In taking up membership of the board, a new appointee should be generally familiar with how the board fits into the organisation and who the main players are. There may well also be an appreciation that issues of compliance and good governance will have to be faced with a new sense of responsibility. What may be less obvious is that the board will be sensitive to external pressures not previously experienced and that it will also have its own difficulties in discharging its duties effectively. In other words, the board will not be a perfect and well-oiled machine ready and willing to spring into action at all times. Part of the challenge will be to contribute to making the board a more effective and relevant institution.
It is important for all members of the board, the new and the experienced, to know what is expected of them when their role changes. A successful CFO of a FTSE 100 company was fast-tracked when the CEO was fired. It was a case of a man being in the right place at the right time. However, he lacked any experience of managing thousands of people and he soon found himself facing all sorts of unanticipated difficulties in exercising his authority and power. Like many extremely bright people, he assumed that most things could be tackled by the application of brainpower. The difficulties he experienced seriously undermined his self-confidence and he became a lost soul. He had completely mistaken his role. He thought his job as CEO was to solve problems, as he had done so successfully as CFO. Again, the issue was about creating the space and place for others to perform.
There are many types of organisation that can be referred to loosely as a company. The main differences between these types will tend to reflect aspects of ownership and liability. The different types can be grouped conveniently into public sector corporations, joint-stock publicly-quoted companies, private companies, partnerships, and voluntary organisations. Collectively, it is useful to regard all these types as some form of corporate entity which will be referred to in this book as a company. The shareholders, such as the taxpayer through a government agency in a public sector corporation and the investor in a commercial company, are empowered to elect a board of management to look after their affairs.
In a company the board will be made up of executive and non-executive directors. The executive directors will be experienced people with significant expertise in one or more functional areas of the organisation. These people wield significant power from the authority delegated to them by shareholders. Individually and collectively they comprise one of the most powerful and influential sections of society. In a partnership the board typically comprises a select group drawn from leading shareholders and it will be usual for all shareholders to be directly involved in the business in some way. Some partnerships, especially the international public accounting and audit practices, have evolved into large corporations. Voluntary organisations, by their very nature, will be very different from those with a commercial mission. Subscribers replace shareholders and lay members tend to represent a variety of constituencies in contrast to directors who simply represent investor interests. Despite the differences and the use of different terminology many of the challenges of being a director will have relevance.
Executive members of the board are usually senior employees of a company and will have a full-time position outside the boardroom. Senior executives typically face the biggest transition challenges when they take up their first boardroom appointment. They will almost certainly be competent and ambitious people who have pursued a career path with some success. Whilst their appointment to the board is not strictly a career path move it will certainly be a major feature of their CV.
Non-executive members of the board are usually only part-time employees of a company. It will be commonplace for these directors to have an executive directorship of another company and they may well have other non-executive directorships, too.
Shadow members of the board will only be found in subsidiary companies. They are usually full-time employees of the parent company and may even be executive directors. Their role is essentially that of a non-executive director.
Taking up membership of the board will be a different type of experience in different companies. In part, these differences will reflect different commercial pressures and different capital structures. However, organisations also exhibit distinctive, often unique, characteristics that will have evolved over time. This is often regarded as the culture of an organisation and it will be this culture that will largely define the type of challenge that will be faced when taking up a new boardroom appointment.
Organisations can exhibit an infinite variety of behavioural characteristics but, in general, a few key broadly-based types emerge. An organisation is power-centred when its style is authoritarian. Typically, this power will be vested in the strong personality of the chairman or, more likely, the chief executive officer (CEO). Power-centred companies tend to project clear and simple messages at all times. Few employees will misunderstand the direction and priorities set by the board. These companies can be very successful and probably fit the popular conception of corporate life. However, they do suffer serious drawbacks, too. Succession planning can be a difficult proposition. Powerful people tend not to develop immediate subordinates who will have both the skills and the stature to challenge. GEC after years of success under Arnold Weinstock failed to survive his departure. Powerful people will also shape an organisation to suit their own brand of strengths and weaknesses. While this is a natural tendency in all leaders to some extent, in extreme forms it will lead to a structure that may not be logical nor be suited to a successor. Power-centred cultures descend into a cult based on the personality of the person in ultimate control. Southwest Airlines was such a phenomenon and was it a very distinctive experience when it was run by its charismatic founder Herb Kelleher. These situations will put an extra dimension on the challenge of fitting into a board and making a worthwhile contribution.
