at least two directors (although only one is needed in New Zealand). A collective of directors is called a board. A board is a necessary requirement. But what of the practices of corporate governance? What if the owners work in the business on a day-to-day business? Is the formality of board meetings, reporting and and associated practices—and the administrative overhead—actually required? What value does it add? Is a functional board of directors always needed, let alone desirable?
    When no separation exists between ownership and control, the underlying basis for formalised governance practices is not apparent: the shareholder (the owner, if you will) is directly present making decisions. Some of the tasks often associated with the board (setting direction, making major decisions, fiduciary responsibilities) are still required for sure, but these activities can readily be undertaken by the owner-manager. If an owner works directly in the business they own, and if they seek out experts (lawyers, accountants, industry experts, coaches, strategists, et cetera) for advice, what additional value is to be gained from adding the rigour of a formal governance framework? Would it not make more sense to limit the (formal) practices of corporate governance to those companies with absentee owners, and to those with aspirational owners who want share the decision-making risk?
    Please note that this is not an argument against boards for all smaller businesses. If the entity is a company, a board is required. It is the formal practice of corporate governance that may not be. ​
    I recently had the privilege of leading a strategy development session with the owner of a large logistics company. His motivation was straightforward: to establish a functional board to secure some additional expertise and to share the decision-making 'burden'. We had a great time together as we worked through the issues. To see the eyes open and pennies drop as the owner, a couple of his team and two outside advisors began to realise what might be possible with a functional board in place was a delight.
    Contrast that experience with another recent discussion. The two owners of a successful and profitable business approached me for some advice after they were told "you need a board" by a consultant (whose business is to set up boards). They could not see the benefit of establishing a formal corporate governance framework given their aspirations. (Their stated intention was to continue to work in the business for the foreseeable future.) After discussion, I suggested they consider the option of surrounding themselves with expert advisors that they call on from time to time instead. ​
    So, where does this leave us? We need to get our thinking straight: to understand when a functional board (i.e., one undertaking the practices of corporate governance) is necessary, when one is helpful, and when one is, quite frankly, a burden. Otherwise, we run the very real risk of treating the whole world as it it were a nail on the basis that we have a hammer in our hand. All that will do is squash some very capable owners under a burden of cost and compliance: a burden that they don't really need.
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    What is "corporate governance culture", and how is it relevant?

    Governance Leadership Performance Strategy
    Ah, culture, an oft misunderstood and sometimes misrepresented word. In the last few decades, a lot has been said about culture in business. Drucker's comment, that culture eats strategy for breakfast, is widely quoted. Given the importance of strategy to the achievement of objectives, culture must be really important! 

    Many of us know about culture, but what is it? You might like to read what others think culture is before you read on, because I have just come across a rather troubling variation: corporate governance culture. Yes, that's right. Corporate governance culture. It's mentioned here. Craft makes some good points in his article, but this term seems to imply that boards have their own culture, which leaves open the possibility that the rest of the company has a different one. That doesn't sound right.

    Craft suggests that the vital relationship between culture, strategy and performance is at the heart of good governance. We nearly agree. I suggest that the vital relationship between culture, strategy and boards is at the heart of effective performance. Same elements—different arrangement. But then Craft moves on, and in so doing he loses me:
    The only way in which a company is able to ensure that it is delivering the right type of business growth is through performance analysis and appraisal.
    Really? Performance analysis and appraisal are both rearward facing activities. How does looking backward only ("the only way...") help if you want to go forward? Bob Garratt's book, The Fish Rots from the Head, tells us most of what we need to know. Culture starts at the top, in the boardroom, and it pervades outwards from there. If boards expect to influence the achievement of company performance outcomes, they need to engender a company-wide culture and wrestle directly with strategy (which is "the art of command" after all). So, let's leave cute terms like "corporate governance culture" where they belong—on the cutting room floor.
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    Boards: talking with shareholders is not optional

    Governance Leadership Management Performance Readings
    I've been on vacation this week, in Perth, Western Australia, with my wife. One of the things that we enjoy while away is to read newspapers that we wouldn't normally see at home, especially the local newspaper. This routine gives us a different perspective on what's going on in the world at large, which serves to broaden our horizons. I try to get my hands on a print copy of the The Australian when in Australia, and often read online versions of the New York Times and The Times as well. 

