Boards That Excel: Candid Insights and Practical Advice for Directors, by B Joseph White
DO YOU serve on a board of directors, or are you considering a board appointment?
You would do well to consider author Professor Joseph White’s insights, gathered from his experiences on the boards of listed, unlisted companies and non-profit organisations. Since boards are ultimately responsible for the organisation, directors need to be clear as to what effective board membership entails.
“How a person approaches Board service and thinks about the role of Director really matters,” White explains. The performance standards of boards of for-profit organisations is economic value creation for owners, over the long term. For non-profit organisations, the performance standard is the achievement of the organisation’s mission through the efficient use of resources.
Directors have fiduciary duties. This is the duty of loyalty and care required of a person to whom property or power is entrusted, for the benefit of someone else. That is why we talk of “serving” on a board.
In the case of a non-profit organisation, “loyalty” is to the mission of the organisation, and in the case of a for-profit company, loyalty is to the shareholders who own the company. The duty of loyalty requires that directors put the interest of the company above their own.
The duty of “care” is to ensure the highest level of performance, in perpetuity – for ever! The “care” required of directors is no different to that one would apply to one’s own business. This starts with a deep understanding of the entity being governed - too often lacking among non-executive directors.
A very significant, but often ignored factor is the board's responsibility to maintain control of the organisation’s destiny, so others are not able to through a hostile takeover, or others do not have to because the organisation is failing.
The board’s task is to govern; management’s task is to manage. Directors must not manage. “One good description of the Board’s proper role is nose in, fingers out,” White observes.
“Boards That Excel” provides a top-ten list of the duties for a board. I will focus on only a few.
The board is to set the tone of the organisation by establishing high-performance aspirations. The board does this through the people they appoint, and the actions they take. “Board work is,” White asserts, “work”. The director’s diligence and conduct in their board work strongly influences this tone.
The appointment of an excellent leader is another board duty. When the board gets the CEO appointment right, organisational success is possible. When the board gets this appointment wrong, performance suffers. The right CEO is a person who has “the smarts to develop a good game plan and the skills to execute it successfully”. Since character cannot be delegated, this is a CEO prerequisite. White suggest: “Warm as toast and tough as nails.”
Ensuring deep succession planning is part of the board’s duty. In rock-solid American companies such as Caterpillar, Procter & Gamble and UPS there is always “a smooth succession of strong internal candidates who accept the baton in the relay race of leadership, then provide the requisite mixture of stability and change to maintain the strength of these iconic companies”, White notes.
Strategy formulation happens at the boundary of the board of directors and senior management, and stops when it is done. Strategy execution is solely the responsibility of management.
It is a key - but often mistaken as the only - duty of the board to ensure the quality of financial reporting and the effectiveness of internal controls. As such, the financial smarts of directors will enable the board to be vigilant, and must be a prerequisite for all directors, not only those on the audit committee. Accounting is the language of business, and all directors need to speak it.
Added to these duties is that of overseeing enterprise risk, and being vigilant about capital investments.
Tough at the top
In my experience, the board’s duty of assisting management in “uniquely useful ways” is too often overlooked. It really is lonely at the top, especially in difficult times and situations. Management often needs an accessible testing ground for new ideas and issues, and a safe place to share concerns. Most directors want to - and can - be helpful to management, but need to understand the sensitivities in giving advice.
White cites three methods for keeping a board from going stale.
One is board evaluation, which can be conducted in writing or through interviewing. It offers each director an opportunity for self-reflection, opinion on co-directors’ performance and, most especially, on the functioning of the board as a group.
Second is education. This should be ongoing for the whole board on matters relating to the industry or the organisation, for example. Education could also be specific to individuals to hone a skill which would improve their directorial functioning.
Finally, there is renovation. “No matter how good its evaluation and education processes, every Board needs fresh infusions of talent from time to time,” White explains.
There is the value to any organisation of having a fully functioning group of well-chosen people at the top, guiding its affairs. Boards don’t excel by accident; they excel because they take their task very seriously, and reading this book could add significantly.
Readability: Light --+-- Serious
Insights: High +---- Low
Practical: High -+--- Low