Over the past three decades, corporate governance has moved from relative obscurity into the full glare of public discourse. This is through a combination of regulation, scandal, 24/7 media coverage and the ease of access that the web provides to previously obscure information.
As a result, the demands on non-executive directors to ensure firm compliance with ever-evolving sets of regulations have increased at a rate that makes them unattainable.
NEDs are now facing continual workload growth and pressures to achieve positive, short-term results, while the amount of time spent in the boardroom to carry out duties remains unchanged.
On average, boards meet eight times a year as their agendas overflow with governance compliance matters, in addition to accounting, legal and shareholder-related issues. On top of this, and in a post-Covid world, the board’s focus on quarterly results has intensified.
The pressure’s on
Overall, boards are becoming ever more focused on compliance issues, with the aim of preventing corporate misdeeds and subsequent loss of shareholder value and reputation.
Despite this, without equal attention to stewardship and long-term strategy, there may be even greater destruction of shareholder value as companies fall into a spiral of decline.
Importantly, the increased compliance focus has induced unintended consequences, with the most negative outcome being the inability of directors to consistently focus on ensuring the strategic and long-term success of the enterprise.
This compliance preoccupation is casting NEDs into the role of corporate police officers, whose job has become to enforce rules and gather evidence surrounding managers’ missteps, rather than helping guide them through the frequent challenges they face.
Boards have to improve their effectiveness. Less time is now spent on long-term planning and the intricacies of strategy delivery, while the pressures for immediate and measurable results continue to grow apace.
CEOs’ average tenures have shrunk as their pay packages have grown. They are incentivised to take the quickest route to attractive shareholder quarterly results, rather than face challenges blocking the realisation of the organisation’s long-term goals.
It is under these circumstances that, when confronted with corporate decline, the board’s reaction is to blame and remove the CEO and search for a replacement, often from outside the organisation.
The smarter chair
The work of board committees has increased and often cannot be completed in the time available, resulting in hastily arranged e-conferences as stop gaps. Agenda items that address future concerns are given less attention and the central board remit of stewardship is the biggest casualty.
However, at the same time, there are other boards that successfully balance compliance with stewardship; these are notable by having exceptional chairs at the helm.
These chairs, driven by their duty to add value, invest extensive time and energy in nurturing dynamic governance that adjusts attention to compliance and stewardship needs through far-sighted strategic thinking, appropriate succession planning and financial thinking.
Smart chairs recognise that it is the management’s responsibility to develop and implement strategy, while the board takes a long-range lens to requesting and vetting management’s proposals.
A culture of encouraging senior management to raise their performance, even when things are going well, and challenging them when threats emerge is shaped by the chair. This happens only when both chair and CEO hold a clear view of where they want the organisation to be.
The chair notwithstanding, effective board directors must be appreciative of the minutiae of their day-to-day organisation’s functioning, but also stay focused on the impact of long-term trends on the organisation.
This means that NEDs—and the chair, in particular—should exercise their broad knowledge and accumulated wisdom firstly on the adoption of relevant business domains, finance, strategy, marketing and technology, and secondly on trends, threats and risks.
Preparing the organisation to meet future challenges depends on the chair’s ability to sufficiently appreciate the company’s operating context and, through this, enhance the NEDs’ and management teams’ confidence and performance capabilities. The chair’s impact on binding short and long-term objectives is crucial.
To do this, chairs must exhibit three core characteristics: contextual sensitivity; engagement through aligning arguments; and tenacity to speak up and change.
The exceptional chair is distinctly aware of situational opportunities and constraints that impact on directors’ behaviours, functional relationships and the shaping of mindsets.
Impactful chairs are conscious of the power of context and how it affects the disposition and personal characteristics of each director. Comments can have substantially positive or negative effects, even over minor matters, in a precariously balanced board. Even seemingly immaterial observations can prove to be the tipping point between improved dynamics and irrevocable damage.
Engagement through aligning arguments
Faced with contrasting reasons and rationalisations for pursuing particular courses of action, the exceptional chair allows space for the airing of competing arguments. Engaging through rational argument enhances the motivation of the varying interests in the room and through discourse it becomes evident how purpose can be realised.
It is challenging to offer a counter argument against a ‘prevailing view’. A chair committed to engagement across different stakeholders gives voice and time for alternative rationales to be raised and presented. The chair considers:
- What are the main arguments being countered? What are the reasons and rationalisations for doing so?
- What’s at stake for the key parties, including those who disagree?
- What levers can the chair use to influence those who pursue alternative perspectives?
- What is the most powerful and persuasive response to the rationalisations presented?
Tenacity to speak up and change
Of course directors need to be well-informed and highly interactive with their stakeholders in order to provide the impetus for management and to enhance the company’s sustainability.
Boards approve senior management’s plans and proposals, and boards can change the top management if they see it necessary. Boards can also deliberately engage senior managers in discussions about critical future concerns, and signal which issues are priorities. The chair has a primary duty to make all this happen.
Although management usually drafts the financial goals and the means for achieving them, boards have to determine whether the senior team is creating the proper capital structure.
As a result, directors need to spend less time on quarterly earnings, and more time on financial infrastructure, delving into questions about the cost of capital or the debt-to-equity balance that the organisation is wrestling with.
The directors’ assessment of management’s proposals needs to equally consider short-term consequences and the long-term perspective. Both parties need to systematically examine the organisation’s competitive advantage and opportunities through several long-range options, such as industry trends, geographies, brands, IP, talent, labour contracts, and product and operational costs.
The agreed strategic plans need to be reassessed regularly to help directors and senior executives understand whether factors have emerged that may require a shift in priorities.
Shaping, or reshaping strategies for the long-term is a process that takes place over multiple board meetings. Our ongoing research has found that only boards with an exceptional chair participate in such a lengthy exercise.
These chairs encourage open discussions that draw out knowledge and insights from board members in an uninhibited manner. The chair’s tenacity in the relentless pursuit of a goal and unwavering resilience in the face of obstacles is requisite.
Exceptional chairs naturally do this, but they are also comfortable in taking ownership of running high-performing boards. They accept this responsibility and see associated challenges through to the end, learning every step of the way.
Ultimately, it is the willingness to accept responsibility for a high-performing board and the mindset to plan ahead by shaping sensitive dialogues that make for successful and outstanding chairs.
Andrew Kakabadse is professor of governance and leadership, and Nada Kakabadse, is professor of policy, governance and ethics, both at Henley Business School