Today’s boards operate amid the pressures of ever-increasing business complexity, technological disruptions, fluid regulatory environments, shareholder activism, cybersecurity threats, and more. Through these choppy seas, a board is charged with keeping the ship pointed toward success in both the short and long term, while scouting risks and opportunities, steering the organization to respond appropriately. It’s a lot to navigate, and yet—that’s the job, mates!
How, then, does one do it well? Not surprisingly, success in the boardroom begins with alignment around clarity of purpose. For a board to thrive, its members need to understand their mission and know exactly what is (and is not) in the board’s mandate. The three essential activities of all boards are Strategy, Performance, and Governance. While every productive board will, of course, interpret and enact these activities as they see fit, it helps to have a common understanding of the tasks themselves.
Let’s start with Strategy. Not too long ago, a board that got too involved in company strategy might have been accused of meddling or overstepping. Today, with industries experiencing cataclysmic change in ever-shifting global markets, engaging in strategy is considered by many to be critical business of the board. To be sure, boards aren’t accountable for writing or executing it, but they must understand and embrace the strategic plan. Directors often spend substantial time contributing to and stress-testing an organization’s strategic thinking, as they guide executives to make sound plans and well-considered decisions.
Beware of scenarios in which management conceives of a strategic plan hoping board members will rubberstamp its approval. This not only short-changes management—who benefit from being asked tough questions and hearing other perspectives—but it could expose the board to legitimate criticism, even legal complaints. Instead, directors should serve up ideas, risk factors, and an abundance of questions before, during, and after, a plan is presented—with approval coming only after meaningful debate has taken place.
Of course, approving a plan is just the beginning. The board is also charged with actively monitoring the company’s execution of strategy—and ensuring that directors receive adequate data to evaluate results. Not surprisingly, when things don’t go as expected, the board must find out why and nudge the company back on course—or suggest it identify a new course. No wonder today’s board seats are filled with thought leaders whose careers have been punctuated by successfully conceived and executed strategic plans. Directors with experience scaling a business or expanding into foreign markets, integrating acquired companies or squaring off against aggressive competitors bring a “walked in those shoes” perspective, and, hopefully, deep, current knowledge of industries, key players, or processes the organization must navigate. Forward-thinking boards now use assessments to identify strategic gaps and objectively assess their future needs for expertise and thought leadership. In short, they are constantly thinking ahead.
Next, consider Performance—the litmus test for boards. A quick glance at the news is all you need to know that underperforming companies are in hot demand—by activist investors! Hedge fund managers are more aggressive than ever, quietly amassing stakes in companies they’ve identified as poor performers, then launching bruising attacks in which they demand that their strategies be put into play, often forcing out executives along the way. Such harrowing consequences aren’t reserved for public companies, of course—underperforming private companies can be hit with punitive fundraising terms or untimely exits. Because board members are ultimately responsible for a company’s results, their seats are as vulnerable as the leadership team’s when the company is not doing well.
It’s easy to understand, then, why a board must actively monitor company performance and trends. As part of their responsibility to all constituents, directors must stay informed about not just the company’s metrics, but those of its industry, competitors, key customers and/or suppliers, and any aspects of the global economy that could present risks or opportunities. While financial results often are the outcome of strong execution, the board needs to keep an eye on a number of core indicators of performance. Reviewing market analysis, understanding growth engines, scanning the horizon for risks, or drilling down on why a strategic objective is not being met, are all part of the job. Equally important is keeping an eye on stock performance, market moves, activist-investor threat levels and more.
Smart boards recognize that while staying abreast of this myriad of information, they must also pay attention to the effectiveness of the CEO. After all, the chief executive has an outsized influence on company performance. The old maxim that “hiring and firing the CEO is the board’s most important job” is on its way out, and boards have a responsibility to do more to promote strong leadership and encourage desirable behaviors. Recognizing that performance reviews that focus solely on financial results do little to boost sustainable performance, savvy boards take time to thoughtfully assess the chief executive, acknowledging successes, examining challenges, and offering support to help the CEO perform at the highest level.
The most evolved boards also know that self-assessment is an extremely rewarding process. Board evaluation is mandated for public companies, and most boards recognize the value of taking it beyond the bare minimum. Gathering feedback in a thorough and objective manner and then reviewing the aggregated results can deliver real insights. A strong assessment framework helps reinforce what works well. It also identifies what doesn’t, allowing key issues to get raised in a constructive environment rather than behind-the-back murmurs or worse yet, not at all!
Finally, the all-important role of Governance. Descriptions of good governance tend to be pretty dry, but failures of governance make for sensational reading. Stories about boards that could have done more to prevent management from making costly mistakes, including approving disproportionate compensation packages, are a mainstay of the business press. And not where you want to see your name in print.
So what is good governance? In practice, it is an established set of processes by which the board monitors the company’s strategic goals, operating standards, risk management and perhaps most importantly, leadership culture. At a core level, governance is the mandate for oversight, authorization and accountability. Good governance relies on commonsense and ethical behavior of board members who protect the welfare of the company and the interests of its various constituents. And on the subject of behavior, the highest functioning boards know that thoughtful discussion, respect for fellow directors, good listening skills, open-mindedness and maintaining a broad perspective are critical to success.
The key to good governance, then, is selecting leaders and stewards who are aligned with the company’s values and strategic mission as well as shared responsibility for contributing to its success. More than anything, governance requires people to care about getting it right.
Let governance, strategy, and performance guide your course and it will be smooth sailing all the way.