A governance expert once said to me: The real job of the board is to find the next CEO.
Watching the long and growing list of CEOs who have recently left their positions – HSBC, eBay, Juul, WeWork to name a few – it appears boards have been busy.
But have they, really?
These were all high profile departures in the full glare of public scrutiny for one reason or another.
It is not improbable that in these instances, the boards only acted because they knew their actions — or lack of actions — were being watched. In other words, optics may have driven boards into taking action.
It is not improbable that a large number of similar situations are simmering below the surface, below public radars, or beyond media reporting, where terrible CEOs are still at the helm making bad decisions and destroying shareholder value and ignoring stakeholder impact. In the UK, for instance, the Wates Principles do not but should apply to the smaller private companies too.
All of this makes me wonder about boards and their role as it is now, and whether the way boards work currently is fit for purpose.
Board hiring is non-transparent in most cases though this is changing. Given how most hiring is happenstance, poor outcomes in governance should not really surprise anyone but they still do.
Boards, in theory, seek independence in their directors. That sounds good, right? Cognitive independence and sufficient dollops of it around the table can help mitigate the risks of group think. In practice, many boards are content to box-tick independence. The UK Corporate Governance Code’s guidelines on non-independence unfortunately end up being used as a checklist.
.. a director who has been an employee of the company within five years; or, has had a direct or indirect material business relationship with the company or its officers; or has received remuneration, apart from a director’s fee, from a company’s employee or pension scheme; or has close family ties with the company’s advisers, directors or senior employees; or holds cross directorships or has links with other directors through involvement with other companies or bodies; or represents a significant shareholder; or has served on the board for more than nine years. The inclusion of such a person as a non-executive would constitute non-compliance with the Code and would require justification by the board.
Boards can be too fixated with fiduciary box ticking than actual accountability and direction-setting. These are not mutually exclusive, but they can often be seen that way and can get embedded in a board’s culture. There is a third kind of challenge — boards that are too involved in the detail of operations, and are actually doing the job the CEO or the exec team should be doing. If one had to choose one evil to get rid of, my vote would be on the last kind of, uh, engagement model.
Boards can not realistically know more than the execs they hold accountable, given the limited time asked of them and given their reliance on information supplied by the exec teams. Even the sharpest questioning can at times fail to unravel fraud. A lot of decisions rely on tacit information elicited to supplement the codified information board packs contain. To be effective in oversight, board members may need to build good relationships outside the board and invest time in them to be more well-informed. These back channels serve an important function but are replete with problems. They can inadvertently facilitate the next issue.
Boards (and committees) are susceptible to capture. Undocumented communications on the sidelines, outside the board and without a trail can create significant information asymmetries, enforce biases, undermine trust, and derail adequate functioning of the board.
Boards may not actually know what the company’s diverse and changing shareholder base actually thinks about various issues. Despite some stellar guidance at least in the UK, in the corporate governance code, boards can remain focused on shareholder interests instead of widening their lens to stakeholder interests. These two issues are related. Neither on its own is helpful for good stewardship given the business environment of rapid change, complexity, and uncertainty. A dispersed shareholder/ stakeholder base makes things much harder for enlightened capitalists.
Board decisions and the impact of those decisions may be public but the decision-making often remains opaque. Sometimes for good commercial reasons. Sometimes not. This is a difficult problem to resolve.
Which brings us to the last but not the least point: Quis custodiet ipsos custodes? In listed companies, there are mandatory disclosures to shareholders but apart from large institutional shareholders, few have any other insight. In unlisted or privately held companies, some shareholders may have a board seat but others rely on shareholder communications if any are forthcoming at all. There are many ways the principal-agent problem can manifest here.
A board’s major task may be to find the next CEO. But sometimes even the bravest board cannot stand up to a high profile hero CEO, and his or her personal brand. Sometimes it may be the tide of public opinion, and the board and the CEO just read the room, nay the entire market, wrongly. It is possible to get a lot wrong.
A board’s most important task is to ask regularly if it itself is fit for purpose.
That requires, above all, a deep sense of self-awareness, cognitive independence, and metacognition, which are skillsets no boards seem to be seeking actively in their search for new directors.
I would be happy to be told otherwise.
(Disclaimer: These are my own views and do not reflect the views of the boards of JP Morgan US Smaller Co.s Investment Trust or Temple Bar Investment Trust or London Metropolitan University, where I serve as a non-exec director, nor of Ditto AI, where I am an exec director.)