WHAT CAN QUOTED COMPANY BOARDS DO TO ENCOURAGE SUSTAINABLE PERFORMANCE?

The Pressures on Boards.

Boards are under unprecedented scrutiny from investors, press and regulators. Recent years have seen a convergence between pressures from investors for very high financial performance and for compliance with the letter of the Combined Code on Corporate Governance.
Research shows that directors believe that the dominant influences on their reputations, tenure and wealth now come from institutional investors, aided and abetted by the financial press. One effect of all this pressure is to threaten the unitary character of UK boards, to the extent that non-executive directors are regarded by investors as the independent guardians of the 'shareholder' interest.

Further research shows that most directors believe the most valuable role of the board is to craft the company's strategy, not to police compliance with codes of governance - it has been demonstrated that the scale of value destruction by all the compliance disasters and scandals is a minute fraction of that destroyed by misguided and inept corporate strategies.
Despite this, most press and investor attention has been focused on compliance - presumably because it is far easier and more immediate to 'measure' compliance with Codes than to exercise complex judgments about the quality of corporate strategies.
But, it would appear that the small minority of investors who do make mature and informed judgments about qualitative as well as quantifiable aspects of corporate behaviour tend to out-perform the investment markets by significant margins over the long term.

Taking the Initiative to Develop the Company.

So, it would seem rational for boards to focus the bulk of their special skills and experience on crafting superior long-term strategies for the enterprises that they lead - taking Code compliance seriously, but not allowing it to get in the way of strategic leadership. This way, all stakeholders are likely to benefit the most through sustainable value creation and containing strategic risk.

Many boards seem to be passive or resigned to the fact that their focus must be on what investors want - even if this means destroying viable companies - and maybe some directors see benefits in pleasing investors rather than standing out for the long-term interest of the company.

What can boards that are concerned to sustain the long-term viability and independence of their companies do in a world that is becoming increasingly unstable, combining competitive pressures from the global economy with a growing confusion of often conflicting investor demands?

What can Boards do?

There are no sure-fire strategies - but here is a distillation of the experience of some very experienced and successful Chairmen and CEO's.........

1. Don't try to 'second-guess' investors. Develop and follow strategies that serve the company's best long term interest and create sustainable value.

   The board's role is to do the best for the long-term interests of the company and its shareholders. This means using all the skills and experience available to create and implement successful competitive strategies.
   It will be impossible for a board to satisfy the multifarious, often short-term and changing needs of investors - and boards, except in times of crisis, should not try to follow the moods of the investment markets.

2. Don't relegate 'Strategy' to periodic events and presentations, make strategic leadership more like a continuous stream of ideas, discussion, learning, decisions, actions, feedback and adjustments.

   Effective boards clear their time of routine reporting and detailed issues of governance compliance to enable them to develop a 'stream of consciousness' about the evolution of strategy and of performance against key strategic projects and milestones. Crucial in this regard is the strategic 'memory' of the board in understanding past actions and commitments, present performance and future developments. Some board members need to have been around long enough to hold this memory - otherwise 'strategy' will become disjointed and potentially lacking in coherence.

3. 'Craft' corporate-level strategy to be coherent, do-able, with clear risk assessments and multi-dimensional milestones.

   An effective board will be in touch with the company's internal and external environments, thus being able to balance clear perspectives on what it takes to be sustainably successful in the competitive market with a deep understanding of what the organisation is capable of.
   A clear 'line of sight' into the company will be enhanced by a Balanced Scorecard of performance and effectiveness measures - many of which will be qualitative - so that the board may develop realistic milestones on progress and performance - which may also be used to develop a balanced approach to top management reward strategy.

4. Communicate and promote the company's long-term strategy to the investment markets and opinion formers clearly, assertively and with confidence.

   The board is not responsible for what a multitude of investors, often with conflicting objectives, may think. But it is responsible for using all its experience and skills to develop and monitor the implementation of strategies that will make the enterprise a sustainable wealth creator - to the benefit of all stakeholders.
   
   It is likely that enterprises that have clear strategies can take the initiative to attract appropriate investors - at least they can have some influence over the make-up of their shareholder roster. According to our informants, too many UK boards are fuzzy or passive in their approach to investors.

