Board and management relationships are evolving
The relationship between boards and senior management is evolving. The National Association of Corporate Directors (NACD) collected benchmarking data on governance trends and practices from over 1,000 corporate directors and governance professionals in its “2015–2016 Public Company Governance Survey”. The report tells how boards are expanding their influence, time commitment and interaction with management, but it also exposes the potential for unhealthy friction between boards and executive teams. It reveals that problems such as overstepping boundaries and ineffective communication can arise and that boards need to address short-term financial pressures. The NACD findings are instructive for all governing boards, whether they represent shareholders or customers.
Today’s world of increasing complexity and risk means that the days of passive, response-only boards are ending. Boards must thoroughly address topics of strategy, talent, technology, cybersecurity, reputation and other enterprise risk management matters. As a result, directors now spend more time with management than ever before, and having an effective Lead Director, who is often but not always the Chair, becomes more important. The Lead Director should have the skill to facilitate effective communication, to keep meetings on track and to make sure board agendas address the needed topics.
Although boards must observe the dividing line between oversight and managing, there are no one-size-fits-all rules defining the line that cannot be crossed. Often the size of the company makes a difference. For example, CEOs of smaller companies may want the mentorship and advice of an experienced director. In general, however, the norm for smart directors is: “Do not meddle in execution of day-to-day operations and management affairs.” Directors, however, must always be prepared to ask the hard questions and be clear when they do not agree with management ideas or proposals.
Management and the board must openly share information. The NACD study confirmed that a breakdown in board/management communication underpinned many company crises. The board must have serious dialogue and debate, and directors must engage C-Suite executives to fully comprehend issues that involve their areas of responsibility. The board’s clearly articulated expectations of management and performance goals are well understood. One NACD respondent aptly said: “Good boards don’t necessarily make their CEOs more comfortable; they make them more successful.”
Boards and management have a duty to create long-term value, yet, almost 80% of NACD respondents felt pressure to demonstrate financial results within two years. Short-term pressures can be difficult to handle. Although 75% believe that the strategic time frame should be three years or more, 44% use a shorter time frame due to perceived demands of quarterly reporting, activist shareholders and the 24-hour news cycle. Board members should think like activists, looking for unrealized value and opportunity. Whether a public company or a board, directors must ask the tough questions an activist might ask and management must be prepared with thorough data-driven answers. The best CEOs take a long-term perspective; they view their responsibility as “creating value for the next CEO”. The best boards support them in this effort through vigorous, appropriate and in depth attention.