An organisation is merit-centred when there is a clear spirit of collective endeavour around the board. In these organisations ultimate leadership will follow the more able boardroom performers. The boards of such companies tend to be strong on its functional composition. In these companies, as board members move on, the patterns of power shift imperceptibly as a new personality mix exerts new influence. Merit-centred organisations are much admired and widely copied. Such companies often turn in good, if rarely outstanding, performances but will have the intrinsic flexibility to evolve with changes in the marketplace. Succession issues are usually much simpler to resolve in merit-centred organisations. However, from time to time a new senior player can come from a functional background that can distort values and strategic direction. Accountants will tend to exert a conservative influence when in the top job and, while growth rates may flatten, profits will often advance during their tenure. Conversely, salesmen in the top job are susceptible to growing the top-line in a business without creating a commensurate fall-through to the bottom-line. Successful merit-centred companies often develop a strong core team of executives and their very success and close bonds can be a barrier to full acceptance for new board members.
An organisation is rule-centred when, usually in the absence of noticeable long-term change, power is exercised through an ability to change the rules or conventions. Many rule-centred organisations are in the public sector although with privatisation many of the classic examples, such as the nationalised utilities, have moved on. With its public service ethics and its institutionalised social awareness, a rule-centred organisation tends to adopt management-by-consensus practices. Often, such organisations have very remote commercial objectives and budget management may fill the business vacuum. The positive driving force in rule-centred organisations might simply be avoiding mistakes or at least being always able to justify action in relation to their missions. Succession planning in these organisations can be remarkably simple and effective if rarely egalitarian. Advancement is usually based on merit and service but the candidates, who will often be generalists with deep and shared experience, will have a tendency to perpetuate known and proven models of management.
An organisation is tribe-centred when its performance is determined by the attitudes of a small group outside the formal management structure. Highly unionised organisations, such as the Post Office, usually behave this way. Management may have little strategic impact on activities as change will rest in the hands of people who may see no value in change. Such companies end up in a time warp and will struggle to stay competitive as markets and technologies move on. For this reason, many tribe-centred organisations tend to be monopolies. These organisations present some of the biggest challenges in a modern economy.
Newly appointed directors will not only be faced with understanding their new role and relating it to their other task-based responsibilities, but they will also be faced with making a transition in an environment that will be defined distinctively by the type of organisation culture that prevails. Making a first contribution in a power-centred boardroom will be a very different experience from doing it within a rule-centred top team.
Ethics in their simplest form are value systems. They are often adopted by mutual consent in the pursuit of some common cause. Ethical considerations usually result in some declared code of behaviour. Consider the very special circumstances faced by pharmaceutical companies. It would be a catastrophe for them, and their customers, if their research and development programmes were not rigorous enough to reject unsuitable products, such as another thalidomide type offering. These companies need to reward their researchers for developing failures as much as they would for winners, otherwise failures may get out into the marketplace. For these sorts of companies, ethical behaviour has to be hard-wired into the organisation.
In a seminal study on ethics carried out for the Institute on Management Consultants during the presidency of Paul Lynch it was concluded that ethical behaviour was defined by two concepts: transparency and vulnerability. Transparency is not an absolute phenomenon but exists in different degrees. Very cleverly, the IMC study defined degree by the answers to the question,” would you reveal this to………? ” A low degree results when the answer is “no one” or “selected colleagues” and a much higher degree results when the answer is “to my close and immediate family” Ethical behaviour should have respect for everyone and the test for vulnerability is whether an action affects an interested or involved party in a way that exposes their position and puts them at a disadvantage or opens them to sanctions.
