I see the board providing two broad areas of value to an organization and its owners: oversight of management, providing assurance to the owners and other stakeholders that management is running the organization effectively and in the interests of those stakeholders; and, insight — helping the management team with the selection of strategies and their execution that create value.
Given the traditional role of the board as representing the interests of the owners, my priority is on oversight — recognizing that insight is also of huge importance.
Taking "insight" first, the board has to have the appropriate combination of experience and knowledge among its members that are additive to that of the management team and, therefore, enhance the opportunity for the organization to excel.
I would look to the chairman of the board (and the lead independent director if the CEO is also the chairman) and the governance committee to conduct an annual evaluation of the knowledge and skills needs of the board.
It is not enough that the current board members are each, individually, contributing at a high level based on their individual capabilities.
It is necessary for the board members, collectively, to contribute the insight needed for the organization to optimize value creation.
That means that a diverse board is essential. Leaving aside the issue of gender and other diversity for a moment, the board needs a broad range of experience and insights on topics such as:
- The business, competitive, and regulatory environment. What is happening now and can reasonably be expected to be around the corner?
- The technical aspects of the business, such as manufacturing, technology, retail, and so on
- The customer
- Strategy and planning
- Risk management
- Financial reporting, management, and related topics (including tax)
- Technology and its use
- Leading an organization of similar size to success
In my opinion, too many boards are composed of CEOs and "names" because there is a belief that investors will rate the board higher as a result. But, that means that they fail to have, collectively, all the experience and insight necessary for success.
Diversity, specifically gender diversity, has become a popular topic. Studies have shown that when there at least two of each gender on the board (including males on a female-dominated board), the quality of the discussions is higher. Clearly, gender diversity becomes even more important to understand customers when the majority (such as in a retail setting) are of a different gender to the majority of the board members.
Other forms of diversity may be required to ensure there is sufficient insight when operating internationally, and so on.
Board culture is critical. Each member of the board must be able to share, completely and without reservation, their wisdom.
It is equally critical that each board member should be free to challenge any member of management as well as any other member of the board.
At the same time, the board should ensure it cleanses the board of poor-performing directors, including those who are unwilling to share, do not come to meeting fully prepared, fail to challenge or speak out when they disagree, or who have not kept up to date with recent developments in their area of expertise (such as a retired CIO who still relies on his experience with mainframe systems).
But, I see "oversight" as the primary responsibility.
This means that board members have to remain professional skeptics and ensure they do not engage with the management team to the point that they lose their objectivity.
It can be hard to challenge a friend with whom you play golf, go on vacations, and dine in family settings.
Yet, directors must be able to stand up and challenge the management team, even when the CEO is charismatic, powerful, and has a long record of success.
A charismatic, powerful, and highly successful CEO may have lost the ability to listen to his management team, consider other points of view, and be prepared should events not continue to go his way.
A risk is such a CEO will only provide the information to the board that he wants them to receive, rather that all the information they need to provide effective oversight.
To be effective in their oversight role, directors not only need to have the ability to stand up and challenge, but they need the "insight" to ask the right questions.
For example, how can a director ask the CEO about risks to strategy if they don't understand what risk management is?
How can a director challenge the CEO's proposed business strategy if they have no idea what other strategies are available, what options were discussed by the executive team, what competitors are doing, or what regulations may be coming their way?
Oversight requires insight, and both require an effective culture — where the members of the board, as a combination, have the insight, experience, and ability to ask management the right questions.
I welcome your comments.