An Indian MC speaking at a luncheon meeting in India on the topic “The Director’s life” said mention the phrase ‘board of directors’ to the average investor, and they are likely to conjure up images of nicely dressed men and women seated around a teak table, smiling congenially and attending the odd board meeting.
This is entirely understandable; many annual reports prominently feature glossy photographs of just such scenes. Then, he said, ask the investor to describe the primary responsibility of the board of directors and very few will be able to give you a definitive answer. At the core of corporate governance, of course, is the role of the board in overseeing how management serves the short term and long-term interests of shareholders and other stakeholders. Therefore, a board’s role he argued is to enhance shareholder value and the long-term financial performance. It agrees strategy and assesses its effectiveness by, for example ensuring that company operations are in line with strategy; and monitoring financial and key executive performance. Then some other matters are delegated to committees like the audit committee ( to monitor financial reporting and internal controls), the nominations committee ( to monitor directors performance and board appointments), the remuneration committee (to approve executive remuneration and incentive arrangements) and corporate/strategy/risk and social responsibility committees are becoming increasingly common.
Right Balance
This, he argued, underscores the need to have a mixture of the right mix of talent on a board i.e. age, education, skills and varying experience. Therefore, he argued, if seat-warmers on a board were re-elected unanimously, that means the entire board voted for them too and to endure an ineffective or otherwise dysfunctional fellow director in a public listed company is a recipe for disaster. However, he said, this is not to slam boards. As a whole, they add real value.
Nevertheless, boards frequently tolerate troublesome performance from one or two of their members; it is simply too time-consuming or impolite to eradicate. In addition, that, unfortunately, is why too many board directors do not make the full contribution they could, and should. Then some directors in listed companies in India, he said, are too busy with their own companies, other directorships or their lives in general to care about a particular board.
He observed that some directors do not have the passion to work up any interest. Still others lie low for job security. In most Asian markets, the speaker observed, prestige is often the reward. As a result, many do not wish to challenge or probe data given at meetings. Nor do they venture out into the field to check the pulse of the company, checking to make sure that what they are hearing in the boardroom about values and strategy matches what employees are feeling and saying. Further, he observed, some directors lack courage-a key characteristic of any good board member. With every public or private challenge, they pollute the boardroom by hyperventilating for a settlement, even if it means selling out on principle just to get out of the crosshairs.
Sure, a board must settle a dispute on occasion, but never before seeing the organization through a thoughtful discovery of the facts. Such a process creates a culture of trust between management and the board, and it is only in such an environment that risks can/will be taken. Responding to a question from a chairman of a manufacturing outfit about the basic hygiene skills, a director needs to have to become an effective board member and whether some boards have its own powerful Non Executive Director committee within the board to take key decisions. The speaker observed a director should be an expert or a generalist’s, be commercially savvy, credible, willing to commit time and have the courage to take those tough and unpopular decisions.
In conclusion he said directors must focus on the big picture issues like CEO succession and strategy, meeting with the high-potential talent and discussing industry dynamics, without getting caught up in all operations details, because board members are there for their special expertise, wisdom, sound counsel and judgment, not for the day-to-day running of the business. In the final analysis, as a board member, it is easier, he argued to let a couple of benchwarmers stand around until retirement and to tolerate a few disruptions for the sake of peace, but the problem is, companies that use public money to run their operations and make money-selling products to the public need to be much more responsible, accessible and be accountable to the public than ever before.
Therefore, all those listed companies need to get their management firstly, to understand the anticipated performance of the company and secondly ensure the company is on track, because no one can keep a Board on its best behaviour but the Board itself. In fact, Professor Sonnenfeld in an article in the Harvard Business Review “What makes great boards great”, identified four characteristics of successful boards. Firstly, they operate in a climate of trust, based on timely access to relevant information and people, without meddling in day to day operations. Secondly, they foster informed dissent and discourage silent board members.
Thirdly they don’t typecast board members.
You need “big picture” individuals who have the technical capacity to probe individual businesses and products. Fourthly, they ensure individual accountability and evaluate performance of directors as rigorously as is done for top management. There may be lessons here for Sri Lankan companies. |
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