Different value systems cannot co-exist in different parts of the same organisation. This often becomes a problem after a merger or in entering a new alliance. When the dilemma is left unresolved it encourages a process of arbitrage between one system and another until one system prevails. This effect can be seen dramatically in some celebrated cases of police corruption such as the Serpico affair in New York. The driving out process following a merger can feel just as traumatic for those involved.
Continuous and consistently ethical behaviour is the key process in building trust. Trust is consolidated when the value system is respected and its interpretations are predictable. Unethical behaviour is always a shock as it shakes the faith and trust that was formerly accorded. In this sense, the Parliamentary crisis over MPs’ expenses in early 2009 was less about suspicions of dishonesty than it was about the collapse of ethical behaviour. Once trust is lost it can be very difficult, if not impossible, to regain.
Organisations, particularly in their extended form, will comprise a number of distinctive constituencies. These can be formal or informal, implicit or explicit. Understanding their distinctive characteristics and needs is critical for effectiveness in the boardroom. A constituency is any important homogeneous grouping that will have some distinctive claims on the organisation that demand constant attention.
Colleagues will form a constituency close to the heart of life in the boardroom. Their views and support will be vital in the decision making process and in the management of change. Additionally, boardroom colleagues will be in the most powerful positions to influence events for the organisation. To become effective with this constituency it important to know as much as possible about their personal leanings, their family values, their social awareness, their leisure time passions, and their working style. All these factors will influence their work ethic, their corporate commitment, their decisiveness, and their personal sensitivities. Understanding the behavioural traits of colleagues is not only essential to help win arguments it is also vital when assessing their judgement. If friendship results, it will be important to maintain objectivity when on different sides of the argument.
Employees probably comprise the most demanding constituency of all. Their well-being will be vitally affected by boardroom decisions and their productivity and cost-effectiveness will be determined by how happily they co-operate in meeting corporate objectives. Employees not only need to feel valued by their organisation and rewarded fairly but they also need to feel that their particular contribution delivers value on their own terms. All tasks comprise the elements of planning, execution, and control. When jobs are defined with one or two of these elements missing there is usually an undercurrent of employee dissatisfaction. It is no accident that some of the most contented of employees have worked under difficult conditions in traditional industries. This is particularly true where the principle of division of labour has little impact on productivity and where working in a close team is normal practice. Miners, for example, work in teams of four or five; they plan their shift in terms of what yardage of coal they will cut; they then move the coal-cutters along the face and plough back the coal won before re-setting the coal-cutter forward for the next shift. The incentive is to maximise the coal won, as that will impact earnings, but come what may the machinery has to be in the right place for the next shift to start without penalty. This all takes eight hours. Now compare this job with its satisfying completeness to that carried out on an auto assembly line where each worker will have two to three minutes of activity to be completed while walking down a 15 metre slot before returning to start again. It may be a competitive imperative but it will create truculence, too.
Shareholders, despite their being so vital to the investment in an organisation, are often a forgotten constituency. However, this is the one constituency that can bite back with some venom. When things go well in a company, shareholders are normally happy to back the resolutions put forward in general meetings by the directors. From time to time shareholders will switch their preferences between taking income and enjoying capital growth according to the state of the economy and their personal circumstances. When things go badly, or when issues that raise questions of ethics or fidelity surface, directors can face a torrid time. Institutional shareholders when suitably motivated can change the composition of a board with almost immediate effect. Disgruntled private shareholders are adept at frustrating resolutions put forward by directors and will enjoy subverting executive remuneration proposals when provoked. A good chairman will always be sensitive to shareholder interests at board meetings.
Colleagues, employees and shareholders represent the traditional core constituencies of an organisation. In highly unionised companies there is always the danger that if the union replaces the employees as a prime constituency the company can get progressively divorced from their employees. However, in highly unionised organisations the employees will certainly not be a forgotten interest group even if they get very detached.
