My notes from the 2nd module of Board Direction program
The Board Direction program was created by Ukrainian Corporate Governance Academy for current or future board members of private, public or state-owned companies. The modules are taught by the invited professors from top business schools such as INSEAD and London Business School. In order to better internalize all the ideas I learnt from the lectures, cases and internet articles I am publishing these notes made during my study. I thought they might be of interest to those, who like myself are eager to learn how to build truly effective and value creating Boards. I worked as a Board Director in various companies and witnessed firsthand how that governing body alike scalpel surgeon could be an instrument of healing as well as of destruction.
Attention! These notes are NOT what the professor said or what was written in the study materials - there are just my thoughts extracted from all the content I heard and read during last week in various sources, which was filtered through my perception and personal experience. It should also be noted that for the reader some of the ideas may sound unclear or even contradictory, as they require knowledge of particular context or my additional explanation. Thus if you have any questions, comments or complaints, please address them only to me personally.
"Corporate governance is the system by which companies are directed and controlled" -Sir Adrian Cadbury, UK, 1992
The term Governance comes from classical Greek “Kubernetes” – the art of steering a ship.
By limiting our risks, we are increasing the risks. The worse the position the company is, the more risk you should take.
Defining the appetite for risk is a strategic choice.
You are allowed to make mistakes in the process, but not allowed to mess up the process itself.
Internet crises (2000-2002) taught us the need to protect from fraud (internal controls, internal audit, external audit).
Financial crises (2007-2008) taught us to protect from risks (strategy process, risk oversight, board composition, culture)
Board director - you always has to balance contrary demands of various stakeholders.
If you need money from someone you make what they ask (what's comfortable for the investor)
History teaches that banks are never more profitable when they become bigger.
Depending on the situation boards vary (in between "Passive" and "Dominating" extremes):
- the Passive board - board functions at discretion of CEO
- the Certifying board - certifies to shareholders that CEO is performing well
- the Engaged board - directors are partners with CEO
- the Intervening board - often in crisis situations
- the Operating board - often in startups to "fill the gaps"of management
An "Engaged Board" is when the Board is most effective.
Board Director, remember - you are in business of managing the dilemmas.
- directing/overseeing vs managing
- conflicts of interests
- entrepreneur vs prudent control
- short-term vs long-term
- commercial vs wider consideration
Lender doesn't care about your company's value growth, but only about your ability to pay the debt back.
When you are board member of the subsidiary company within bigger holding - who are you loyal to?
As a BD you have to be schizophrenic, i.e. consider simultaneously different views.
Four good reasons to become Board Director:
- Interest and contribution to the company
- Leveraging one's skills
- Experience enrichment (kind of executive education)
Two bad reasons to become Board Director:
- Cash, i.e. to make money (BD should not feel financial constraints to ensure his independence)
- Social status, i.e. to advance one's career (again the hook causing the loss of independence)
Nobody should become a Board Director to get rich.
Risks will always be identified here and there despite any internal audits.
How you react to the identified risks is as important as preventing them.
It makes sense to be a Board Director in industries where you have expertise. Otherwise it takes a lot ot time to move along the learning curve.
Strategy committee is non-sense. Strategy is the essence of Board Director's work.
You say what you have to say in the board meeting or shut up.
Board meetings with the presence of CEO (often CFO as well) are indispensable. The only exception is compensation and evaluation meetings.
CEO as a Board Chairman or not? The trend is separation. When CEO is also a Chairman, there is a need for Lead Director as well to ensure independence of the board.
Risk and Strategy are two sides of the same coin.
The proper use of business consultants - Data, Benchmarking and Modeling
Consultant are useful for:
- fact gathering
- more data to management
- more objective information
- digging deeper
Wrong use of business consultants is to ask them to do company strategy (the recipe for disaster).
Risk is what prevents you from achieving your objectives.
The Board is not a risk-manager:
- accessing risk appetite
- risk mitigation (not elimination)
Risk oversight (board) is not the same as risk management (executives).
Risk is emotional subject, difficult for management, because risk is a weakness of company, i.e. weakness of management.
Two kinds of risks:
1. Traditional risks (well-known, no emotions) - proper processes should be in place.
2. New risks (cybersecurity, terrorism etc.)
The role of the board is to force management to think about new risks, risks behind the carpet (reputation, technology, incentives)
Corporate governance is designed for situations when things don't work that well.
Mistakes are made by everyone, but risk develops into crises because of bad behavior.
There is a need for right mix of greed (entrepreneur) and fear (board) to improve decision making.
Questions to ask oneself before accepting Board directorship:
- Why do they need me?
- Did you make a due diligence of the company?
- Did you meet CEO, CFO, auditors and every single Director?
- Is there a chemistry, fit with all other Directors?
Headhunters are a good source of board director opportunities search.
It takes time to build a good fit with within the board (1-2 years, difficult situations).
Very good board members are not talkative - they are good listeners and talk at the right time.
Key point - make difference (listen and make impact)
Most board meetings are boring. Once a year there will be important discussions. Once every 3 years there will be a major crises situation discussion.
Americans sue first, then talk (shoot first, then talk).
Don't confuse company's Liquidity (cash, sort-term obligations) with Solvency (balance assets/debts, long term obligations)
The concept of (unified) "Government" ("State") doesn't exist in state-owned companies, because there are multiple conflicting interests (e.g. Prime-minister vs Finance minister).
It's OK to take discussions between board directors outside the board, but it's NOT OK to make decisions outside.
Chairman's role is to ensure that board discussions are not fake.
It's OK to have the board decision other than mine. It's NOT OK not to listen to me as a Board Director.
Board meeting is not a place for long detailed discussions. Committees are designed for that - they bring flexibility to board work (free-form, no limit, brainstorm).
Appointment of Chairman is as important as appointment of CEO.
When CEO is also a Chairman and the Board doesn't have a Lead Director the problems are inevitable, as the new person would suddenly would emerge in that role (as opposed to be appointed).
Never underestimate the importance of the board meeting agenda.
Weak Board Chairman is real danger. The worst - if he is weak, knows he is weak, but pretends not to be.
Strong "Dominating" Chairman can be managed if you are strong enough AND he can listen.
"Split" boards are usually because of a "Rogue" Director.
There might be legitimate reasons (that you hardly realize) when YOU become "Rogue" Director for a while (family issues, personal health, tragedy etc.). Here the role of the Chairman is critical.
"Rogue" Director is the one of the most difficult and dysfunctional elements of the Board.
Two-tier system of corporate governance (Management and Supervisory boards) works only in Germany (probably because of culture).
In reality management (CEO, CFO, particular manager) need to be present on Board meeting for proper discussion of business.
If there is a split in board voting, you have a real problem.
There are no cultural differences when boards do work well. Much more difference in dysfunctional boards.
To read the Part I of notes, please read here
Photo: Grey New York board meeting, 1957