If you compare the transcripts from boards of directors' meetings over the last fifty years, you would see few differences over time. There would be commentary on industry trends, discussion of financial performance and future targets, and debate on potential mergers and acquisitions targets and offers. The belief that "business is business" and it is all quite standardized from the board's perspective started as a white lie fifty years ago and has now become a legendary myth.
Information, data, strategy, and technology get more complex every day and change at an ever faster pace. Competitors respond to pricing in seconds, promotions in hours, placement in days, and products in weeks. Even for the "non-technology" (does this exist anymore?) sector, a technological breakthrough can render entire companies nearly obsolete. The board should be the shining beacon of corporate governance and leadership, not a stodgy and archaic tangentially interested party.
How should an effective board of directors operate?
The board represents the shareholder and has specific functions to fulfill. 1) The board should act as the real Human Resources for senior management. This means motivating, recruiting, and evaluating performance. 2) The board is frequently one of the few or the only resource for unfiltered feedback for senior management. 3) The board should provide a unified vision with each other and the CEO on the company's strategy. The current structure is not effectively fulfilling these functions. Below are five significant changes that could be made to modernize and make the board of directors fit for the 21st century.
First, unless the CEO is also a significant owner, she should never be chairman of the board, ever. I can understand why the CEO would want to be chairman. Who wouldn't want to be their own boss, like an entrepreneur, but have someone else write the check? The board should keep the CEO in line and provide a reality check to a position that succumbs easily to ego and tunnel vision. The prevalence of the "CEO as chairperson" structure demonstrates how broken the current corporate accountability structure really is.
Second, board members should rarely be professors, senior managers in related industries, or "30,000 foot" investment bankers. Boards are not for networking. Boards are not "good work if you can get it" part-time jobs. Board positions are not status symbols. The livelihoods, and sometimes lives, of thousands, hundreds of thousands, or even millions of people are counting on the board's effectiveness. A board position should be a significant time commitment, and appropriate compensation should be paid accordingly.
Third, revamp the internal audit function. The internal audit department already reports directly to the board. Elevating the department into a formidable data and process center allows the board to directly access actionable and granular data without depending on the upward filters of typical management. The head of internal audit needs to be able to present data in, what I call, a multi-subjective fashion. Objectivity is incredibly hard to maintain. However, presenting data from two different viewpoints, acting as both prosecutor and defense attorney, allows the department to embrace putting on the alternate masks, challenging biases and encouraging critical thinking. This is far more realistic than trying to assume the difficult task of complete objectivity, or the far more dangerous behavior of superficial objectivity.
Fourth, kill the soul-sucking, data-overloaded PowerPoint presentations. Because of the adaptations in the internal audit function, the vast majority of data relating to company financials, mergers and acquisitions, and industry data will already have been studied, reviewed, and challenged. The board can then focus on critical items that need the board's attention. Data overload can also be a subconscious tool for CEOs to bamboozle a board to allow the CEO to be monitored less effectively and have more freedom to pursue his passions.
Fifth, consider alternative board structures. There are fewer legal hurdles to experimenting with a new board structure than one would think. Designated rotating full-time board members could be utilized. A strategic consulting firm could, in essence, be hired as a board member. A flat fee could be paid to the strategy consultants to provide strategic direction on a full-time basis, without being beholden to presenting items that the CEO would find threatening.
These five items are only a beginning of what is possible in the corporate governance Venn-diagram of "Realistic" and "Results." However, starting from a few basic premises, other corporate governance improvements, from long-term restricted stock unit compensation for board members to more transparent communications between board members and the public, can be considered.
This should happen, but who is going to change it?
To a large degree, there is a principal-agent and inertia problem. Who has the incentive and the power to truly fix this corporate governance issue?
Smaller private companies have hovering insiders, VC investors, or private equity funds that usually are looking after their investment. Large family-owned companies generally have hovering insiders and outsiders. Perhaps some of the general principles here could help, but most if not all of them are utilized on a consistent basis in these settings. The items listed above are not "new and revolutionary" in the sense of never existing. The concepts are somewhat common, but only in these limited spheres.
Large public companies have an incredible amount of inertia, legal hurdles, and dispersed ownership. Significant changes in board structure will be a non-starter, especially if it's viewed as a structure that only small private companies use.
After excluding these areas we are left with medium-to-large non-family private companies and public companies with a dominant owner, perhaps even a larger public company. Because there still is the inertia and risk-aversion element in public companies, the easiest method would likely be an innovative private equity firm. This private equity firm would be one with a "value add" mindset, rather than the "bargain hunters" or "pay and pray" types. The right private equity firm to innovate in this area would be one that has dedicated and qualified in-house staff to serve as board members. This practice would next scale to ever larger privately held companies, then to public companies with a dominant owner, and, hopefully, eventually to large public companies.
