WHEN BOARDS GET IT WRONG
June 24, 2013 5 Comments
“God made the idiot for practice, and then He made the … Board”
American author and humourist Mark Twain (1835-1910)
I have come to realise that quite a few boards of directors don’t add much real value to the company that they are meant to be helping to steer, and that instead of helping, a dysfunctional board can actually seriously hinder a company’s ability to succeed (see “Why many company boards are ineffective” posted July 4, 2011).
Part of the problem appears to be that many executives, on their retirement from corporate life, seem to believe that joining a board is a natural next step, without really understanding why they want to do so, nor what value they need to add beyond their business experience, nor as to what is the true function of a non-executive director.
This means that many boards can get it seriously wrong in some critical areas.
Interfering in operations … Other than its fiduciary and legal responsibilities, and the importance of protecting the interests of all the stakeholders of the company, one of the main functions of a board of directors is to advise the CEO and the executive team on direction and strategy, and to review progress. It is not the role of the board to interfere in the operational areas of responsibility of the executive team. I recently came across a board where the Chairman has little respect for the CEO, but where they have to live and work together as they are equal, and jointly, the majority shareholders. To try to overcome his view of the CEO’s operational weaknesses, the Chairman, without any buy-in from the CEO, keeps recruiting COOs. Not surprisingly, none of these have lasted more than 6 months as the CEO and the executive team have no commitment nor buy-in to their existence in the company or to their success. The role of the board is to advise and support the executive team, not to take over their responsibilities and, if there is no confidence in their ability to deliver, the board must act to find replacements for non-performing executives to ensure that stakeholder interests are protected.
Not guarding confidentiality … I sat on a board where two of the founders, who were also employees, were the staff representatives on the board, the other founders also still being company employees, and collectively still the majority shareholders. It meant that everything discussed at the board meetings was speedily and automatically relayed to their founder colleagues, and therefore was quickly disseminated into the whole organisation, often with disastrous results. For example the joint weight of the majority employee shareholders would often be used to not only continually discuss and dissect, but also to disagree with board direction, and would therefore also often result in pressure on the board to reverse some of its decisions. As a result the board could not function effectively, and I did not stay very long. Just as in Las Vegas, what happens in the board needs to stay in the board.
Wrong VC representatives …. VCs need to be more than just interested equity partners who sit on the board to protect their investment. It is important that the right people are appointed at the right time, based on the need of the company at its particular stage of development. Having a VC board member who only focusses on the numbers when the company needs advice and direction in building go-to-market and/or globalisation strategies will not add much value at that time, and will mostly just duplicate the skills that one would rightly expect from the CFO. There is no question that a “number cruncher” can be valuable, but timing is critical. All members of the board must be there to add value or they should be replaced, and as for CEOs, should not be allowed to serve for more than about 5-6 years maximum, to ensure that they do not get too comfortable nor too complacent (see “How do you know when you should step aside” posted April 2, 2012).
Friends of the founder(s) … I have seen too many early boards that are constituted mainly from friends of the CEO/founder in the belief that the friendship will ensure their commitment to the success of the company. Unfortunately this rarely works, as their tendency is to support the Founder/CEO in whatever s/he does rather than to act as sanity, performance review and sounding boards for the executives. Friends will tend to prefer to work on sustaining the friendship rather than being prepared to hold the executive team to task for their actions. To be effective a board needs to be constituted by people with a broad set of skills including financial savvy, some entrepreneurial spirit, good business experience and also be “connectors” that have the ability to introduce the company into some required strategic markets and companies, as well as the presence to elevate the reputation and standing of the company. It must also have a Chairman who can manage the board effectively and with integrity from within both business and legal frameworks.
Being a board member is not necessarily a valid next step for all retired executives no matter how senior or experienced they may have been in their corporate life. It takes people who not only have the skills and knowledge that are needed, but who also fully understand their roles and responsibilities as a non-executive board member, and who have the right mind-set to take a strategic and advisory role, rather than retaining the operational mind-set that they have held for the previous 35-40 years of their working life. As not all executives will find it easy to make this transition, it is important that boards be constituted with considerable planning to meet actual needs, as well as with wisdom, caution and forethought.
“In modern business it is not the crook who is to be feared most, it is the honest man who doesn’t know what he is doing.”
English poet, William Wordsworth (1770-1850).