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Boardroom basics

Oct 07 2012 10:27 Ian Mann

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The Future of Boards Edited by Jay W Lorsch

THIS thought-provoking book is a collection of essays on the effective functioning of boards edited by Professor Jay W Lorsch, who has taught at Harvard for over 47 years. The other contributors are lecturers at Harvard Business School and have either been CEOs of major corporations or served on their boards.

At the most basic level, boards of directors are groups of experienced part-timers from many different careers who come together to govern a company.

The challenge a board faces is how to discharge the complex task of overseeing a company that they cannot really understand deeply within the limited time they are able to devote to the task. In the US boards typically meet only six times a year.

In the Lorsch’s interviews with 45 directors of major organisations, the concern was expressed that if boards do not do what they were supposed to be doing, governments would vicariously be running corporations through regulation and legislation.

Clarifying the board’s role is less obvious than it would appear at first. The lack of clarity is not for want of guidance from regulators or legislators - there is a surfeit of that - but because one size does not fit all.

Every industry is unique, and every business in every industry is unique. Even the matter of finding the correct balance between the time boards should devote to compliance issues and more substantive business concerns is also context specific.

A seasoned director quoted by Lorsch points out that “you really can’t understand everything that’s going on in a company, and the notion that you can is misguided”. Compounding this problem are the obvious constraints placed on board membership by people with active connections to the company’s industry, which limits the number of experts available to serve on boards.

The consequence of this lack of understanding is a heavy reliance on the information about the company filtered through the company’s top management.

Clearly, boards cannot manage companies, though poor quality boards often try to. The challenge is clarifying where the line should be drawn between board and management in decision-making responsibilities.

It is here that the relationship between the board and the CEO comes into play and is impacted by the confidence the board has in the CEO’s leadership.

A board has responsibility for providing oversight of the company’s strategy; however, too many feel they should be engaged in the setting of strategy, contributor Professor Krishna Palepu observes.

This is an obvious area for concern as a significant number of boards passively review and approve management’s proposed strategy, rather than actively working with management in debating and developing the strategy.
 Formulating the strategic plan is ultimately a management responsibility, as only full-time management has a granular and deep enough understanding of the business to be entrusted with this task.

Despite most directors’ interest in being strategically engaged, this is extremely difficult with only 20% of the directors surveyed by Palepu feeling they had a complete understanding of their company’s strategy.

One barrier to strategic contribution identified by Palepu is the lack of role clarity between boards and management in the strategy setting process.

If boards are not engaged actively engaged in the strategy formulation process, how can they be expected to exercise their responsibility for approving the strategy at anything beyond the most superficial level?  

Another barrier is the amount of board time absorbed by compliance and oversight responsibilities, and the reviewing of financial performance. This leaves very little time for debate and discussion of the company’s industry, competitors and the gaining of competitive advantage.

Four questions are identified that every board should ask to get an adequate understanding of the company’s strategy.

What does the customer we are targeting need and what is our proposed solution? Who are our competitors and how do we win against them?

What do we need to do to make our strategy profitable? What is the game plan for sustaining our competitive advantage or for strategic renewal?

The thoughtful consideration of these questions will put board members in a far better position to meaningfully contribute to a partnership with management in matters of strategy.

What cannot be underestimated is the human relationship dimension of board work. This was considered to be a deciding factor in a board’s success by all the contributors to this book. The relationships between board members is particularly critical as so little time is available for their work together and has to be maximised.

A board in personal conflict is debilitated.

The board must work effectively, if not with the entire management team, then at least with the CEO. This is probably what has misled so many boards into thinking that a primary part of their responsibility is the selection of the next CEO.

A careful consideration of this matter leads to the conclusion that this is not a board responsibility, but rather another joint responsibility with the incumbent CEO. It is the CEO’s responsibility to ensure the development of the next generation of leaders and the board’s responsibility to see he does this. When a company needs to turn outwards for the next CEO, it is an indictment on its effectiveness.

This book is not intended to be a manual for effective board membership; rather it is a conceptual guide and a good one at that.

Readability:   Light ----+ Serious
Insights:        High -+--- Low
Practical:       High --+-- Low

 - Fin24

* Ian Mann of Gateways consults internationally on leadership and strategy.

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ian mann  |  book review
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