Avoiding Corporate Governance Failures Begins With Better Understanding the Board’s Oversight Role
Boardroom Metrics has been involved in corporate governance consulting now for over twenty years. We’ve also served as Directors for public, private and not-for-profits organizations. Here’s what we’ve learned about avoiding corporate governance failures:
The #1 reason for corporate governance failures is that Boards and Directors remain unclear on their role. As a result, insufficient effort goes into the oversight function that is fundamental to corporate governance (governance = oversight).
Clarifying that oversight is the primary role of a governance Board helps all Directors begin to understand their role better.
Identifying the three key areas of governance oversight focuses Directors better on their oversight role. The three areas of oversight are risk, strategy and performance management of the CEO.
Including oversight of environmental (external market) risks and operations (internal) risks, not just legal and financial risks is an important expansion of the risks most Boards look at. Many governance failures result from environmental and operating risks that were never considered.
Boards should evaluate strategy on the basis of how well risks are being mitigated and how well the organization’s mission is being achieved. Many Boards and Director fail to recognize these links between strategy and corporate governance.
CEO’s are responsible for executing the Board’s approved strategy. Boards get confused on this and fail to assess the CEO in the context of risk mitigation and mission accomplishment.
In summary, the key to avoiding corporate governance failure is to clarify the Board’s oversight responsibilities and simplify its efforts on risk, strategy and CEO performance management.
This infographic captures the focused Board role and execution that helps organizations avoid corporate governance failure.
Executing the Board’s Oversight Role Means Focusing on Risk, Strategy and the CEO
There are only three elements of corporate governance: 1)identifyrisk 2) validate and approve strategies for mitigating risk and executing mission, and 3) performance managing the CEO’s execution of the strategic plan.
What makes this definition effective is the onus it puts on the Board to execute these elements – and only these elements – in their governance discussions.
Sound too simple? Try this. Out of the limited amount of time your Board has available to provide strong corporate governance, how much time is going towards the role outlined here?
Risk comes in four flavours. Legal, financial, environmental (outside the organization) and operational (inside the organization). Most Boards are reasonably well informed on the legal and financial risks. Not so much on the environmental and operational risk. In the early days of the smart phone era, RIM’s Board managed to miss the risk posed by the iPhone. VW’s Board missed the risk posed by faked emissions results. What risks might your Board be missing?
Strategy is what separates sustainable leaders from lifestyle organizations. Strategy starts with mission. Quick, what’s the mission of your organization? Boards cannot govern effectively unless they understand who the organization is serving and how it serves them. Once a Board understands that, everything else – the strategies, tactics, even the org chart – fall into place. (Note: in the governance audit work we do, most Boards and Directors CANNOT consistently articulate the mission of their organization, ie everyone has a different idea of what the mission is)
Hiring and performance managing the CEO. Most Boards understand their role to hire the right CEO. An increasing number of Boards understand that performance management of the CEO is also part of their role. CEO’s are generally the only employee reporting to the Board. We expect every other employee to be well managed. The same must apply to the CEO.
The Five Operating Elements that Make Boards Effective
For a Board to focus on risk, strategy and the role of the CEO it needs to have these five elements in place. Here’s how:
Board Composition: The trend in corporate governance is to competency-based Boards – Boards comprised of Directors with the skills and expertise to understand risk, strategy and performance of the CEO. If this sounds like a no-brainer, it’s not. There are still many, many Boards where composition is driven by membership, geographic and community representation – not necessarily competencies reflecting the risks and strategies the organization is facing. What’s the composition of your like? Do you have someone who understands technology risk? Corporate strategy? Finance? Legal?
Board Information: Information that informs the Board on risk, strategy and performance of the CEO. Think of the information your Board receives. How well does it help you understand the environmental and operational risks the organization is facing? What is the iPhone equivalent threat in your business? Is it Amazon? How much does you Board understand about Amazon? What additional information is required for you to be better informed?
Board Processes: Processes like Board meeting agendas help keep the Board focused on risk, strategy and performance of the CEO. If you look at your last Board meeting agenda, how much time was dedicated to the three elements of the Board’s role? If each of the agenda items had been reframed in the context of risk, strategy or CEO performance what would have disappeared from the agenda? What different questions would you have asked?
Board Leadership: It’s the Board leaders (Chairs and Committee Chairs) who ultimately determine what the Board focuses on. Some take their direction from the CEO – a basic governance mistake. Others are respected, experienced leaders who understand the Board’s role and the relationship with the CEO. As a Board Chair, what kind of focus are you leading your Board towards?
Board Culture: Studies show that organizations with Boards who work well together and with the CEO perform better. However, working well together doesn’t mean always agreeing on everything. Focus your Board and CEO on risk and strategy. How well is it working together on these priorities? What’s missing?
At Boardroom Metrics our mission is to eliminate governance failures by helping Boards understand and execute their oversight role. Our services include Board and CEO assessments as well as Board training. If we can be of more assistance, please let us know at [email protected]