What are boards for? Do they do what they are meant to? And do owners hold them to account?
Back in March, the Financial Times began a series of articles on Better Boards, and in an earlier Strategy Snack I referred to an article by Andrew Kakabadse of Cranfield Management School in which he suggested that "non-executive roles are 'of little or no value to the business'".
The series of articles was introduced with one from Peter Whitehead, which begins with the comment: "using a board structure to run a business might be horribly flawed, but no-one seems able to devise anything better. This is the consensus view of those working most closely with, or on, boards of directors". He goes on to suggest that "one of the first questions anyone seeking a non-executive role, or to extend their portfolio of positions, needs to ask concerns the very purpose of boards".
Lesley Stephenson, publisher at the Financial Times Non-Executive Directors’ Club, thinks that without boards businesses would be even more short-term in focus. She says: “one of the reasons boards were introduced is to deal with the ‘agency problem’ – so that the people who are responsible for running the company do so on behalf of the people who have invested the money and expect to make a return. The problem arises because the first group is assumed to be operating with the best interests of the second group in mind, but in fact the interests of the two are not necessarily, indeed arguably cannot be, aligned.
Managers do not have their own money invested in the company and have their own self-interests at heart and will want to be applying strategies and actions that maximise their returns as opposed to perhaps longer-term strategies that will add value to the business.
This might not present human nature in a very positive way, but I think given the excesses, scandals and financial failure of business under the current regime – which is by no means perfect – I hesitate to think what would happen if there were no checks and balances at all”.
What this quotation does is to confirm that giving managers stock options as incentives, intended to be a means of dealing with the agency problem, has failed. And, if anything, has made the problem worse. This is now well-recognised, but is the problem being fixed?
What the board is for, and what the board does, are also thought to be two different things in many cases, as Jennifer Sundberg, Founder and Managing Director of Board Intelligence, a consultancy which advises on board efficiency, makes clear. She says: "we ask the board, what is your board for? And we get very upset when people start to parrot the UK Governance Code at us. Just as a good driver is not one who merely adheres to the Highway Code, a good board is not one that merely achieves the lowest level of adherence to the code.
The board is there to help fashion the business in a manner that is appropriate to all of those invested in it, be that financially or as an employee, or customers who depend upon its services. It’s not just an entity concerned solely with risk management and value preservation. But at the moment, risk management, value preservation, scrutiny, probing and policing, which are absolutely core roles of a board, are at risk of filling all the time the board has available”.
Another observation Sundberg makes is that "fluid ownership structure of most large UK companies can make the non-executive’s role ambiguous. If you are on the board of a listed company with an amorphous shareholder base, I see the job as being that much more ambiguous.
We’re only human and if you’re on a board representing somebody with whom you can identify, somebody with a human face, I think we behave differently than if we are representing somebody that we’ve never met and somebody that does not actually have the long-term interests of the company at heart.
Yet somehow a non-executive board is supposed to maintain their interests. They don’t exist as an individual; only as a notion. It’s quite hard to get passionate about defending a notion. Because as long as the investors are disengaged from the long-term interests of the company, it’s not the best context for a board to thrive. There is no substitute for owners – and we have a lot of ownerless companies.
A pension fund with an asset manager might have hundreds of investments. So they’re just voting. It’s a full-time administrative job just dealing with the paperwork for AGMs, EGMs, voting, etc. And, frankly, most fund managers see that kind of engagement as a pain in the rear end”.
The comments above suggest that in many cases boards do not know what they are supposed to be doing, or are not doing it even if they do, and they are not properly held to account by owners if those owners are institutional investors. These are generalistions perhaps, but if there is truth in them we need to be very concerened.
Written by Paul Barnett, Founder & CEO, Strategic Management Bureau
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