For many years now I’ve been fascinated by the failures of corporate governance.
From RIM to Volkswagen, Enron to Valeant, big organizations with smart Directors keep blowing themselves up.
With some research, it’s always easy to get at least a little insight into the mistakes made by smart Directors on high profile Boards.
RIM is my poster child. Not only is it familiar – I was in Waterloo when RIM took off and half my friends are still using Blackberries(?!) – but the mistakes made by the RIM Board over the years were basic and easy to learn from.
Not concerned that your Board Chair is also your CEO? Check out RIM. Not concerned that you don’t understand technology? Check out RIM. Not concerned that you don’t understand the market? Check out RIM. Not concerned about the ego of your CEO? Check out RIM. Not concerned that what goes up always comes down? Check out RIM.
RIM was an unfortunate disaster. But that’s not the point. The point is how the Board enabled it and what future Boards can do about not repeating it. Enter the Board evaluation.
Board evaluations are now common place. They are a requirement for any company listed on the NYSE and considered a best practice for most public and not-for-profit Boards.
The goal of the Board evaluation is for the Board to assess how well it is doing its role. Frequently, almost all of the input on a Board evaluation comes from the Board’s Directors.
So, what happens when the Directors aren’t clear on the what the Board’s role is? Answer: all of the Board evaluations in the world won’t stop the next RIM from happening.
I do a lot of work with Boards. Here are some common perceptions I see from Directors about the role of their Board:
- The role of the Board is to ensure that the organization is performing well.
- The role of the Board is to ensure that the organization isn’t doing anything bad.
- The role of the Board is to support and provide expertise to the CEO and management team.
- The role of the Board is to meet regularly and make decisions as required.
- The role of the Board is not to manage the organization.
Imagine doing a Board evaluation on the basis of any of the above. Would it stop the next RIM blowing up on the front page of the Wall Street Journal or Globe and Mail? Probably not.
From our perspective there are three elements to the Board’s role.
First, to protect the organization and its stakeholders. That means assessing and mitigating risk.
Second, to ensure the organization is on the right strategic path. That means understanding where the organization is going and choosing the best option(s) for getting there.
Third, to provide the organization with strong leadership. That means attracting and retaining the best CEO.
When I talk to Boards about this role, many Directors are surprised. Whatever they think their role is, it’s not this. And understanding the role is the easy part.
The real challenge for strong Boards isn’t the what (the definition) – it’s the how (actually doing it). How to identify and mitigate risk? How to define and lead the best strategic direction for the organization? How to know the CEO is the right CEO?
Let’s look at RIM again:
Even if RIM’s directors were clear that their role was to identify risk, they missed Apple. Market risk is a risk. There are many others.
Even if they were clear that their role was to lead strategy, they lead an organization that focused on batteries and security, not apps and usability. Their strategies were wrong and they took the company down.
And even if they knew their job was to ensure the organization was properly lead, they hung onto their CEO(‘s) even when it was obvious that the business was failing. Apparently they believed that no one else would be better.
So. How does your Board see its role? Does it understand what risks your organization is facing? Does it know where the organization is supposed to be in the next one, five, ten years and the strategies to get there. And, do you have a CEO who can lead the charge; a CEO who can get it there?
Most importantly, how do you know?
Hopefully, it’s not just because your CEO said so.
If you don’t know, don’t waste your time evaluating the Board. You already have your answer.
Instead figure out a way to help the Board internalize a new role and how to do it better.