Boards can expect to come under ever increasing levels of scrutiny from their shareholders, the media, and their own subsidiary operations. Difficulties will inevitably arise if boards are seen more as cost centres than as a source of value. This can be particularly true when operating authority has been largely devolved to divisions or quasi-independent subsidiaries.
All directors need to understand how to add value for stakeholders through discharging their boardroom responsibilities.
There are four principal vehicles for adding value in the boardroom.
Leadership comes first. This starts with having a clear vision for the future of an organisation which is focussed on building sustainable competitive advantage for products and services in selected markets. It will require the ability to influence other boardroom colleagues when facing critical decisions and events. Typically, the uncertainties thrown up by continuous change put constant pressures on leadership. In a forum of equals, such as the boardroom, leadership comes from a mixture of personal stature, a reputation for sound analysis, and effective advocacy. Influence will grow with experience and its value to the organisation lies in the way a director can unify the separate efforts of others in a common cause. However, while leadership is a necessary contribution to success it is not sufficient in itself.
Objectivity is a second vehicle for adding value in the boardroom. For individuals it requires putting the wider interests of the organisation above issues of personal advantage. It will demand a sense of realism about events and circumstances and a commitment not to avoid difficult or unpleasant situations when they demand attention. Objectivity is a duty for directors. Its practice can be a powerful antidote to the abuse of political power or position by other boardroom colleagues. Shareholders, who will represent a wide spectrum of different interests, are normally very alert to situations where members of their board might have been less than objective.
Integrity is a third vehicle for adding value. It is a mixture of honesty, fidelity, and adopted ethics. Being honest, in this context, is about openness, notwithstanding the obligations of sensible commercial and political confidentiality. It will mean making concessions to good argument when these should prevail for the wider interest and it will mean avoiding the sins of selective or convenient omission simply to win an argument. Fidelity in legal and financial matters is not only essential for a director; it is also a powerful weapon in establishing a personal reputation. Nothing impresses staff more than when they see members of the board make personal telephone calls from their own cell-phones or post their personal mail with stamps from their own wallets and purses. Fidelity is one of the few absolutes in corporate affairs. Indiscretions, however small, will tarnish reputations for ever. Ethical values are what drive people to do the right things for the right reasons. Continuously ethical behaviour is a key component in building trust and it is a hard but rewarding taskmaster. When directors are admired for their integrity they invite others to share issues and concerns without fear. This can be critical when mitigating the risks of decision making.
Judgement is the fourth, and most important, vehicle for adding value. Without good judgement, all else is ephemeral. Given good leadership from the boardroom, blessed with objectivity in its deliberations and integrity in its motives, it is the application of sound judgement that delivers ultimate value. The key to sound judgement is often one of balance. Reconciling the head (ie the quantifiable aspects of knowledge, skills, and intellect) with the heart (ie the qualitative aspects of culture, effort, and emotion) is generally the secret. It is quite normal for directors to disagree about the best way forward. However, conceding an important point against one’s better judgement can be unusually disconcerting. Everyone can make mistakes from time to time and they must be allowed to do so in the cause of building experience but when the poor judgement of others is backed by insufficient resolve it is likely to lead to embarrassing exposure.
Directors play a number of different roles in the boardroom and these roles provide opportunities to add value.
As a trustee, the director acts to serve the interests of the stakeholders by ensuring that the organisation is well positioned at all times to adapt itself to new and evolving circumstances. A trustee is directly responsible for protecting value and ensuring that new value created is fairly attributed to all beneficiaries.
As an ambassador, the director represents the organisation and its interests in the outside world. In this role the director needs to present a positive image which objectively reflects the stature of the organisation. Playing this role will fall mostly to chairmen but in their absence other board members will be expected to fill the vacuum. Good ambassadors can win surprising advantage from neutral and uncommitted situations.
As a networker, the director provides the enterprise with a growing resource of contacts and influence for business development. This role is central to the identification and creation of new opportunities for revenue growth, without which all organisations eventually stagnate and atrophy. When directors speak, listeners will assume they are speaking for their organisation. This gives great power, and responsibility, to the networker when they act as principals in building new revenue earning opportunities.
As a catalyst, the director energises boardroom colleagues for new challenges. However, from time to time a catalyst will also be needed to reconcile entrenched and opposing views around the board. This role is often undervalued and frequently absent. Catalysts are proactive and prompted by the desire to ensure that others use their talent for the greater benefit of the organisation.
