The chattering class has been very active of late, responding vociferously as case after case of corporate failure and misstep has come to light. Carillion plc and the venerable Institute of Directors (both UK), AMP (Australia) and Fletcher Building (New Zealand) are the latest examples that have resulted in consternation and angst.
That seemingly strong and enduring organisations continue fail (or have significant missteps) on a reasonably regular basis is a cause for much concern; the societal and economic consequences are not insignificant. Many commentators (primarily, but by no means exclusively, the media) have responded by berating company leaders (the board and management specifically), placing 'blame' squarely at their feet. This is a reasonable: ultimate responsibility for firm performance lies with the board after all.
Calls for tighter regulation and stiffer codes abound. Yet the geographical spread of these failures implies that local statutes probably aren't a significant contributory factor. The responses of the boards have been telling: some have circled the wagons (a demonstration of hubris?), others have cast out the chairman or chief executive (diverting blame elsewhere?), and some individuals have simply walked away.
At this point, it would be easy to join the chattering class; to stand on the margins and berate all and sundry. But let's not go there. Instead, let's try to identify repeated patterns of activity may have contributed to the situations, in search of learnings. Several things that stand out:
The role of the auditor: Most if not all of the firms mentioned above were attested by their respective auditors to have been operating satisfactorily. Yet they were not, clearly. Whether the auditors were in cahoots with management or the board, failing to discharge their duty to provide an accurate assessment or, even, inept remains to be seen. Regardless, something is amiss. To date, few commentators have called out the audit profession as being an accessory (Nigel Kendall is a notable exception).
Business knowledge: Remarkably few of the directors of the companies identified here seem to understand the business of the business they were governing. Many directors are recruited for their technical skills (notably, legal and accounting expertise), but few if any have any significant experience in the sector that the business operates in—research by McKinsey shows that one director in six possess such knowledge. How any board can make informed decisions when most of its directors do not understand the wider operating context well is perplexing—it would struggle to detect important though weak signals, much less understand the implications of them.
Board involvement in strategy: The boards of all of the firms identified here relied heavily on management to prepare strategy. Directors backed themselves to ask questions in response to proposals when they were presented. While most directors are capable and well-intentioned, such a heavy reliance on management is unwise. If the board is not involved in the development of strategy in some way, as many researchers and commentators recommend, the likelihood of the board understanding what it is being asked to approve and subsequently providing adequate steerage and guidance is low.
If boards are to learn from the failure cases noted here (amongst others), the first and, frankly, most pressing priority is to mitigate apparent weaknesses and focus on what matters. My research suggests that high levels of firm performance are contingent on several factors including:
- Ownership: The board is the apex decision-making authority in every company, meaning the board is responsible making the very biggest decisions. Consequently, if the board expects to have any influence over performance at all it needs to take responsibility—directly—for the big calls.
- Purpose: If performance is to be achieved and sustained over time, all contributors need to understand their role and why it is important. Sadly, many directors bypass the 'why': they do not understand (and, therefore, cannot describe) why the company exists (activity trumps reason, it seems). Even if they can, they often do not hold a single view. Agreement on why the company exists—its purpose—is crucial; it provides the touchstone against which all other decisions can be made and performance assessed.
- Strategy: Purpose alone is insufficient. Strategy is the course of action required to achieve the agreed purpose. While no one model (of strategy development) fits all situations, the board should roll its sleeves up and get involved in the formulation of strategy, together with management.
- Effective board practice: This is the biggie. Check this link, it paints the full picture.
Some commentators have suggested that the success of the board is entirely a matter of luck. I disagree. While outcomes are not guaranteed, my doctoral research and experience shows that boards can exert influence beyond the boardroom, including on firm performance, but only if they focus on 'the right things'. Unless and until boards start taking their responsibility for the performance for the company seriously the hope of much changing remains, sadly, dim.
