Governing with Impact: Tackling a Distinctly Wicked Problem

During the last decade or two, boards have become newsworthy. Questionable practices, a string of missteps and failures of various kinds, and sanguine CEOs and assertive executive teams that 'take over' have seen boards become highly topical, targets of both curiosity and criticism in the business media and, increasingly, the wider public. While public companies have garnered most attention, private companies and family firms have not been immune to missteps and failure.

Regulators and institutions have responded by doing what they do best: introducing a plethora of statutes, codes, guidelines and ‘best practice’ recommendations, all with the intention of establishing boundaries and steering boards towards effective practice. But most have had minimal effect: companies and their boards continue to fail despite additional boundaries, guidance and (supposedly) increasing levels of awareness of what constitutes good practice. The ongoing stream of failures raises many questions about the role and performance of the board too, especially the board's supervision of management (or lack thereof), the behaviours and motivations of directors, malfeasance and ineptitude in the boardroom, information flows and decision-making practices. The efficacy of 'best practice' recommendations, not to mention the role and influence of external parties including advisors and auditors, merit further scrutiny too.

All this matters for one reason: the linkage between the board’s work and whatever follows—especially, company performance and prosperity, and, ultimately, human flourishing. When alignment is achieved, the benefits available can be significant and enduring, a point made clear by Benjamin Friedman, a political economist, in 2006:

“Economic growth—meaning a rising standard of living for the clear majority of citizens—more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms.”

The implication here is that if societies are to prosper, economic growth (in the form of high company performance) is critical. The board, as the senior-most decision authority in companies, has a critical role to play, by doing what is needed to ensure the companies in their care operate sustainably and perform to their potential. That the primary role of the board is to make decisions to achieve great outcomes seems self-evident. Bob Tricker, a doyen of corporate governance, made this clear when he argued that the purpose of the board is to govern, meaning to oversee the formulation of strategy and policy, supervise executive performance, and ensure corporate accountability¹.

The question, rather obviously, is how this might be achieved.

In recent years, a range of structures and compositions have been proposed by academics, regulators, and institutions. Also, boards and directors have been encouraged to become adept in specific risk areas, as a means of ensuring better outcomes. Directors need to organise themselves, and to be able to identify major risks if they are to make informed decisions. But, and importantly, that it not to say that boards should rely on a particular structure, nor that directors become experts on climate change, cybersecurity, disruptive technologies, ESG, sustainability imperatives, and other emerging risks (and opportunities) in a dynamic landscape. Not only is this wasteful and, probably, futile, but it would also result in the board taking its eye off its core role, which, as we have established, is to make decisions as a group, to ensure the sustained performance of the company. That many directors do not seem to understand this, much less the performance imperative or underlying duties and responsibilities, is a barrier to progress.

While many directors are well intended, a significant percentage say they have become confused about the purpose and role of the board, what corporate governance is and how it should be practiced. Others struggle with conflicts of interest, especially if they hold multiple roles such as is common in private companies and family firms. Research is revealing: while about one in six directors understand the business of the business—meaning the competitive landscape, emerging trends and disruptions, and the main sources of risk—some two-thirds of directors claim such knowledge. My own work with boards indicates one in twenty boards and executive teams are aligned in relation to the purpose of the company. Director capability is mixed too; nearly half of all directors believe at least one of their director colleagues should be replaced. In relation to strategy, three out of four of directors believe the company’s strategic aims and sustainability commitments are appropriate and well-articulated, and that the board not only understands but is also fully supportive of the corporate strategy. And yet, when asked, fewer than twenty-five per cent of directors can clearly describe the company’s strategy and its strategic aims.

Directors harbour various biases too, and decisions need to be made in far from ideal circumstances: a dynamic environment without the benefit of complete information—the ‘fog of war’ to invoke a military analogy. The challenge is, in effect, akin to describing with precision and accuracy a distant and irregularly moving object that is well camouflaged against a backdrop itself far from static.

A quick review of how boards spend their time is revealing: most boards seem to be more concerned with compliance, monitoring, and control activities—the underlying motivation of which appears to be the avoidance of corporate and reputational risk, and the protection of personal and professional reputation. That the board does not run the company directly—the chief executive does—and that decisions take time to implement and have effect, exacerbates the challenge.

Conceptually, the principles outlined by Tricker¹ seem straightforward and easy to understand. Guidance to assist boards navigate turbulence and achieve ‘best practice’ is not in short supply either. In fact, a surfeit of recommendations has now pervaded directors' institutes, consulting firms, universities, and boardrooms. Codes and regulations have been introduced in many countries as well, to provide boundaries and guidance to boards. Amongst them, a clear separation between the functions of governance and management; diversity of various forms; say-on-pay; ESG and sustainability; and, independent directors have been promoted at various times, as precursors to effective board practice, sustained operations and, ultimately, high company performance. Many boards and shareholders have been enthralled by these recommendations as they have searched for a definitive board configuration to suit their purposes. To what effect? Boards continue to stumble and, sometimes, fail. That they do, despite seeming to comply with conventional ‘best practice’ recommendations, suggests that new approaches are required.

If boards are to contribute effectively, to realise the full potential of the governed business (while also minimising the chance of corporate failure!), directors need first to embrace their duties, and maintain an active and sustained involvement in steerage and guidance of the company towards an agreed goal. While a strategic mindset is crucial (the value creation imperative), the underlying attribute needs to be one of service: the board and management working harmoniously together, as a team in service of the company.

At the core, the board is a social entity. Therefore, the board’s work is best understood as social interchanges between directors and others, and decision-making too, not a set of rules, structures, and boxes to be ticked. Directors need to lift their collective eyes, to identify and understand the market forces, technical innovations and human factors that characterise what is demonstrably a complex and dynamic operating environment. They need to work together to make sense of information drawn from multiple sources and make informed decisions in the best interests of the company. And if this is achieved, the likelihood of governing with impact is enhanced.

Emerging research and practical observations of high performing boards in action point to effectiveness and impact being dependent on the synergistic interaction of three contributing elements. These building blocks are, straightforwardly: what directors bring (capabilities); what the board does (activity); and, how directors act and interact (relationships and behavioural characteristics). Together, this is the Strategic Governance Framework (*), a social ‘system’ that recognises and accounts for the subjective and contingent nature of humanity and interactions between people. And it should not be any surprise that the elements are not dissimilar to the enablers of effective teamwork (trust, commitment, compelling direction, enabling structure and supportive context) and goal attainment (purpose, strategy, values, and behaviour standards).

Necessarily, the board needs to be discerning and committed in its work, having considered information from internal and external sources, and using reliable governance practices and social interaction to make decisions and pursue performance objectives.

Once shareholders understand the competencies and behavioural characteristics needed in their directors (and recruit accordingly), and boards understand the tasks and behaviours conducive to ‘performing’ corporate governance effectively, increased influence from the boardroom is not only possible, it is potentially sustainable. The consequential impact on the effectiveness and reputation of boards, not to mention the downstream benefits on economic and societal well-being, is likely to be significant.

(*) Hear Dr. Crow discuss the Strategic Governance Framework and its implications for private companies at the PDA National Conference.

¹ Tricker, R. (2019) "corporate governance: principles, policies, practices" (4th ed.) Oxford University Press. Oxford, England. 

ABOUT PETER CROW, PHD

Dr. Peter Crow is an independent director, advisor and educator, best known for his expertise in corporate governance, strategy, and boardcraft, and extensive record helping boards govern with impact.

Peter holds a doctorate in corporate governance and strategy, a first in technology and management, and is a chartered member of the Institute of Directors. He lives in New Zealand but works globally.