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Board governance depends on where you sit

September 17, 2013 Leave a comment Go to comments

An article by a former CEO and board veteran (William George), published in McKinsey Quarterly earlier this year, makes interesting reading.

I agree with the author’s perspective that improvements in organizational governance should focus on the performance of the board rather than “ministerial details”. In other words, make sure the board’s discussions are informed, timely, constructive, and fruitful.

One of the first points that George makes is an obvious one: that members of the board have less insight and experience with the business and its environment, and less time to spend considering it, than the executive leadership. He calls this “information asymmetry”. The lack of timely information is a frequent complaint and I wish the author had included suggestions for how it could be improved. My view is that the board should recognize this as a problem and set expectations with management on what they will receive, when it will be provided, and the level of detail that will be included. Management should be held to that expectation. In addition, board members should meet at different business locations and receive regular educational updates from leaders of the various business areas.

The author makes an interesting point, without calling it out as such: independent board members who are not afraid of “information symmetry” have an ability to challenge established thinking and the views held by those with far more experience in the business. Fresh perspectives can bring fresh thinking and the breaking down of long-held bias. However, this means that the know-it-all executive has to change and be prepared to at least listen to new ideas.

I am encouraged by George’s observation that board performance has improved, “with a new generation of CEOs sharing with boards more openly, listening to them more closely, and working to achieve a healthier balance of power with independent directors”.

The article mentions the need for “good chemistry”, but doesn’t call an acid an acid (or a spade a spade). George recalls how an independent director challenged the CEO in the board meeting while the other directors sat silent. But when they moved to executive session, they suddenly were able to speak and voice their agreement. This is poor performance, whatever your views are on chemistry. A board member who is silent in front of the CEO and only able to speak when he is not present is a poor performer. It is essential that every director be prepared and willing to speak out, even when alone in his views. Directors who don’t are only qualified to carry the CEO’s rubber stamp.

The author does call a spade a spade when he talks about the need for real succession planning. The board simply cannot afford to defer to a CEO that does not support or even obstructs such a process. I suspect that when a CEO is unwilling to consider succession planning he is probably a poor developer of executive talent; I would worry about what would happen if he were to leave.

George shares his views on whether combining the role of CEO and board chair is a good or a bad thing. He seems to come down on the side of combining and I will let you decide whether he is convincing.

In his concluding Reflections section, George makes some useful suggestions. I like this, from the middle of the second bullet.

[Everybody that works with or on the board should demonstrate] “high-level listening skills, the ability to see situations from the other person’s perspective, and the wisdom to understand the basis for the different points of view”.

I welcome your views and perspectives.

  1. September 17, 2013 at 11:27 AM

    Once again you have written an excellent and interesting post.

    I have read William George’s article and have a few comments to make

    I agree that no single solution works and the Board composition must be decided taking into account the individuals but also many other elements such as the structure of the company, how it operates in its particular market and the risks and challenges it does, and could, face.

    Whether the CEO should also be chair of the Board is somewhat academic since there is also no single solution.

    It is clear to me that the independent directors must have some specific knowledge and experience of the industry or of industries which have the same kind of issues and challenges. I see little room for the independent director who simply attends Board meetings every quarter. Such independent directors may be brilliant people, but their opinions may not be as well considered as they should be without some specialised knowledge of the industry. But once again there is no single solution.

    Clearly there should be very careful consideration of the composition of the Board to avoid it being considered by others as out of touch with the realities of the everyday operation of the organisation.

    I am not on any Board, but have been in the past.

    Graham

  2. Norman Marks
    September 17, 2013 at 11:35 AM
  3. Gary Lim
    September 17, 2013 at 7:15 PM

    From Malaysia perspective, I believe most independent BOD are appointed because of the relationship with the major shareholders, often they are there to support what the major shareholders wishes to purse. An organisation Minority Shareholder Watchdog Group tried to offer a panel of professionals so that Public Listed Companies can select a TRULY independent directors, I think it did not that popular. I was in the panel and has since withdrawn to save a few ringgit. Only in a matured society where the voice of the minority shareholders are taken seriously otherwise it is a futile effort.
    CEO will only list out issues during the BOD meeting which pleases the ears of the BOD, hence often filtered reason being to save time during the meeting. Take the example of the top 10 major risks of the companies, seldom it is deliberated merely for the record purpose of being discussed. Maturity is the key.

  1. September 21, 2013 at 12:19 PM

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