Board health check

January 2010

Martin Gray mulls over some recent governance reviews and identifies the key success factors of an effective board

Ultimately a board’s role is to ensure the performance of the organisation it directs. So how can a board measure its success in achieving its objectives?

This article describes three critical measurements of a board’s success:
(1) an effective chair/CEO relationship;
(2) ethical leadership; and
(3) fostering a climate of innovation.

Effective chair/CEO relationships

During the past two decades, commencing with the Cadbury report in 1992 [1] , governance advice has focused on the need to separate the roles of chair and CEO. The rationale behind this is the danger of concentration of corporate power, and the need to share work load in an age of ever-increasing corporate complexity.

Recent events have shifted the focus from checks and balances to the effectiveness of the relationship. As Cadbury said: ‘The roles are complementary, not competing. The two individuals need to trust each other to be effective.’

The CEO/chair ‘compact’ built on trust

Well-functioning, successful teams usually have chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds on another; what Professor Walker in his Review of Corporate Governance in UK banks called ‘a virtuous cycle of respect, trust and candour’ [2].

Timely and relevant Information – responsibility of the CEO

The board is reliant on timely and relevant information provided by management. The importance of the freedom to be criticised was emphasised by Professor Salter: ‘Enron’s chairman and CEO never told the board that whistle-blower Sherron Watkins had raised major questions about financial irregularities. It is impossible for a board to monitor performance and oversee a company if complete, timely information isn’t available to the board [3].

Effective decision making – responsibility of the board

The other side of the compact is the responsibility of the chair to lead the board in effective decision making. ‘The board meeting should be an environment in which effective challenge of the executive is expected….. It is the chairman who is responsible for leadership of the board, ensuring its effectiveness in all aspects of its role … and should facilitate, encourage and expect the informed and critical contribution of the directors in particular in discussion and decision-taking. [4]’

Ethical leadership

Several recent reviews of corporate collapses have noted the lack of ethical leadership by the board. Professor Salter says ‘truth telling is the cornerstone of corporate governance’, and ‘the role of the board is in ensuring that principles, not rules, are the ethical framework for the organisation.’

This sentiment is echoed in the words of Justice Cole commenting upon his investigation in to unlawful activity by the Australian Wheat Board (AWB): ‘No-one asked, what is the right thing to do?.... At AWB the board and the management failed to create, instill or maintain a culture of ethical dealing … Legislation cannot destroy such a culture or create a satisfactory one. That is the task for the boards and management of the companies.’

Fostering a climate of innovation

From a survival perspective, the recent economic crisis has highlighted the critical need for creativity and adaptability. Notwithstanding this, recessions also provide great opportunities with many iconic companies founded during recessions, such as IBM, Disney, CNN, Apple, Gillette amongst others. Dramatic change and simple evolution give birth to a new set of market needs and creativity
is at the heart of developing solutions to these needs. It is the responsibility of the chair and CEO to work together to infuse the climate of creativity starting from the board and filtering through the whole organisation. Nevertheless, there is much to do, a recent benchmark survey by ACEVO of 200 trustees of not-for-profits revealed that more than 20 per cent were
dissatisfied with the board’s role in formulating and reviewing strategy.

Outlook for board reviews

Ultimately, behavioural psychologists and organisational learning experts agree that people and organisations cannot learn without feedback. No matter how good a board is, it is bound to get better if it’s reviewed intelligently.

However, these reviews need to be focused on correct measurements and the ACEVO survey of not-for-profit trustees indicated that more than 50 per cent of respondents were dissatisfied with their board performance reviews.

Governance reviews until recently have tended to be of processes but, as the Walker review noted, principal deficiencies in boards related much more to patterns of behaviour than to organisation.

[1] www.ecgi.org/codes/documents/cadbury.pdf
[2] http://www.hm-treasury.gov.uk/d/walker_review_consultation_160709.pdf
[3] Innovation Corrupted: How managers can avoid another, Enron. July 2008
[4] See note 2 above

Author: Martin Gray

Martin Gray, together with Dr John Bircham facilitates performance reviews of boards and other teams – small and large, state owned enterprises, sports bodies, advisory bodies, government, not-for-profits, etc, in the UK and Australasia. This includes ACEVO’s governance review service (GRS) for their members and customers using a web-enabled, targeted self-assessment methodology.

www.acevo.org.uk

Click here for other articles written by Martin Gray

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