by Don Lowman, Towers Perrin
Readers of this blog may not realize that I am an executive compensation consultant. I have been for most of my 27 years at Towers Perrin. In today’s environment — with all of the bad press about “grossly overpaid” CEOs and words like “shameful”, “outrageous”, “inconceivable”, etc. being used to describe various aspects of executive pay — you may wonder why I would even admit that I consult in this area. But I am proud to be an executive compensation consultant.
Critics argue that a central issue with respect to the problems of executive compensation — and, much more significantly, with respect to the crisis that has sent the world’s economies into a tailspin — is one of governance and a failure to understand and oversee risk.
The responsibility for assuring effective corporate governance resides principally with a company’s board of directors. And in many recent cases of company failures one of the root causes was the failure of company boards to fully engage and dig into the true economic and financial circumstances of the companies they were responsible for governing.
So what do great boards of directors do? They fully engage! What does “full engagement” mean in the context of a board of directors and overall corporate governance? Here are some things that great boards should do:
- Don’t overcommit and underdeliver. Being an outside director today requires more time, attention, and commitment than many board members can realistically devote . Twenty-five years ago, many outside board members served on six, seven or more boards. Today, three board assignments is a stretch for most. It may feel prestigious to have a longer list of board appointments, but this can put the board member and each of the companies he or she serves at significant risk.
- Do your homework and pay attention. Board members need to insist on receiving information for Board and committee meetings at least a week in advance of the meetings, and they need to study the materials and prepare good questions in advance of the meetings. Board members can no longer fulfill their responsibilities by simply skimming documents as they travel to the meeting. And the chairs of board committees need to work with management to ensure that sufficient relevant background information is prepared and distributed to committee members.
- Ask lots of questions — even if the question may seem stupid. For many years, board members would sit politely and listen to management presentations and quickly vote “Aye” when the resolutions were read. And the meetings would be pretty brief and remarkably smooth and comfy. Today, board members have to raise questions when issues aren’t explained to their satisfaction, when unfamiliar terms are used, or when there seems to be incomplete discussion of potential risks. It is too risky not to ask.
- Insist on executive sessions. Boards and their committees must reserve time to discuss issues without management present. Executive sessions allow for a more open dialogue and enable Board members to raise issues and concerns they may feel uncomfortable raising with members of management present.
- Get to know the next generation of leaders. At some point, often before it may be planned. senior executives need to be replaced. It is very costly to go outside the organization for new leaders, both in recruiting costs and make-whole payments, as well as in opportunity and transition costs. Insist on meeting the next generations of leaders and ensure that there is an organized process for their development.
- Don
2 Comments
Dear Don,
What a timely topic of discussion. Julie was in KL and I had the opportunity to ask on the every same issue – “how come EE not KRA for good corporate governance?”
Sad as it may be for many who have been affected by the economic downturn, what a wonderful opportunity it presented in opening up, more so eyes rather than doors. Yes, it’s time like these issues of leadership responsibilities and accountabilities come into question and scrutiny.
So, what lessons do we take forth in making sure we learn and do not get ripped off by financially creative wizards and blissfully ignorant “yes man” BODs.
You mentioned, “So what do great boards of directors do? They fully engage! What does “full engagement” mean ….”.
I understand your discussion addresses the core issue at hand that calls for BODs to into the true economic and financial circumstances of the companies. But taking a competency perspective, don’t you think BODs should be held accountable for how the business is run – the strategic and operational component, as well. I am not sure about the US, but Malaysian code on corporate governance was revised in 2007 to hold BOD on 6 areas of responsibilities. And first on the list, is,”reviewing and adopting a strategic plan for the company”. I do not want to sound cynical, but this must be a joke!. The basis of my argument is – competency. How can you review a plan if you do not know how to formulate one, in the first place?.
The second responsibility states is related to my earlier point. It says, “Overseeing the conduct of the company’s business to evaluate whether it is being properly managed”. Now, you tell me, how can a BOD be effective if they are confined to a room, analyse “good news” reports and listen to great presentations.
Then there is this thing on “Succession Planning”. This I cannot understand. Do they really expect to see?. I work as a group HR in public listed company and this a taboo topic.
I have had a few e-mail exchanges with the Director of training for Malaysian Security Commission on this subject. My point centres on, “How to make accountability stick, when self-regulation at the BOD, fails?”. Where or when does regulatory measures come in. Or is it meant to be “free for all” discipline that is market and maturity driven.
I feel it is time BODs be held accountable for more than mere token representation. They need to be see ‘walking” the ground, digging deep and being “physically” engaged with the people, system, structures and even culture. The time has come to measure the behavioural dimensions of BODs beyond the attendance records !. Responsibilities must be tied to KPIs and record of performance. If they are the top guns responsible for a code of conduct, why should their very behaviour and performance results be be above the law and best practice. Does, “What gets measured, gets done” not apply to BODs in rolling out good corporate governance?.
The biggest challenge here is, “lets get good before we become great”.
Regards
Yuva
Thanks for your comments. I believe a company’s board should be held accountable for ensuring that the company has an effective management team in place to execute on the company’s annual and longer-term business and strategic plans. Boards should not be involved in the day to day operations of the business — that is the responsibility of management. If a company under-performs and fails to achieve the objectives that have been set, the board’s responsibility is to make sure that proper steps are taken to improve performance. And if the management team is unable to improve the company’s performance, then the board’s responsibility is to replace the members of management with other qualified people who can. While I agree that boards need to take a more active role in understanding and evaluating the actions taken by management, they should not be more actively involved in the business’s day-to-day operations. Most outside board members have other full-time jobs and also serve on one or two other boards. The involvement you suggest would be impossible for them to take on. – Don Lowman