Outside the core, customers and suppliers represent important commercial constituencies and with a growing emphasis on customer service and more extensive outsourcing practices these constituencies have an increasing relevance. Customers provide the only non-financial revenues for an enterprise and their requirements will drive business opportunities. A common axiom in business is that the customer is always right which should signal their importance if nothing else. Customers should always be accommodated whenever possible but should never be allowed to get so close that they can influence directly the allocation of vital and scarce resources. Customers can be ruinously expensive unless positioned on the right terms. Suppliers, with their willingness to extend credit and their contributions to quality and innovation, underpin the whole business. It is now increasingly common to speak of suppliers as partners although relationships are more likely to be contractual than ones of ownership. Suppliers who do not produce goods for end-users are particularly vulnerable to the success of their principals and deserve to be part of business planning exercises. With pressures on cost containment it is all too easy to pass on the pressure to suppliers. If this results in the failure of the supply chain little will have been achieved. The major supermarket chains in the UK have managed to destroy the domestic dairy farming business through over pressurising farmers on prices and they are now exposed to the volatile behaviour of continental farmers.
In recent years there has been a growing use of the term stakeholder. This new term embraces two increasingly important constituencies in the shapes of the general public and the government. With a growing and often quite sophisticated awareness of environmental issues the general public already drives the affairs of some companies. Nuclear fuels re-processing and new motorway construction come in for particular attention. This involvement with the general public can be very political and often unwelcome but it cannot be ignored. The government in different guises can often be a customer, a supplier, a regulator, and on occasions a competitor. These circumstances no doubt inspired the very American sentiment that you can’t beat City Hall. In these roles, government must be treated as part of whichever constituency is relevant despite any calls they may table for special consideration. However, governments can change the rules of the game and will set the burden of taxation. To make matters worse, government through its agencies may not behave rationally or consistently and is impervious to most attempts to punish. Anticipation and avoidance action are the best weapons to combat government interference.
Finally, there are also parties who will seek to impose themselves on an organisation as a legitimate constituency to further their own agenda. Such parties may include the media, pressure groups, and single-issue protagonists. Some of these parties may even have charitable status. All have to be handled with care and it is worth remembering at all times that many will have no legitimate claims for consideration.
All constituencies are better managed through co-ordinated programmes of internal and external relations. All members of the board should be competent in articulating the policies of the company to any enquirer and be comfortable in doing so. Nothing is likely to be more testing for a director than being required to do this alone and at short notice. It is a useful exercise for all directors to rehearse what might be said about objectives, activities, and policies to a constituency with a claim on the company.
The way constituencies are managed in a company will often define its public image. These images can be very valuable and powerful but when they are at variance with reality severe problems can result.
Playing a role is very different from undertaking a task and the boardroom is essentially a place bound up in roles.
The chairman is the nominal head of a company and this defines their primary role. Their main responsibility, however, is to look after shareholders’ interests. A powerful chairman will be able to fire the CEO unilaterally if that is deemed to be in the best interests of the shareholders. Such a move would be infrequent, of course, and only in the event of a very serious situation arising. In doing it chairmen would almost certainly seek the unanimous support of their non-executive directors. If this action were not ratified by the next general meeting the chairman would be obliged to resign. The day-to-day activities of the chairman will concern preparation for and the conduct of board meetings. This work may vary enormously in scope and content from one company to another but it will almost certainly include the preparation of the agenda, the collation of papers for submission, and the drafting of minutes with the assistance of the board secretary to summarise the outcome of meetings. It is the sole responsibility of the chairman to build the board, subject to eventual shareholder approval, so as to secure the objectives set for the organisation in a most effective way. This building activity should include executive and non-executive directors. A board should consider itself to be a sovereign body in the sense that there will be no higher authority in the affairs of the company. In association with the CEO, the chairman should set corporate strategy and should expect to be given a budget sufficient to prepare strategic plans comprehensively and objectively.
