One of the main points about corporate governance concerns the way boards are formed and members selected and invited to join a board. This is fundamental for a corporate board, a not-for-profit one, or whether the government is the owner. The reason for this is simple and applies to all teams, as the board is a collegial body. Once the team has been assembled, the dies, in terms of performance, have been largely cast. Many cases of poor board governance are the consequence of a poorly assembled group. A single board member can derail a board, even more so when that person chairs it. Hence, board appointments require the utmost attention.
The benefits of regular reviews by a board nominations committee
Coaches of major sports teams devote endless days to assembling their team. Owners ought to be equally aware of the importance of the task. A good board nominations committee, where owners can discuss potential candidates with trusted advisers, experienced board members and specialists, is invaluable. That is also the place then where board member performance is reviewed, and members possibly terminated, or at least provided with feedback, positive and negative, that will allow them to contribute in even superior ways. There are no perfect boards, improvement is always possible and in any case, the world keeps changing and with it, boards ought to change regularly, too.
The challenge of anticipating the future
The single most important decision a board will make is appointing the chief executive. This decision must anticipate the challenges that will be faced by the business over the coming years, say decade, as average chief executive terms are about eight years, though shortening. That suggests that any board must have the competences and skills to be forward looking, to envisage some of the major changes that will affect the business over the next few years. Short of this, how can the right chief executive be appointed, supported, and challenged?
Why corporations might be better at this than single businesses
Therein lies a big difference between corporate owners and business owners. “Corporate” refers to an organisation, such as GE, that is the home of a number of businesses. GE has so many businesses that they typically fall into one of GE’s industrial segments. GE Corporate, as the representative owner of these business, must spend a fair amount of time determining which corporate executives will sit on the business boards, and which non-executives will join them. When one does this year in year out, one develops a competence in assembling board teams and improving them that is hard to match by owners of a single business, where board membership decisions are often ad hoc, or the consequence of a single board member’s retirement.
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A dangerous type: owners or their representatives
Quite often owners select individuals who “represent” them. Boards are collective bodies – the Latin word is corpus, which in English became the “corporation” – that legally are the corporation. Owners are not, their liability often being limited by their financial stake. In addition, owners can buy and sell; while directors’ responsibilities are remunerated for precisely “being” the corporation. Boards sit between owners and managers and one of the questions boards have to answer is whether a corporation benefits from the best ownership for the project and in which direction ownership should evolve to maximise corporate value – of course, following due process with owners, typically through meetings with shareholders. Owners either sit on boards or select their representatives. Warren Buffett, the world’s most famous “owner”, does not typically sit on the boards of the companies he owns, via Berkshire Hathaway. Once, to rescue it, he chaired Morgan Stanley, an experience that confirmed to him that this was not what he liked to do. I have sat on boards where owners destroyed their company, dismissing objections, including my own, aimed at stopping the value destruction. Owner representatives often behave like “owners”, are treated with excessive obedience if not compliance, partly because these owners or their representatives also decide on continued board tenure. On the other hand, having someone who can speak for and with the owner(s), and plays their role properly, with discretion and openness, can be invaluable. This leads us to the question of the requirements for board members.
Essential characteristics for board members
For me, there are six characteristics that qualify board members, or disqualify them when they do not possess them all. First, the ability to bring the right spirit to the meetings. Some members are “toxic” and ought to be sent off with a red card right away. It only takes one toxic member to destroy the spirit of a meeting. Experts can always be invited to a particular meeting. Part of the spirit is to understand that board work is about governance, not execution. Chief executives or former chief executives do not necessarily understand or practice this.
The second characteristic must be to bring a unique competence, even talent, to the board. One of these can be business expertise; for others, it can be technology or market expertise. The third characteristic should be the willingness to devote time to the responsibility. Highly talented board members who have no time render a board dysfunctional. The fourth characteristic is to care about the role, to like doing it, which is helped by a passion for governance, for the industry, its products, its customers and its employees. It is about bringing positive emotions to the role – and a certain dose of generosity can only help – for example, in giving credit to the executives and to colleagues. Finally, one needs a realistic sense of self-confidence and courage to stand for what she or he believes in.
As a sixth, and final, requirement I would cite having a great sense for the wider context, complementing the “inside” focus of executives.
Chairs play a key role, and none more than the board chair. The traditional committees also need leaders, such as for audit (and finance), risk oversight, and senior executive nominations and remuneration. Other committees could be considered. One appointment that I find an essential insurance for good governance is the senior independent director, who has responsibility for proper governance in the company, including by the chairman.
Finally, there is the issue of size: beyond eight to 10 members, team feeling dissolves quickly, and so does personal commitment and the opportunity to make a positive difference.
Ludo Van der Heyden is an INSEAD chaired professor of corporate governance and the director of the Corporate Governance Initiative.
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