When boards of directors underperform

Published: Friday | November 16, 2012 Comments 0
Aubyn Hill
Aubyn Hill

Aubyn Hill, Financial Gleaner Columnist

The economic difficulties we face, the delay in the IMF agreement, and the pervasive and almost palpable uncertainty which Jamaicans face on a daily basis have put a lot of focus on the performance of the Government.

But the Government and its agencies are not the only operators in the economy.

Private businesses have a very important role to play and that importance puts a bright spotlight on boards of directors and the management teams they put in place, along with the crucial governance and monitoring roles these boards of directors must shoulder.

For the most part, the relationship between a CEO - and by extension his or her management team - and the board of directors is generally a collegial and cordial one.

That kind of professional civility should not lure the CEO and his team into complacency or lethargy, nor should board members become too comfortable about their fiduciary responsibility of monitoring management's all-round performance.

THE MAIN JOB

The board has one main responsibility and duty and that is to choose a very good chief executive officer.

When that duty is carried out effectively and the right person with the right background, experience and temperament is chosen to fill the role of CEO, the rest of the board's responsibilities become fairly easy to handle and even routine.

The success of a business is tied significantly to the effectiveness and efficiency of the CEO, and this fact gives the board very little room for trial and error when it comes to choosing the leader of the business.

The selection of a CEO magnifies by many times the importance of 'getting it right'. Really well-run boards of directors spend time and resources to choose the best outside candidate they can find.

Alternatively, they take the long-term decision and follow a defined process to groom a preferred candidate, or a clutch of excellent in-house candidates, from which the winner for the CEO post is selected.

This process tends to apply in the private sector but less so in government-run companies and institutions, where politics often plays a much bigger role in the selection process.

One result is that very few, if any, government for-profit institutions ever live up to that billing when that entity has to compete outside the monopoly model in the open market.

Also, government ownership keeps many of these 'businesses' in operation long after they should have been closed by bankruptcy or inefficiency or both.

THE MANAGEMENT CONNECTION

The next important duty of a board of directors is to set the right policies for the organisation and this generally, but not always, means approving the ones brought by the CEO.

Once these policies are agreed, the board sets about its main ongoing responsibility of monitoring the activities of the CEO and his management team to ensure that the agreed policies and business objectives are being followed and achieved.

The board has the periodic - often monthly - responsibility to meet with management to get a reading of the performance of all facets of the company's business or businesses.

It also has the key duty of providing a formal assessment of the CEO's performance.

Given the regularity of board meetings at which the board gives and the CEO gets feedback on his or her performance, there should be really no major surprises in the formal, written CEO performance assessment.

The CEO's main role is to choose his or her management team, prepare and secure approval of the company's annual business plan and budgets and then organise the company's resources in such a manner that policies are kept while achieving the sustained profitability of the firm.

The CEO and his management team also have the broader responsibility of building and protecting the company's good reputation in the marketplace and in the many communities it may serve.

COSTLY MISTAKES

Boards of directors are made up of different types of personalities, yet when they act, they must act as a collegial body that represents, legally, all shareholders.

A board member cannot just represent the narrow interest of a shareholder, or group of shareholders, that may have appointed him or her to the board.

Boards make mistakes when they attempt to appoint the executives who report to the CEO. The CEO cannot be held accountable for results when some other party chooses his most important resource - his people.

Some board members confuse support for the CEO with complete acquiescence with his or her every wish or with shoddy CEO performance; or mix up the monitoring and assessment role with interference with management.

Both are costly mistakes. The board's approach must be balanced - give management the necessary autonomy, support and room to manoeuvre, but hold the CEO's nose to the grindstone of performance and excellent results.

While the board should reassure a CEO of security of tenure in his or her post based on consistently very good performance results, a board makes a grave error if it ever allows any CEO to begin to believe that occupancy of the CEO's chair is permanent or a right.

Any CEO must know that his or her job is always on the line and any permanence in the position is gained by excellent results.

Take a look at how CEOs who believe they cannot be removed behave, they believe and often pretend that they are little gods. Long serving CEOs in government-owned companies tend to display these negative traits of long tenure, but the trait can also be found in CEOs who operate in the private sector.

Giving any CEO a pass on poor performance, missed targets and missed profitability, except in clearly exceptional circumstances, is a serious disservice to the CEO. It is also a clear failing by a board of one of its primary responsibility to a company and its shareholders.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years.writerhill@gmail.comfacebook.com/Corporate.Strategies twitter:@AubynHill




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