Henri Eliot: What should boards really focus on?
9:30 AM Wednesday May 14, 2014
What should boards focus on?
Given the recent scrutiny that company director’s face, understanding the scope of their key responsibilities is critical for effective corporate governance. I’ve compiled a list from my research from several sources that may provide tips for directors and boards on the key areas they might want to think about when setting their list of priorities.
1.Strategy Oversight and Development
Strategy sets the direction for a company and impacts virtually everything the company does. The right strategy is often the best starting point for business success. The board has a vital role in overseeing management’s development of the strategy and future successful implementation. Recently, this has become a challenging area, as directors need to completely understand the company, industry, emerging trends and risks coupled with management’s key assumptions.
If directors are equipped with the right information and time, they can engage in a robust discussion that allows them to contribute to management’s proposed strategic plan. Ideally, this involvement will help ensure that the company adopts the right plan that will enhance shareholder value in the medium or long term. There are too many examples of strategies gone wrong and the board’s involvement was not adequate.
2. Risk Management
Companies today face a multiple of known and unknown risks. Some of these risks turn into a major crisis that may have a significant impact on their operations or even the company’s future. Any potential risk or crisis is a major challenge for boards to ensure that these risks are monitored effectively.
Often Boards delegate elements of risk management oversight to the appropriate sub-committees such as the audit committee. But ultimately the responsibility for risk oversight resides with the full board, and each director should understand the key risks facing the company. Boards need to better understand the changing landscape of risk oversight, management’s role in managing risk, and effective ways to oversee the process.
3. Corporate Ethics
Compliance with laws and regulations is critical. Directors need recognise that it is only the starting point in creating a culture of ethical behaviour in a company. The right tone at the top, reinforced by business unit managers throughout the company, is vital to ensure these values cascade to all employees.
4. Monitoring Company Performance
Boards use many metrics or dashboards to monitor company performance. This may include traditional financial metrics and non-financial metrics coupled with industry information. In order to monitor your company’s performance, it’s important to know which metrics are most effective in helping directors to understand performance and be alerted to signs of trouble. Commercially astute directors also know that it is important to raise concerns based on a gut feeling or a strong sixth sense- even if their concerns prove to be unfounded.
5. Transformational Transactions
At some stage, a company will go through a merger, acquisition or joint venture. The stakes are high in terms of investment, reputational risk, and whether the transaction will contribute to the strategic success of the company. Given this scenario, boards play a key role in working with the management team in ensuring the deal maximizes shareholder value.
6. Management Teams Performance, Compensation and Succession Planning
The Board is ultimately responsible for managing the CEO’s performance and ensuring the appropriate evaluation and compensation process is in place. Shareholders and media scrutinise the executive’s pay.
The board must find the right balance between executive remuneration and performance in order to achieve long-term shareholder value. The issue of CEO succession needs to be dealt effectively as most boards struggle here. They should look at identifying and developing their own talent internally first as part of any succession planning activities.
7. Communicating with Stakeholders
Boards need to ensure that communication with stakeholders is transparent, accurate, and reliable, while balancing increasing demands for more information in a digital age of instant communication.
8. Boardroom Dynamics
Board composition and leadership are critical in supporting the board’s ability to carry out its responsibilities effectively. Boards need the right combination of skills and experience. They also need a Chair who will ensure that the board is effective in its fiduciary responsibilities to shareholders.
Henri Eliot is CEO of Board Dynamics