Why corporate boards are failing

by DR KENROY R. BURKE

WHEN A CORPORATE SCANDAL or mishap occurs, whether in the private or public sector, the same questions emerge: What was the board of directors doing?

How could the board let this happen? Why were directors not doing a better job of monitoring corporate management? This has been the case in very recent times in the light of the disclosure of the precarious position of both public and private sector enterprises.

Boards are increasingly under pressure from regulators, shareholders, and stock markets to be held accountable for corporate performance.

The reality is, failure in corporate governance is often attributed to board members’ incompetence or lack of incentive and shareholders are holding directors accountable.

The global drive in governance standards has substantially raised the requirements for board performance, driving the rapid evolution of the role of corporate boards and board members. Investors are now openly stating their requirements for the appointment of high performing boards. Institutional investors are seeking reforms to enable them to elect independent non-executive directors to challenge the executive and hold them accountable for results.

Critical to our understanding of how several boards may be failing is a greater awareness of the key functions of said boards. Corporate boards of directors have many duties and responsibilities.

In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders. With this in mind, board members must wholeheartedly embrace the gravity of their role, fully understanding the far-reaching implications their decisions have on the everyday lives of people.

Good corporate governance relies on distinct differences in the roles between board directors and managers. It was never intended for board directors to be directly involved in the daily operations of a corporation, and they certainly shouldn’t engage in micromanaging the management of the organisation. Explicitly, the main role of board directors is oversight and planning, a role that is made much easier with the collaboration of management.

The Corporate Finance Institute, a leading provider of online financial certification programmes, training, and workforce development, states that “a corporate board of directors acts as a fiduciary for shareholders”.

The board, then, is also tasked with a number of other responsibilities, such as creating dividend policies, creating options policies, hiring and firing of senior executives (especially the chief executive officer), establishing compensation for executives, supporting executives and their teams, maintaining company resources, setting general company goals and making sure that the company is equipped with the tools it needs to be managed well. There is absolutely no mention of “rubber-stampers” or “old boy clubs”. Boards, therefore, are not expected to be selected based on nepotism nor political affiliation.

Why do boards fail?

Memory Nguwi, an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm, posits some reasons why he believes boards fail; reasons that often originate in either politics or nepotism.

Lack of information

Depending on the relationship between the board and management, sometimes the board is starved of information required for them to lead the organisation. Management can selectively drip feed the board with information.

Selecting the wrong people as board members This is one factor most corporations fail to understand. The success of board members is not based on how glittering their qualifications and experience are. Selection should be based on proven track records of success in their area of expertise.

A belief that corporate governance training is the solution to poor performance It is not true that boards that fail on governance were not aware of the proper governance procedures. Companies need to select board members with an impeccable reputation for good practice. Training ought to be the means through which boards are kept relevant.

The wrong chairman of the board

Everything rises and falls on leadership.

You need a solid leader who can harness and accommodate different views from other board members. He or she should be well-rounded and knowledgeable. The ability to extract the very best from all members is paramount. If this does not occur, the board will be dysfunctional and failure will be imminent.

Failure to question everything

Board members bring failure to the board when they fail to question everything. In good boards, non-executive directors have the freedom to question everything. This includes taking their fellow directors to task, taking management to task when they see something unusual or suspect something that is not right is taking place.

Failure to put together a solid executive team Without a good executive team, the board will ultimately fail. A candid assessment of each executive team member must be done and the board must be satisfied that they have a good team in place.

More is required of boards

According to Andiara Petterle, executive vicepresident of product and operations at Grupo RBS, “Gone are the days when being on a board of directors was primarily seen as a position of prestige and supervision. Rather than passive oversight, being a board member today entails active leadership, personal responsibility and senior executive mentorship”. She further opines that “board members must shift from reactive to dynamic by addressing their board job with renewed enthusiasm and passion for positively impacting the organisations on whose boards they serve”.

Being a member of any board is much more than perks and power. Boards of directors must see themselves as channels to provide a competitive edge to businesses. They offer an outside perspective, overcome strategic blind spots, increase awareness of external threats, engage with governments, society, and other stakeholders, establish credibility, and develop trust in ways that executive teams cannot.

Dr Kenroy R. Burke, managing consultant of Exousia Consultancies, is a leadership expert, entrepreneur and business consultant, certified coach, mentor and teacher. This article was taken from this week’s BARBADOS BUSINESS AUTHORITY.