Here is a simple question for you to ask of your next board agenda – how many of the items ‘for decision’ on this agenda really need to be at the board table? Really challenge yourself on this point, answering not only what needs to be there but, in each case, why?
When it comes to many such decisions confronting boards today, too often the board feels at sea. Too much technical information and too little familiarity around the board table with the concepts concerned can result in the board not only failing to add value but instead subtracting value. As one CEO put it, when the board feels uncomfortable in the territory of a particular decision, it is easier to say ‘no’ than to say ‘yes’ even though it may be a tremendously exciting strategic opportunity. Directors fearing liability, even subconsciously, for corporate decisions might equally subconsciously believe that they are less likely to be ‘found out’ for rejecting a proposal than accepting it with potentially dire consequences if they have not adequately understood the risks. This is clearly not a good enough result for the company where individual inadequacies in the knowledge or experience of the board as decision-gatekeeper prevent decisions being taken.
I suggest that there might be two legitimate reasons why a decision really warrants being at the board table; first, because the board can add some real strategic value to the decision or, second, because it is something that is so significant that the board provides appropriate ‘checks and balances’ rather than leave it purely to management. Please, challenge my thinking on that but if you cannot satisfy one of those two criteria, I ask you to be honest with yourself as to why it really needs to be at the board table. In some special cases, as explored a little later in this article, it might even be the more responsible course to appoint a designated group other than the board to be responsible for the decision.
Of course, there are also many things that legitimately get to the board table without needing a decision. This includes the range of management matters or strategic projects that are reported to the board directly or through one of its committees ‘for information’ only. This type of information fulfils a different function, namely to help the directors fulfil their ongoing monitoring responsibilities and to enable the board to understand the business of the company. The value of this type of information becomes apparent when a major board decision draws on this wealth of background knowledge developed over time.
Returning then to the opening question of what decisions really belong at the board table, consider that question against the two below criteria suggested for legitimising decisions remaining on the board’s agenda:
Value-adding Decisions by the Board
As discussed in the article entitled ‘Board as ‘Agent’ for the Owners (or are they?)’ published on this site in June 2016, the prevailing theory of the board that has emerged over the past century regards the board as the ‘agent’ for the ‘principal’ – the latter being made up of the shareholders as collective ‘owners’ of the corporation (or ‘members’ of a not-for-profit). This prevailing view is extremely flawed, as discussed in that article. Compared to the company board as agent, there is no other field of life in which the so-called agent holds disproportionately so much more power than the principal.
Instead the article supported the refreshing idea (posed by authors Blair and Stout in 1999) of the board as the ‘mediating hierarchy’. This is essentially a view that the board is collectively the servant of the corporation itself, not of the shareholders or members. It sees the role of the board as being to mediate the interests and inputs of the various interested stakeholders of the company, including employees and shareholders.
On either view, whether the board ultimately serves the shareholders (agency theory) or it serves the corporation through balancing the different interests of the stakeholders (mediating hierarchy theory), the board should be serving to add value for the benefit of those it serves. Many directors and executives today will readily – if privately – admit to one another that the board is unable to add much by way of value to many, if any, of the board’s decisions that are already well-considered by greater subject-matter ‘experts’ within management or as advisers to the company. There may be more opportunity for the board to add real value in smaller private and not-for-profit companies where management resources are truly scarce.
It is to be hoped however that the board can add some real value in the instance of anything that might be classified as a strategic decision. If the decision can be classified as strategic – something with significant and/or long-term ramifications for the company – the board’s role in challenging management (and ‘expert’ adviser) thinking should be of real intrinsic value. This is because management having done much of the work in bringing the idea to fruition can become too entrenched and convinced of the merit of its own ideas and so robust challenge from the board is of intrinsic value. Provided, of course, that the board in fact does use real intellectual effort and the benefit of its collective wisdom and experience, in challenging management thinking, and doesn’t just regard itself as a ‘tick box’ filter for management ideas.