5. Discourage distinctions between executive and non-executive directors inside the boardroom.

   Different directors will always have different roles - for example, the CEO will be primarily responsible for operational leadership of the company, the chairman for the performance of the board and with others, selecting or dismissing the CEO. Other directors should be on the board because they have specific contributions to make.
   But when it comes to exercising strategic leadership and crafting the strategy of the company, all directors should have a free and equal right and duty to make a full contribution - there should be no distinctions in this regard between executive and non-executive directors. Non-executive directors should be used as a resource to support and challenge the executive in creating strategy. Make as full use as possible of non-executive experience and judgment within the strategy process.
   Placing the non-executive directors in a policing role over the executive can be the kiss of death to effective board performance.

6. 'Design' board composition to meet specific needs.

   • Get the 'Core' composition of the board right.

     Several experienced CEO's believe that all boards need a 'core' membership, which in all cases should contain a Chairman, CEO and - (in a quoted company) - a director responsible for executing Investor Strategy. Some boards will also need an industry expert, responsible for advising on what it takes to succeed in a particular industry environment.

   • Flex the composition of the board to meet the changing needs of the enterprise over time.

     Others of our respondents contended that the 'life' of sustainably successful enterprises will be characterised by periods of relative stability, when the key issues are rolling out a developed business model and continuous improvement of the existing model. But at other times, changes in the external or internal environments will signal the need for extensive, even radical change.
     They pointed out that the composition of the board will need to be markedly different in the two cases - and that negotiating periods of extensive change needs special skills to design and execute internal change programmes and manage external concerns and pressures - as well as understanding such issues as technological and fashion changes.

   • Do not load the board with' trophy' non-executive directors.

     Non-executive directors should be selected because they have specific and strategically relevant skills - not because they are members of the Great and Good, who might be felt to be 'safe pairs of hands' by investors, headhunters or press. This perspective would immediately widen the field of choice for many boards.

   • Make sure that sufficient directors have long enough service to provide the board with a strategic 'memory'.

     Strategy is really a stream of decisions and actions over long timescales - the long-term memory of past commitments, successes and failures is a valuable resource to the board, not a liability as some contend - nurture and protect it.

7. Develop effective Processes and a supportive but challenging Culture.

   Some of the more important ideas are:
   • Make sure that non-executive directors know the business and the people who run it. In particular, this means that they should spend sufficient time in the business, that they should be encouraged to find out for themselves and not be too dependent on organised briefings. Such practices as requiring non- executives to report informally to the chairman/CEO on what they have found and their perspectives can be a very useful means of inviting contributions.
   • Discourage excessive formal reporting of routine performance and compliance issues at board meetings - leave sufficient time for making strategy 'live' at each board meeting.
   • Strongly discourage a culture of rehearsal for board meetings. Encourage all directors to speak straight and spontaneously whenever possible.
   • Design board information systems to focus on a Balanced Scorecard of vital signs of strategic progress or problems. Review key strategic projects regularly.
   • Make special provision for briefing and discussion on key strategic or industry-related matters, inside and outside normal board meetings.
   • Be clear about the Chairman/CEO roles and relationships, as this is the key dynamic. It seems that effective chairmen are able to balance a coaching role with the ability to take distance and make clear judgments about CEO performance - both are important. Equally, chairmen need to be clear about the non-executive nature of their roles and be non-executive without being disengaged.
   • Implement stringent formal and informal assessments of the effectiveness and performance of the board. Experience tells that it is important to elicit directors' contributions privately, but also encourage a collective review of improvement needs and actions.

8. Take People Development very seriously.

   Many boards simply go through the motions when it comes to support for learning and talent development. Many of our respondents believed that a keen eye on the quality of current and future talent is a central part of boards' strategic role. And they wanted directors, especially non-executives, to take an active hand in getting to know key managers and specialists in their working environment. (Not through the occasional presentation). Some went further to propose that mentoring should be an integral part of the non-executive role - and that people who were unable or unwilling to do this were unlikely to be productive directors.