The degree of "brokenness" in corporate governance is frequently discussed and solutions are recommended. However, many of these reforms simply trim around the edges instead of resolving the underlying issues of board effectiveness.
Information, data, strategy, and technology get more complex every day and change at an ever faster pace. Competitors respond to pricing in seconds, promotions in hours, placement in days, and products in weeks. Even for the "non-technology" (does this exist anymore?) sector, a technological breakthrough can render entire companies nearly obsolete. The board should be the shining beacon of corporate governance and leadership, not a stodgy and archaic tangentially interested party.
How should an effective board of directors operate?
The board represents the shareholder and has specific functions to fulfill. 1) The board should act as the real Human Resources for senior management. This means motivating, recruiting, and evaluating performance. 2) The board is frequently one of the few or the only resource for unfiltered feedback for senior management. 3) The board should provide a unified vision with each other and the CEO on the company's strategy. The current structure is not effectively fulfilling these functions. Below are five significant changes that could be made to modernize and make the board of directors fit for the 21st century.
First, unless the CEO is also a significant owner, she should never be chairman of the board, ever. I can understand why the CEO would want to be chairman. Who wouldn't want to be their own boss, like an entrepreneur, but have someone else write the check? The board should keep the CEO in line and provide a reality check to a position that succumbs easily to ego and tunnel vision. The prevalence of the "CEO as chairperson" structure demonstrates how broken the current corporate accountability structure really is.
Second, board members should rarely be professors, senior managers in related industries, or "30,000 foot" investment bankers. Boards are not for networking. Boards are not "good work if you can get it" part-time jobs. Board positions are not status symbols. The livelihoods, and sometimes lives, of thousands, hundreds of thousands, or even millions of people are counting on the board's effectiveness. A board position should be a significant time commitment, and appropriate compensation should be paid accordingly.
Third, revamp the internal audit function. The internal audit department already reports directly to the board. Elevating the department into a formidable data and process center allows the board to directly access actionable and granular data without depending on the upward filters of typical management. The head of internal audit needs to be able to present data in, what I call, a multi-subjective fashion. Objectivity is incredibly hard to maintain. However, presenting data from two different viewpoints, acting as both prosecutor and defense attorney, allows the department to embrace putting on the alternate masks, challenging biases and encouraging critical thinking. This is far more realistic than trying to assume the difficult task of complete objectivity, or the far more dangerous behavior of superficial objectivity.
Fourth, kill the soul-sucking, data-overloaded PowerPoint presentations. Because of the adaptations in the internal audit function, the vast majority of data relating to company financials, mergers and acquisitions, and industry data will already have been studied, reviewed, and challenged. The board can then focus on critical items that need the board's attention. Data overload can also be a subconscious tool for CEOs to bamboozle a board to allow the CEO to be monitored less effectively and have more freedom to pursue his passions.
Fifth, consider alternative board structures. There are fewer legal hurdles to experimenting with a new board structure than one would think. Designated rotating full-time board members could be utilized. A strategic consulting firm could, in essence, be hired as a board member. A flat fee could be paid to the strategy consultants to provide strategic direction on a full-time basis, without being beholden to presenting items that the CEO would find threatening.
These five items are only a beginning of what is possible in the corporate governance Venn-diagram of "Realistic" and "Results." However, starting from a few basic premises, other corporate governance improvements, from long-term restricted stock unit compensation for board members to more transparent communications between board members and the public, can be considered.
This should happen, but who is going to change it?
To a large degree, there is a principal-agent and inertia problem. Who has the incentive and the power to truly fix this corporate governance issue?
Smaller private companies have hovering insiders, VC investors, or private equity funds that usually are looking after their investment. Large family-owned companies generally have hovering insiders and outsiders. Perhaps some of the general principles here could help, but most if not all of them are utilized on a consistent basis in these settings. The items listed above are not "new and revolutionary" in the sense of never existing. The concepts are somewhat common, but only in these limited spheres.
Large public companies have an incredible amount of inertia, legal hurdles, and dispersed ownership. Significant changes in board structure will be a non-starter, especially if it's viewed as a structure that only small private companies use.
After excluding these areas we are left with medium-to-large non-family private companies and public companies with a dominant owner, perhaps even a larger public company. Because there still is the inertia and risk-aversion element in public companies, the easiest method would likely be an innovative private equity firm. This private equity firm would be one with a "value add" mindset, rather than the "bargain hunters" or "pay and pray" types. The right private equity firm to innovate in this area would be one that has dedicated and qualified in-house staff to serve as board members. This practice would next scale to ever larger privately held companies, then to public companies with a dominant owner, and, hopefully, eventually to large public companies.
The degree of "brokenness" in corporate governance is frequently discussed and solutions are recommended. However, many of these reforms simply trim around the edges instead of resolving the underlying issues of board effectiveness.
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