Boards turn on themselves

Have company boards taken their eye off the ball? Has the insistence on more
transparent investor relations, more regulation and more reporting requirements
meant that boards are now obsessed with compliance but have forgotten the very
basic problem of not just running the shop but running it well?

A report published tomorrow, The role of boards in creating a high performing
business, sponsored by the Corporate Research Forum and the Performance Reward
Centre, says board members are under increasing pressure to spend time and money
on investor relations and meeting regulatory and reporting requirements. But it
also stresses that board members are concerned about the effect these activities
are having – and will continue to have – on the running of their business.

Worse than that, the study suggests that the executive and non-executive
parts of the board are increasingly polarised and alienated from each other.
Instead of contributing their wealth of experience and expertise, non-executives
are putting their policeman’s function first.

‘Research conducted in the US, by management consultancy Booz Allen Hamilton,
shows that when it comes to value destruction in corporates, only 13% comes from
governance issues while 87% comes from making strategic mistakes,’ explains
report author Don Young.

Growing fear of liability among non-execs has led them to spend far more time
ticking boxes. Instead of taking creative decisions and focusing on the
long-term future of the company, there is a tendency for boards to become
defensive and suspicious. But to reassert their traditional role, the report
argues, they will have to swim hard against the tide.

The report is based on interviews with 40 senior executives, consultants and
advisers, including 10 directors of the top 30 performing FTSE100 companies, who
between them have held more than 100 directorships.

In a nutshell, high-performing boards tend to be strategy-led rather than
investor-led. The board has a primary supervisory role but fails in its
performance role. The relationships between the different board members are more
likely to become distant and hostile.

But the two roles are not contrary – ideally, they are complementary. ‘I
would argue very strongly that unless the board focuses on operational aspects,
it has no basis against which it can judge whether governance is working,’ one
respondent said.

Because of the ‘them and us’ feeling that prevails in many organisations,
non-executives can feel left out of the operational loop.

Another respondent complained: ‘The strategy process is like a polished dart.
You get the strategy book, read it a week before the board meeting, come along
and ask any questions you want. But essentially the possibility of actually
impacting the developing strategy is pretty small. It’s a deeply unsatisfactory
process.’

It’s the chairman’s reponsibility to create the right environment. It is
their job to make sure there is space on the agenda to discuss strategic issues.
Their attitude and relationship with the chief executive are crucial to success.

‘If people say, “What will the City think?” my comment is simple,’ explains
one chairman. ‘The board’s job is to decide what we should ideally do. Let’s
decide and then let’s design a communications strategy to prepare the way
forward. Companies that complain that institutions are short term are often the
ones that have not presented a very clear long-term strategy and are having
themselves mirrored back to themselves.’

There are those like Gerald Russell, senior partner at Ernst & Young, who
question whether there has been any dilution of board interest in driving the
company strategically. The Big Four firm recently conducted research to find out
whether the effectiveness of non-executive directors has increased since Sir
Derek Higgs’ recommendations in 2002.

‘Our findings showed that most non-execs still see their roles as strategic
rather than box filling,’ Russell says.

‘Compliance, regulation and the whole business of covering their backs has
led to far more time being spent on these issues, but our research suggests that
NEDs are putting in more additional time rather than substituting one role for
another.’

Clive Edrupt, legal adviser in the CBI’s company affairs group, says the
organisation is fully supportive of the new regulatory regime and is confident
it will improve corporate governance in the UK. ‘But we also realise that it
will take time for board members to get used to and adapt to the new regime.

‘While there is that period of transition these new demands may seem onerous
but we believe companies will successfully adapt. We need higher standards.’

Peter Cunard, a non-executive director with marketing conglomerate Creston,
admits there is a tendency to be much more interested in back covering. ‘The
real fears we all had about crossing Ts and dotting Is have receded, though we
do spend much more time being the conscience of the shareholders and the company
generally. But I don’t think our strategic input has been affected.’

Star performers

High-performing boards take responsibility for defining the objectives of the
company and monitoring executive performance

Executive and non-executive members co-operate in the development and
implementation of strategy

The non-executive chairman is strongly engaged with the executive and the
business

The executives recognise the value of the board’s accountability and seek to
use the skills of the non-executives

The board emphasises the unitary nature of its responsibilities

The board exercises its formal governance responsibilities through the work
of non-executives on audit, remuneration and nominations committees.