Sunday, September 7, 2014

Corporate Boards – the 'Dark Matter' in the Corporate Universe

In the 16th August 2014 edition of The Economist, columnist Schumpeter writes about the performance of corporate boards as something that ‘might politely be described as mixed.’ He goes on to describe a novel proposal in the May edition of the Stanford Law Review to replace individual directors with professional-service firms, or ‘Board Service Providers’ (BSPs).
At first glance, this proposal has some appeal – after all, Westlake Governance would be a well-qualified and credible BSP, were they to emerge!
However, before we jump to this conclusion, let's be sure we have a real problem.

One paradox of corporate governance is that an effective board is usually invisible to outsiders; its wisdom and insights are evident mainly when the company succeeds, and we typically celebrate its visionary CEO. Boards typically become visible only when things turn sour – most obviously when the directors appear before a judge to face charges.
The traditional picture of independent directors, owing their appointment to the very CEO they are there to monitor, and resembling the description of one prominent chairman – ‘like parsley on fish… decorative but essentially useless’ – is not universal and is increasingly seen as flawed. In many countries, even in the USA, highly performing boards not only appoint (and fire) the CEO, but also hold her or him fully accountable for the company's performance. In addition, such boards identify the gaps in their own skills and experience, and appoint new board candidates with as much rigour as they apply in hiring the CEO and other senior executives.
As many of those who work with us will know, Westlake Governance has developed the FICKS™ Governance Framework, which boards are increasingly adopting to guide them in applying their talents in the right areas – to ‘FICKS their boards’ – very broadly:
  • 60% of their time to creating value – Future focus (strategic decision-making) and discussing external Issues and risks ("F, I");
  • 30% to preserving value – ensuring the company is legally Compliant and solvent - and monitoring Key performance indicators, holding the CE to account ("C, K"); and
  • 10% to ensuring the board remains fit for purpose – dealing with Succession, Skills and governance Structures ("S"). 

As someone who’s been a director and board chair for the last twenty years, I know there's little general understanding of how boards add value; they’re like the undetectable ‘dark matter’ in the corporate universe. But, like cosmologists, Schumpeter and the creators of BSPs risk making flawed assumptions, with unpredictable consequences, if they ignore them and draw their conclusions only from what's visible.
Welcome a-board!