While the chairman is the statutory and nominal head of an organisation, it is not unusual for leadership to reside effectively with the CEO. Indeed, in the USA this would be normal practice. However, this is not an ideal situation for British practices. Despite corporate governance codes that promote a division of responsibilities between chairman and CEO, some companies allow the posts to be combined. Surprisingly, Marks & Spencer, which is often cited as a model of British enterprise, sanctioned such a move with the appointment of Stuart Rose.
The chief executive (CEO) is responsible for the use and deployment of company resources including capital, property, plant and equipment, and people. The principal objective of the CEO is to deliver profits from the best use of corporate resources. It is the sole responsibility of the CEO to build an executive team in a way that parallels that of the chairman in building the board. Often, the strong personality of the CEO when combined with the power derived from their being in control of all budgets can lead to many CEOs being the de facto head of their organisation. Tensions between chairmen and CEOs are ever present and most organisations experience the backwash of a power struggle. This may not be how it is supposed to be but it is in the main the reality even when CEOs are powerful enough when constrained by statutory rules and the codes of good governance. With the power of patronage that comes from building an executive team the political power of CEOs is immeasurably strengthened by strong loyalties. It takes a chairman of great stature to rein all this in.
Within the executive team the finance director (CFO) has a special role to fulfil as official scorekeeper. Numbers increasingly drive modern businesses and the CFO is charged with underwriting the integrity of performance numbers for the board, the shareholders, the regulatory authorities, and the tax authorities. This is essentially a statutory role. Additionally, the CFO will be charged with producing management accounts that compare outturns against budgets and allow operational judgements to be taken. Of necessity, the CEO and the CFO will work closely together and their partnership often appears to speak with one voice. A CFO rarely expects to be challenged on fundamentals by other directors. This is usually because financial matters are supposedly opaque to all but qualified accountants. Being competent enough in financial affairs to challenge the CFO should be a key objective for all directors. Conversely, many CFOs take a very detached view of the other non-financial activities of the company and will have stronger affinities with their opposite numbers in other organisations than with other members of the board.
In former times, a special place was reserved on the board for the company solicitor or a general counsel. Today, the duties associated with these roles are carried out by the company secretary. Too often now, the role of company secretary is appended to that of the CFO and this can be a little too cosy to serve the shareholders’ best interests. A company secretary will be responsible for keeping the shareholders register, submitting returns to Companies House, supervising compliance issues, and keeping the conscience of the business. Effective company secretaries can have an enormously beneficial impact on the affairs of a company.
Other executive directors face their biggest challenge in putting in effective management performances. They are often the junior players on the board but with the support of the CEO they can wield substantial power. Executive directors often fail to fulfil their wider role and many will retreat into a functional comfort zone. Indeed, many executive directors, particularly those who tend to see their directorship as some kind of reward, take the view that much of the board’s agenda is of little direct interest to them. These are the sort of people who would be best confined to the executive committee as they have little to contribute to the direction of the company. However, the executive director group on the board also represents a great potential opportunity for an organisation. Motivated, open-minded, and enlightened executive directors will transform a company.
Non-executive directors have a critical role to play in keeping the ring between the chairman and the CEO, in bringing external experience into play, and in forcing objectivity into discussions at all times. They have a particular role to play in ensuring good governance and compliance. Sadly, many non-executive directors are a disappointment. Above all they should be alert to the dangers of gross error and they should act as a check on over powerful chairmen or uncontrolled CEOs.
However, it is not uncommon for non-executive directors to avoid these difficulties and treat their positions as a sinecure. The corporate failures of the 200-09 banking crisis in the UK were essentially their failures to contain over-ambitious and under-endowed CEOs.
A board will be a mix of different personalities, a galaxy of different talents, and an apology of misunderstood roles and relationships. As an entity it also has a number of roles to discharge.