As a role model, the director can personify the aspirations and ambitions of younger people in the organisation. In the way that leaders have followers, so are role models adopted by admirers in ways that may never become explicit. Role models emerge when some aspect of outstanding performance or achievement becomes widely known. By behaving in ways that others will copy in developing their own careers or interests the role model exerts great influence. A good role model will pass on experience freely, perpetuate all that is good about an organisation, underpin the prevailing culture, and build a platform for continuity. However, occasionally strong role models can be major barriers to essential change if they support the traditional over the necessary and these will need to be won over when dramatic changes are needed.
As a professional manager, the director can ensure that sound business practices and processes are adopted and followed by an organisation. This professionalism and the experience behind it should be a key component in the elimination of waste and the mitigation of risks and uncertainties. Often, insights from one functional area about another can make significant differences in performance.
Playing out the various roles as a director will project a sense of style. Directors, as a group, will implicitly or explicitly set the style in their organisation. If that style is consistent with the values and the culture of the enterprise, harmony will result. If not, it will lead to confusion and possible demoralisation. While style is an important attribute for a director it should not be confused with or substituted for substance.
Directors are usually appointed for their experience, which could come from inside or outside the organisation. They therefore have an obligation to ensure that their experience is both matched to and relevant for the needs of the enterprise. Additionally, there will be some key behavioural obligations to be recognised if added value is to be delivered. Directors need to be serious and responsible but not aloof. An open-door policy to offer easy access at well advertised times will achieve this.
Professional obligations are important, too. Directors should apply their own brand of intellectual rigour and emotional understanding to situations at all times. This is the foundation for offering wisdom and pragmatism. Whereas experience has its roots in the past, wisdom comes from an ability to anticipate the impact of events on the future. The ability to avoid major surprises and to navigate situations advantageously will deliver possibly the greatest degree of added value that a director may contribute.
The boardroom is essentially a strategic forum. It is not the place to re-run tactical and operational decisions. Having a true strategic perspective is one of the biggest challenges facing a new director but his perspective is central to the concept of added value in the boardroom. In quoted companies, the pressures of half-yearly reporting invite constant concern about operational issues and it will take a degree of strong leadership by the chairman to ensure that strategic considerations are not only recognised but given priority.
Added value can only be demonstrated through measurement. There is an old adage that says if something cannot be measured, it cannot be controlled. Measurement can be very difficult, especially when qualitative issues, such as quality and service, dominate considerations.
Statutory measures come in the form of statements about assets, profits, and cash flows. These statements are merely records of what has happened and presented in a standardised reporting format. They are not basic instruments for control. The balance sheet does, however, record value and its movement from previous statements. In contrast, the profit and loss account merely records an agreed profit for the purposes of assessing taxation liabilities. Many organisations that have attempted to control activities through monthly profit and loss accounts have been known to fail as they get overtaken by cash flow problems. Something with more utility is needed to analyse added value and its attribution to activities and contributions.
The traditional definition of added value at a corporate level is revenue less purchases. This definition places all administrative costs in added value whether or not these activities are efficient. If administrative costs are reduced, and all else remains the same then the added value does not change but profits certainly do and to greater advantage. In other words, added value is equivalent to profits plus added costs. Simply maximising added value on the basis of this simple definition can produce bizarre, unexpected and undesirable results.
There is now a growing tendency to define added value in terms of two independent but complementary components. The first component is economic added value (EVA) which measures what is added to purchases through the use of productive resources and the deployment of skilled labour. The second component is market added value (MVA) which measures the premium over strict producer cost that the market will bear to pay for distribution, quality and service. These parameters are much more useful to work with as EVA can be optimised while MVA can be maximised without conflict. It is usually a salutary exercise for directors to establish and quantify what contributions to EVA and MVA can be attributed unambiguously to the activities of the board.
Added value concepts are often confused with productivity issues. Greater productivity is always valuable and is something that should be pursued relentlessly. It can be measured in a variety of ways, ranging from the simple sales value per employee to the ratio of standard hour of product delivered to actual hours paid for. Productivity measures have extra utility when used as part of a benchmarking exercise which compares results across companies, markets, or products.
Professionalism is inextricably tied to adding value. Directors should have commitments to getting things right-first-time (RFT), to continuous professional development (CPD), and to ethical behaviour at all times.
So, what does it take to be a credible and successful director? Kipling gives a clue in his celebrated work “If…”. This can be parodied, with suitable apologies, as follows.
If you can form your own views without being influenced by the mere status of others,
If you can create alliances from disparate groups and hold them together in a worthy common cause,
If you can manage your own behaviour so as never to offend when you are probably right,
And,
If you know when to resign for the greater good of the enterprise,
Then, you will be a director, my friend.