Ultimately of course, in any boardroom, the extent to which the board can add real value to strategic decisions also depends on the board taking a healthy approach to director diversity and board refreshment. If the board remains largely unchanged over lengthy periods of time then it is to be expected that the value of fresh perspectives from the board on entrenched management thinking will be diminished. If the board does not work hard to break out of the mould of recruiting other purely ‘like-minded’ directors (code for ‘just like us’) to the board, then the board itself simply becomes another entrenched-thinking group and its value-add to strategic decisions will be diminished.
So, ask yourself, does the decision remain on the board’s agenda for this reason, namely that it is something in respect of which the board can add real value? And does the board add real value? These are two different questions.
Checks and Balances
Boards also add value in a second category of cases of matters legitimately reserved for board decision, namely in cases where they provide an important ‘check and balance’ to corporate decision-making.
These days, board and management will usually have agreed a statement of Matters Reserved to the Board and Delegations to Management (or the CEO). However, in asking yourself whether the matters on the board’s agenda warrant staying on the board’s agenda, you should not just answer with: ‘yes, it does, because it’s a matter we’ve reserved to the board!’ Rather, ask yourself why it is a matter reserved to the board. Should it still be a matter reserved to the board?
Without doubt it is an important boardroom practice to reserve to the board approval of expenditure outside budget and/or over a certain dollar spend (even if within budget). This enables the board to continuously discharge its responsibility for financial governance; monitoring the financial management throughout the year. However, it is important for boards to consider carefully the dollar level over which it reserves decision-making authority so as not to hamper management being sufficiently fleet of foot. Perhaps there should be a dollar level over which matters are promptly reported to the board and a higher level over which the board reserves true approval authority? Challenging the extent to which the dollar spend reserved to the board is appropriate for the size of the organisation’s budget and balance sheet might cause a rethink in many instances.
Other types of decisions that are explicitly reserved to the board should also be worked through carefully – one by one – against the test of those things in respect of which the board provides valuable ‘checks and balances’ for management. Naturally, for instance, decisions relating to the engagement, performance management and termination of the CEO belong at the board table. But what else belongs at the board table in this category of ‘checks and balances’ will depend very much on the size and sophistication of the organisation. For instance, in some organisations, any type of borrowing or similar financial facility might well warrant board approval. In a larger organisation there may be a great many such borrowings and financial facilities that do not warrant the same level of board oversight based on the low level of overall risk they present to the company.
Again, ask yourself, why is this a matter that is reserved to the board – is it providing a real and valuable level of ‘check and balance’ to corporate decision-making? If not, then go ahead and remove it from the board’s reserved authorities. But don’t forget to put it onto the CEO’s delegated authorities – or make it otherwise clear who is considered responsible for the decision – so that the accountability for it is clear. Which takes us to the next topic of special case decisions where the net of corporate decision-makers might be cast even wider than the board and the CEO.
Special Case Decisions
There will from time to time be the ‘one-off’ decisions that do not seem to fit neatly into the usual business of the board. For instance, a major building project for a small not-for-profit organisation or a generational IT upgrade project for a company.
As mentioned at the outset of this article, this may be the type of decision that the board is not the best placed group to decide.
Perhaps it is time to rethink the old model of all decisions resting ONLY with the board or the CEO. Perhaps it is time to think about who is best placed to make the decision for the company. Because perhaps it is not the board or the CEO in such a case. Perhaps the well-respected duty of care and diligence of directors should be considered to demand that the board put more effort into deciding who will decide, and delegating that decision-making power explicitly (which is permitted by the law in spite of popular mythology to the contrary) than into the ultimate decision itself.
For instance, it may be that in the examples given a small working party convened over several months or more and comprising some board members, some management and some external advisers and other stakeholders might be the group best placed to make the decision. Not only to advise the boards, as is common practice today, but to make the decision. Naturally this should not be at the cost of sacrificing appropriate levels of caution (care and diligence) in the decision-making. It would require a good deal of effort on the part of the board to satisfy itself that it has chosen the right group of decision-makers and made it clear to them that they are responsible, and might be held accountable, for the decision. However, it is time to consider that this is the type of board decision-making that could add real value to a company.
Perhaps it is time to truly disrupt the way boards work for the benefit of the many stakeholders interested in its decisions.
What do you think?