Companies Differ, Why Not the Roles of Boards?

Originally Posted February 2010

In a long article published in Board Member on February 09, 2010 (Hang On- Say on Pay Heads Your Way) author John Greenwald says: “Rules flowing from the Securities and Exchange Commission and included in the enormous financial-reform bills before Congress could subject your board to the most intense scrutiny yet on everything from executive pay to risk management to shareholder rights…  For shareholder activists, Washington’s gusto to regulate is long overdue.”  However, Greenwald says that some business organizations feel these regulations are overreaching and are “a misguided mission to stamp one-size-fits-all mandates on every boardroom.”  Greenwald quotes Harvard Business School professor Jay Lorsch as saying:  “Trying to legislate what a board should look like and all that stuff is about as sensible as saying that every company in America should have the same management structure.”

We agree with Professor Lorsch based both on our research and our years working with companies of all sizes and in all states of development. Boards need a lot of flexibility to design themselves around the needs of the company, and we agree that it is impossible and may even be detrimental to legislate a configuration.

Confidential client research consistently shows that configuration of the Board of Directors for a particular company needs to match the business strategy, the stage of the company’s maturity (start-up, emerging, growth, mature, etc,) and its size and other critical factors. The Board of Directors (like any other group) has a number of configuration issues which we sum up as its people strategy, which consists of the Board’s structure, processes and culture. These are critical success factors.

It is important to remember that Directors roles are impacted by certain drivers:
1) Stakeholders: including the level of shareholder activism, client/customer concerns and issues; and management and employee concerns and issues
2) Business-specific environment and conditions: including the level of competitor threats; the potential for unique events such as acquisitions and divestitures, and
3) Financial performance:  including the business stage of the organization

The structure of the Board and role of its Directors must be appropriate to the organization’s individual situation. It must be structured to sustain and promote the organization’s goals, which will differ based on the company’s size, industry and developmental stage.

Essentially, Boards operate in one of four ways:
• Contractual: Directors function primarily as a “sounding board”
• Conditional: Directors provide advice and counsel
• Conventional: Directors help to set the agenda and review and approve business strategy
• Consensual: Directors have substantial influence over management and the organization, creating strategy and taking responsibility for its execution.

Considering all these variables, it is not just unlikely but implausible that the SEC or Congress could legislate a structure that would be viable for all business concerns.

At the end of his article, Greenwald shares that: “Measures in the Senate take double-barreled aim at companies where the CEO and chairman positions are held by the same person. Activists want to separate the two roles.”

Here is a good example of how wrong headed these requirements could be.  Certainly for a well established company which is comfortably in the growth or maturity stage of development, having a separate CEO and Chairman is entirely appropriate. The trend has been to separate these positions at public companies, and for t successful companies this has been a very good thing. Going back pretty far in time, perhaps 10 or 15 years, there was a real “clubbishness” with Boards.  The unspoken expectation was that “I will sit on your board and raise your pay; you sit on my board and do the same for me.”  This practice contributed to the inflation in executive pay. The SEC essentially put a stop to it with rules associated with Board “interlocks.”

Still, the influence that a CEO/Chairman has over Board decisions is undeniable.  But in some cases this is a good thing.  For a company just starting up or one engaged in a life-or-death struggle for success (a “turnaround company”), it is foolish to choose anyone but the same person as the CEO and Chairman. While all organizations are in fact in “economic war” with competitors those that are in these two stages (start-up and turnaround) require speedy and impressive decisions. While great decisions can come from a group, it is rare that a fast The best performing companies at these two stages (start-up and turnaround) need a single unifying leader, not a multilayered decision making process. The Board’s contribution at these times should be to pick the right CEO & Chairman and get out of the way.
Clearly, changes lie ahead for Boards and their members.  There are two areas where Boards and Directors would be smart to not just embrace but to lead these changes.  First, Boards must develop more specific corporate charters regarding Board roles and responsibilities. “Role confusion” increases liability and the potential for shareholder suits.  Individual Director roles must also become better defined in the form of official position or role descriptions.  Director descriptions will specifically outline the range of a Director’s responsibilities and duties, and will also determine the limits of accountability. This will be critically important in all of the major leadership roles.