Behavioural barriers can be the biggest challenge to becoming an effective member of the board. It has been said that we are all prisoners of our childhood and the experiences we had then. Living in the present may need a conscious break with the past. The challenge is to see the present for what it is and not allow it to be distorted by memories. Three, not untypical examples, will serve to make the point.
A managing director of a FTSE 250 company had experienced great trauma in his childhood when his parents’ relationship broke down. They separated and subsequently divorced. During this period he had taken on the role of holding the warring factions together and developed some finely honed interpersonal skills in his attempts to be the peacemaker. In his corporate leadership role he found it hard to live with the natural tensions between powerful personalities around the top table. With his innate fear of conflict, he saw the hard-talking confrontational style around the boardroom as negative and threatening whereas in this instance it was a sign of vigorous health and a source of effective decision making.
The finance director of a leading property company had been the first in her family to go to university and had qualified brilliantly. This should have been a very positive aspect of her life but this was not the case. As with many individuals with a similar background, she felt fearful of outshining one or both of her parents when she was growing up. Her parents had not had the good fortune to go to university or even secure a decent education. Her fears constantly undermined her own performance. This syndrome, commonly known as envy pre-emption describes the case when an individual fears another person’s envy, real or imagined, and consequently reduces their own capacity to perform to avoid having to deal with it. A mentoring programme explored these fears and established they were just that – fears. Her parents had been delighted with her achievements and the blockage was removed.
A chairman of a traditional organisation had purposely appointed a “new style” CEO to shake up his company and move it forward. He was then surprised when the abrasive Antipodean started to rub people up the wrong way. Moreover, the CEO could not understand when the chairman told him that he was often seen as cold and hostile by others. The HR manager took it upon herself to get the CEO to modify his behaviour. It turned out that the issues were rooted in the loss of his father in early life. He had spent his entire working life attempting to prove his worth to the father he never had during the critical years of his upbringing. This had resulted in tremendous personal drive but came at the cost of bruising behaviour. He needed to find a new way to validate his performance and recognise that he was capable of doing a good job. This relieved the pressures he had placed on others.
Not all behavioural issues come from childhood. Acquired behavioural characteristics can pose an equal threat. A classic transitional problem was experienced by an executive of a FTSE 100 company with its origins in the public sector. The executive had made a great success of running operations in North America and was highly regarded by the board of the company. The company had a distinctive macho-management style and the executive, on his return to join the board, felt very much out of his comfort zone in his new situation. His response was to talk, almost incessantly, in an effort to impress his new colleagues. He made no impact, other than annoying everyone, and by talking and not listening or thinking his technical performance suffered too.
Behaviour acquired by working in one sort of culture can be debilitating when circumstances change. This happened to some long-serving, and successful, directors when they suddenly found themselves exposed in uncomfortable positions when ownership changes forced a change of chairman. A major retailer had grown to be a dominant regional force from its origins as a family company. Part of its success had been the way it had retained and translated its values in serving customers as it had grown. The first chairman of the company when it went public, a member of the original family owners, was a gifted and charismatic personality and the new company prospered under his leadership, developing a national presence. When the chairman retired, and some new non-executive board appointments were made, the long-serving executive directors became increasingly detached, disillusioned and ineffective. They had grown in their positions with a clear and authoritative leader on hand and this support had now gone leaving a vacuum in strategic direction. They all struggled to understand their roles in relation to their executive tasks and were quite unable to make the sort of contributions to the business that is expected of senior executives. It took some time, and some deep mentoring programmes, for these long-serving directors to grow into their new situation and shed their dependence on the previous chairman.
Occasionally, a group behavioural phenomenon will emerge. During the wave of privatisation projects, when nationalised industries were being broken up and the parts were being spun-off, in one case a new company was formed to take over some of the heavy repair and maintenance facilities of the old corporation. The facilities were modern and comprehensive. The workshops involved had developed an outstanding reputation for the quality of their work within both the public sector and the commercial sector of their market. The new investors were keen for some of the managers to be motivated through a series of appointments to the board of the new company. These managers, who were competent at a trade skills level, never understood their new roles and responsibilities and rather resented the presence of the new investors despite being awarded significant amounts of stock in the new venture. The recently elevated former managers hi-jacked the board meetings to pursue their own personal gripes about the relative awards of stock and completely neglected the needs of the business. As the workload ran down with the disappearance of the former nationalised corporation the company went into a spiral of decline and went bankrupt. It was a sad end to a fine facility.