    The commentary pieces and investigative articles published in major newspapers are often quite thought-provoking—particularly when one is relaxing over a coffee and a muesli breakfast. For example, this article, published in the New York Times today, caught my eye. It highlights the difficulties that investors are having in talking with the boards of the companies they own (or, more correctly, part-own). I was stunned. Why would any director who is serious about their contribution not talk to the people to whom they are responsible and accountable? It smacks of hubris. More importantly, what can be done to remedy this problem?
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    Boards and performance: Just how far have we come in 15 years?

    Governance Leadership Performance
    I was fascinated to read this post on CorpGov.net today. James McRitchie looks back at corporate governance, boards and company performance outcomes over the last 15 years. His summary provides some great insights into how far we have travelled as directors, researchers and consultants. Unsurprisingly, some contemporary topics were not discussed to any great extent in the past: diversity, technology and strategy, for example. Sadly, many of the issues that pressed in on boards in the past are still alive and well today. These include fraud, compliance, reputation, shareholder issues, and a propensity to look backwards, amongst others.

    So, how far have we actually come in 15 years? We have travelled some distance for sure, but not as far as many of us would like to think, I suspect. The compliance requirements today are greater than in the past. Directors seem to have a greater awareness of their responsibilities and commitment to their work now. However, many directors and boards are still grasping at straws—protecting their reputations, focussing on compliance, keeping management honest—rather than looking forward, to the things that actually make a difference to performance and wealth creation. Clearly, corporate governance remains a work in progress.

    What will boards and corporate governance look like in 15 years time? Who knows. However, if we can work out how boards influence performance and if we can work out how to motivate directors to concentrate on the things that matter, then there's a chance that value-creating boards might even become commonplace. Is that worth striving for?
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    If the CEO sets the vision, what value does the board add?

    Governance Leadership Performance Strategy
    Over the last three years, I have been banging a drum: that boards of directors need to lift their game. They need to get serious about their contribution to company success. Boards hold the delegated responsibility for the overall performance of the company, in accordance with the wishes of the shareholders. Therefore, important tasks of the board would appear to include setting vision (having understood the shareholders' wishes); determining strategy; and, oversight of management to ensure that the strategy is implemented effectively. Increasingly, directors are starting to think along these lines. For example, most of the delegates on each Institute of Directors Company Directors Course that I facilitate say that the board needs to set the vision and be involved in the setting of company strategy. However, when I watch boards in action, those that spend quality time on vision and strategy seem to be in the minority.

    A case in point is Microsoft. I was interested to read that Satya Nadella, the recently appointed CEO, has shared his first vision—an outline of Microsoft's direction under his leadership. His comments provide some early signals of where Microsoft wishes to head. Such guidance is helpful for staff, customers and investors. However, the article ascribes ownership of the vision to Nadella. There is no reference to the board, which is odd because the research suggests that there is a link between boards that set vision and get involved in the strategy development process, and improved company performance outcomes. This begs a rather obvious question: If Nadella and his managers are setting vision and strategy, what role is the Microsoft board performing (apart from adding cost)? Microsoft has a long and proud history of innovation, yet the very group charged with realising the wishes of the shareholders—the board—appears to be silent and adding no value. Could this be the case? I hope my assessment is wrong.
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    Mixed-sex boards are better. Yes, but why?

    Governance Leadership Performance Research
    Another research report on the topic of women on boards has just been published. This one was completed by Prof. Judith Zaichkowsky of Simon Fraser University in Canada. You can read the full report in the June 2014 issue of International Journal of Business Governance and Ethics (*), or read the headline findings here. Amongst other findings, Zaichkowsky found the boards with even one woman rated more highly than those with no female directors. This confirms a trend that was first noticed a decade or so ago.

    The most interesting part of the report for me was the means by which it was conducted and the scope of the findings. The study was based on the statistical analysis of a number of variables of interest. I don't doubt the validity of the results. However, the thing to keep in mind with statistical analyses is that they can only show, at best, correlations—which is exactly what Zaichkowsky achieved.

    Knowing that mixed-sex boards can and often do have higher corporate governance ratings is helpful. However, there is an elephant in the room. The killer question is to understand why mixed-sex boards rate more highly, so that other boards can learn and apply the knowledge to their own situation. I doubt the answer has much to do with gender per se. Women do something different in the boardroom or they bring something different to the discussion, I suspect. That different thing appears to be valuable, so I would love to know what it is!

    My suggestion to researchers thinking about tackling the "why" question is to get inside some boardrooms and observe what actually happens. That's what I did for my research (to explain how boards can influence performance outcomes). If you'd like to discuss how to achieve this, please contact me, I'd be very happy to exchange ideas, and to outline about how I went about the challenge of gaining access.

    (*) The original article is available from the IJBGE website, for a fee.