The Real Agenda: Corporate Governance and Performance
Author:
Don Young
What can the Boards of publicly quoted companies do to encourage sustainable performance? Don Young outlines a six-point strategy to help Boards sustain the long-term viability of their companies, based on the experience of successful CEOs and Chairmen.
Following Enron, WorldCom and Tyco in the USA and Parmalat in Italy, as well as the crises at Marconi and Equitable Life in the UK, the concern has been with whether the boards of large companies are able to fulfill their governance role as guardians of shareholder interests.
The Sarbanes-Oxley Act in the USA and the Higgs review of the role and effectiveness of the non-executive director in the UK were triggered by an urgent need to restore investor and public faith in the governance of large corporations. This focus on regulation rather than performance has arisen despite the fact that more value is lost through strategic mismanagement than through fraud and malpractice.
Research shows that directors believe that the dominant influences on their reputations, tenure and wealth come from institutional investors.
One effect of this pressure is to threaten the unitary character of UK boards, to the extent that non-executive directors are regarded by investors as the independent guardians of ‘shareholder’ interest. However, recent research, The role of the Board in Creating a High Performing Organisation, which I co-authored, shows that if high performance is interpreted as long-term value maximisation, then the Board should achieve a sustained strategic focus on the drivers of value creation, as opposed to short-term adherence to the pressures of the financial markets.
Despite this, most investor attention has been focused on compliance, presumably because it's far easier to 'measure' compliance with Codes than to exercise complex judgments about the quality of corporate strategies.
So what can Boards that are concerned with sustaining the long-term viability and independence of their companies do in a world that is beset with competitive pressures from a global economy and conflicting investor demands?
There are no sure-fire answers, but below is a six-step strategy that directors can pursue that would demonstrate their concern to ensure long-term sustainable performance, based on the recent experience of successful CEOs and Chairmen.
STEP 1:
Don’t try to second-guess investors
Develop and follow strategies that serve the company's best long-term interest and create sustainable value.
The Board’s role is to do the best for the long-term interests of the company and its shareholders. This means using all the skills and experience available to create and implement successful competitive strategies.
STEP 2:
Don’t relegate ‘strategy’ to periodic events and presentations
Make strategic leadership more like a continuous stream of ideas, discussions, learning and actions.
Effective Boards streamline routine reporting and governance compliance to enable them to focus on the evolution of strategy and of performance against key strategic projects and milestones.
A crucial part of this is the strategic 'memory' of the Board in understanding past actions and commitments, current performance and future developments.
STEP 3:
‘Craft’ corporate-level strategy to be coherent, do-able, with clear risk assessments and multi-dimensional milestones.
An effective Board will be in touch with the company’s internal and external environments. Effective board members will balance clear perspectives on what it takes to be successful in the long-term in the competitive market with a deep understanding of what the organisation is capable of.
STEP 4:
Communicate with confidence.
It is important to communicate and promote the company's long-term strategy to the investment markets and opinion formers with confidence.
The Board is not responsible for what a multitude of investors think. But the Board IS responsible for using all its experience and skills to develop and monitor the implementation of strategies that will make the enterprise a sustainable wealth creator, to the benefit of all stakeholders.
STEP 5:
Discourage distinctions between executive and non-executive directors inside the boardroom.
There should be no distinction between non-executive and executive directors in the boardroom when it comes to exercising strategic leadership and crafting the strategy of the company. All directors should have a free and equal right and duty to make a full contribution. Non-executive directors should be used as a resource to support and challenge the executive in creating strategy. It's in the organisation's interest that information is shared openly with non-executives, and that robust, challenging discussion is welcomed.
STEP 6:
Design Board composition to meet specific needs - this means getting the ‘core’ composition of the board right and changing the composition of the board to meet the changing needs of the enterprise over time.
Experienced CEOs believe that Boards need a ‘core’ membership, which in all cases should contain a Chairman, CEO and in quoted companies, a director responsible for executing ‘investor strategy’.
Change the composition of the Board to meet the changing needs of the company over time. The composition of the Board will have to adapt to periods of relative stability as well as changes in the external or internal environments. For example, special skills will be required to lead the execution of internal change programmes and the management of external concerns, as well as understanding such issues as technological changes.
Don’t load the Board with ‘trophy’ non-executive directors. Non-executive directors should be selected because they have the relevant skills not because they are prominent figures in the City, who will be seen as a ‘safe pair of hands’ by investors or headhunters.
Don Young is Chairman of Value Partnership LLP.