The board must take authority for the preparation of a strategic plan. This plan should attempt to position the company advantageously with respect to its markets and its competition; it should anticipate and then counter any threats its existence; and it should continuously align its structure to deliver results in an effective way. Many boards get distracted by the urgency of current events and the excitements of intervention. This sort of behaviour reduces the board to being just another version of the executive committee and will destroy its essential utility. The board is the only forum available to establish and develop the capital structure of the organisation. It needs to ensure that adequate funds are raised through an appropriate issue of shares and debt instruments; it has a critical part to play in declaring a dividend; and it must programme expenditure on capital projects. With such a canvas members of the board should be inspired but too often the challenges fail to deflect the self-indulgent pleasures of being a member of the top team. A board works best when its members continuously search for improvement and opportunities, rigorously apply objective analyses and assessments at all times, and look to employ sound judgement based on experience and ethical values.
It is now regarded as good practice, with good reason, for boards to set up a number of key committees that comprise non-executive directors, to promote good governance. An audit committee, which should work independently of the executive but in close association with the statutory auditors, is essential to ensure the fidelity of results and accounting practices. The remit for the committee should have few, if any, constraints and it should have access to a budget sufficient to probe hard in vulnerable areas. Even in well-run companies the audit committee should be constantly exposing all sorts of embarrassing situations. A quiet audit committee will be sitting on a nest of poor practices and disciplines. Ideally, the committee should be chaired by the senior non-executive director and have access at all times to the chairman and CEO.
A remuneration committee should be active to determine the compensation arrangements for all executive members of the board. Unfortunately, the majority of these committees have not yet delivered the benefits anticipated when first introduced in the mid 1990s following reports on corporate governance. This may be about to change. While many committees sanction expenditures to participate in compensation comparison studies, few have been brave enough to rein in excessive packages. There has been a tendency to treat executive directors as the owners of a business with their own capital at risk and significant proportions of the growth in profits have been diverted into executive bonuses. In 1945 a director’s compensation was typically 15 times that of the lowest paid. By 2008 some companies had reached factors of 350 times. Remuneration committees have at their disposal a powerful spectrum of payment options in terms of basic salary, share options, pensions, and bonus payments. A major challenge following the difficulties of financial institutions in 2008-09 in the UK is to configure bonus payments in such a way that long-term performance is secured before bonuses are confirmed.
A nominations committee should be present to provide the board with a current list of prospective candidates to join the board to maintain its continuity and forward development. Prospective executive directors will usually be nominated to the committee by the CEO. Prospective non-executive directors should be identified through proper search procedures and budgets should be set aside to do this. In large quoted companies most current non-executives will, unfortunately, have been chosen from a narrow group of fellow non-executives. This often underlies their generally disappointing performances. It is a case of the framework being sound but the application leaving something to be desired. The next generation of directors need to address such shortcomings in current boardroom practices as part of their commitment to make a difference and add value.
Failures in business practices since Edward Heath first talked about the unacceptable face of capitalism have prompted initiatives to set out guidance on good governance. Starting with the Cadbury Report in 1992 the UK has built up an impressive and comprehensive code of corporate governance. While its application is essentially voluntary, few quoted public companies will be in default of any of its main provisions. Companies seeking public flotation are obliged to adopt the provisions now as a pre-requisite of funding by public subscription.
Compliance is outside the scope of this book. Newly appointed directors are now invariably placed routinely on induction programmes that address compliance. Many organisations, such as the Institute of Directors, provide excellent tuition programmes to keep directors abreast of implications. The subject is central to good governance and a summary of the key legislation embracing compliance and good governance is provided in Appendix 2.
When taking up a new boardroom appointment it is important to do some basic homework on what is on offer despite the excitement of a new challenge. A consultancy providing coaching services used an executive search company to find a new managing partner to join its team. The position was sold aggressively and a candidate with a good track record was appointed. Within weeks the new managing partner concluded that the business model was not convincing and did not fit with his experience and expectations, leaving him with an uncomfortable feeling. When he was able to analyse more deeply the financials, which had not been made fully available to him before his appointment, he was horrified by what he found. Rather than pursue a case of misrepresentation he took the courageous decision to resign there and then.