That issue, again? How to distinguish the Board’s role from that of Management is a debate ‘so old that it shines’. Didn’t we resolve that dilemma years ago? True, but how Boards behave today is increasingly diverging from what they say they believe. The upside is tempting, but managing the risks takes high skill.
“Though there is no fixed line between wrong and right, there are roughly zones whose laws must be obeyed” [Robert Frost]
Ever since public Boards began to pursue greater independence, they feared the risk of crossing into Management territory. The classic solution, applied in all ‘ordinary’ times, is still popular:
- Boards should a) select, pay and scrutinize their CEOs and oversee their future succession; b) approve, then monitor the strategy proposed by Management; and c) constantly probe to ensure that all operations, financial reports, and control systems satisfy high standards of performance and integrity
- Managements should do, or take the lead on, everything else
Most agree that only when: a company is in crisis; Boards lose trust in the CEO; or Management has a conflict should Boards expand their scope. These ‘zones’ yield many core benefits by:
- Assigning distinctive roles to those best equipped to fulfill them. Directors offer vital oversight and useful external viewpoints, but only Management brings the insider’s knowledge and full-time capacity to organize, plan and operate a business
- Mandating Boards to speak for the interests of owners and other stakeholders. Managements are the ‘agents’ of shareholders, yet their interests do not always coincide. The separate roles given to each party owe much to that crucial distinction
- Requiring Boards to define the playing field, but to let Management manage. If Boards call the plays or throw the passes, they become complicit. Who is left to hold Management accountable, if the team should underperform?
While these advantages endure, several trends arising from greater complexity are eroding consensus. Hard rules like noses in, fingers out seem to offer Boards less clarity today in making choices about when and how to act than they did before. How Directors draw the line now seems to vary from one firm, one CEO, or one stage of development, to the next. Boards seem to be shifting from a ‘fixed’ model to more of a flexible one.
Moreover, Boards now face steadily rising pressure by governance gurus, regulators, institutional investors, and proxy advisors to demand more from Management. A shorter leash is now a likely outcome whenever weak results make a Board uneasy. Yet what options may such a Board consider that fall short of ‘pulling the plug’? Can it step in, without becoming ‘fingers-in’?
Unwelcome surprises have set other Directors back on their heels. They discovered that their firm had acted in unethical or illegal ways, risking its very existence. Others faced challenges to their company’s social license arising from unpredicted environmental or political crises. To pre-empt such events, some Boards sense that their mandates may evolve, but how far? To what end?
Finally, we see many cases of Managements and Boards moving closer to the line to reap greater value through collaboration than is possible by staying at arm’s length.
Even so, as potential rewards increase, the risks do also. In every case, Directors know that without clarity they can stumble, but what guidance should now build on the old certainties about who is responsible for what? On page 2, we explore some case examples.
One Director observed: “It’s like the line drawn in the sand…left by a receding wave“
Many factors appear to influence how high the tide may rise:
- How great the risk posed by market or financial conditions
- How resilient the firm’s business model in those conditions
- How confident the Board’s belief in the CEO’s leadership
- How deep the executive bench strength appears to be
- How complete the Board’s trust in the company’s integrity
As such concerns unfold, some Boards expand their roles by:
- Probing company plans and operations in greater depth
- Defining more explicitly how success will be measured
- Getting involved earlier in the strategic thinking cycle
- Leading on issues vital to enterprise sustainability, e.g.: shareholder satisfaction, depth of future talent, financial strategy, or firm reputation and mandate
- Focusing the scope for Management decisions and actions (a.k.a. the ‘skating rink’ or the ‘hunting license’)
Each concern may justify expanding a Board’s zone – for a time. Still, they must ask: is this new zone sustainable, long term? If the tide falls again, how will we respond?
Revising Zones: Will these exceptions become the norm?
In our travels, we see many examples of firms consciously altering the classic roles. Some seem to search for a middle ground between a Board accepting all Management plans and actions and one that parts company with its CEO. All are instances of stretching the zone that require high skill and trust for a Board to capture the intended value, without becoming another tier of Management. Only Boards capable of high levels of maturity and performance are likely to succeed.
Case #1: Setting the scope for investments
The catalyst was a major divestiture, generating large sums for reinvestment. The firm’s future purpose and scope were now at stake, depending on how the funds were used. Management first suggested types of companies to acquire. The Board then defined a territory in which to hunt – the scale and profile of targets to pursue. Wider Theme: while CEOs usually propose a strategy for Board approval, when the stakes are high and the range of potential futures wide, Boards may set boundaries within which the firm must operate.
Case #2: Confronting a risk management failure
The initial catalyst was a critical accident that violated company expectations for workplace health and safety. The Board took its first step, challenging the rigor of firm policies and procedures. The ball still remained with Management. When a second event revealed deeper failings, the Board demanded people changes at senior levels. Wider Theme: Boards increasingly act as the keeper of a firm’s standards and reputation; if either is at risk, they will not hesitate to intervene.
Case #3: Taking a lead in ensuring ethical norms
A global financial institution became revealed as deeply unethical at several levels, causing major damage to the firm’s license to operate, as well as to its balance sheet. After the departure of top management, the new Chair did not wait for the incoming CEO to assess and re-build the firm’s ethical practices – he began this task himself. Wider Theme: Boards will no longer be satisfied if control systems are all flashing green; they will also insist on ensuring that the underlying culture is sound.
Case #4: Setting expectations for top talent development
Normally, senior management appointments are the purview of the CEO. Several Boards have neared the end of their CEO’s term to discover that the top tier of internal candidates was insufficiently experienced. Not wanting to be caught unprepared, these Boards have demanded both renewal at senior ranks and accelerated talent development. Wider Theme: Boards are increasingly seeing future-readiness as central to their role – especially with top talent.
Case #5: Preparing for a potential future takeover
Certainly, whenever one firm makes a takeover offer for another, the Board of the latter must act independently to decide whether to sell, and if so, at what fair value. Management has an inherent conflict. Yet, when one Board predicted, well in advance, that it might face a takeover bid, it launched a scenario planning exercise to help both Board and Management prepare. They performed this work collaboratively, as they jointly projected what events might occur and how they might need to act under each scenario. Wider Theme: Any forecasting of a firm’s future must draw richly from both parties; happily, the classic roles are less of a constraint than they are later, when a deal is underway.
When the lines start to shift, relationship becomes critical:
The above examples cover a wide range of circumstances and environments. A common thread is the quality of relationship between Board and CEO. When both appear committed to each other’s success and high trust prevails, the line becomes less rigid – feelings of defensiveness wane:
- Zones become more tacit, and offer more room to stretch
- Both parties meet comfortably in the middle – where the greatest value often lies – without undue anxiety
- Boards balance rigorous probing of firm performance on the one hand with contributions to firm value on the other
- Board and Management slowly build credits with each other, permitting collaboration to thrive and the ‘rough zones’ to flex, while retaining a focus on accountability
As demands on Directors grow, the classic zones will keep on evolving. This is no small challenge – Boards must learn to capture the potential value, yet stay true to their own, distinctive role, leaving room for Management to manage.