Corporate Boards: Moving Beyond Compliance Toward Organizational Effectiveness
In most states in the U.S., a corporation can be formed with a minimum of three directors to make up the governing board. These three roles typically include a chairperson, a treasurer, and a secretary.
For publicly traded companies, though, three board members are almost always an insufficient number to fulfill the duties and responsibilities that are required. The right/optimal number is a somewhat elusive debate in corporate governance circles. Those in favor of larger boards claim that they enable performance benefits by allowing more connections to the outside world, providing more access to resources, and enabling a higher quantity of qualified board advisors. Those in favor of smaller boards claim they provide better board member collaboration and improved member communications. They also claim that in situations with a smaller number of board members, it is more difficult for the CEO to exert control over the board.
The Fiduciary Duties Of A Board
The right number of board members should and need to be determined by the duties and responsibilities that the board is asked to perform on behalf of the shareholders. The most common of these include the operation of a core set of governance committees such as nomination, compensation, audit and finance. Each of these committees seeks to assure shareholders of the proper, effective, and efficient operation of the firm and to provide a checks and balances mechanism with management.
Each committee listed above, and most board committees used by publicly traded firms in the United States, are required by legislation and are part of the firm’s compliance efforts. Nomination committees ensure the proper succession of both executive management and board positions. Compensation, audit, and finance all ensure fiduciary duties are performed according to regulations. Board obligations do not stop at fiduciary and succession duties.
Why Boards Should Move Beyond 'Compliance'
While the establishment of these committees may ensure compliance, they repeatedly fall short of truly providing significant assurance to shareholders regarding the effective and efficient operation of the firm. Shareholders and other investors are calling on boards to provide independent insights, knowledge, alternative viewpoints, and guidance on management decision-making.
In order to do this, boards must concern themselves with formally examining the alignment between the firm’s goals and the organization’s ability (management included) to execute on them. Ensuring effective and efficient operation of the firm extends the board’s “classic” fiduciary responsibilities and pushes a board into the space that has been historically reserved for management.
This is exactly what is done in the case of hostile takeovers and active investors; in these situations, the investor becomes actively involved in the decision making of management. When firm performance dwindles to the point where active investors become involved, inevitably they concern themselves with a small set of key decisional items. These include product/service offerings, market entry/development, pricing, initiative selection and requirements definition, available talent and talent management, organizational design, and key performance indicators connected to incentives.
These seven key decisional items drive performance, and active investors are keenly aware of this. This same involvement is what shareholders are looking for out of boards.
Organizational Effectiveness And Performance Improvement
These new duties that are being ascribed to boards are essentially the discipline of organizational effectiveness (OE). OE addresses talent management, leadership supply and development, organization design and structure, business measurements and scorecards, process development and improvement, and change transformation. OE efforts uniquely lend themselves to inclusion into governing responsibilities by boards. Every OE responsibility listed above produces a unique output, which provides in-depth insight into the effectiveness and efficiency of the firm’s operation.
Talent management and leadership supply/development yield talent profiles, succession plans, workforce plans, and development plans that enable talent movement in a firm. Organizational design can provide for a review of firm structure across business scenarios, ensuring that the firm is ready and nimble in order to respond to changing market dynamics. Business measures and scorecards provide a view to the effectiveness of management’s strategic planning, initiative selection, and execution. Process development and improvement, along with change readiness assessments provide a gauge on the firm’s progress toward capability development and maturity, which in turn drives the firm’s effectiveness and efficiencies.
The outcomes of OE lend themselves well to board committee oversight. This partnership between internal OE experts and a board OE oversight committee would provide an additional check/balance mechanism that, by and large, does not exist in publicly traded firms today. Establishment of OE would help boards bolster their independence and the ability to assure shareholders of the effective and efficient operation of the firm.
The next article in this series will focus on the ability of board OE capability to mitigate the dangers of the agency dilemma.