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Facing
up to the Paradoxes of Governance
It is often asserted that the role of a
director of a commercial, publicly owned
or not-for-profit organisation has changed
and become much more challenging during
the last few years. There is no doubt that
directors are spending more time in the
role and a higher standard of performance
is being expected of them than previously.
This does not mean, however, that the role
is significantly different than in the past.
What has changed is the understanding by
many tens of thousands of directors of the
dimensions and importance of the role that
they fill. Our experience of more than a
thousand boards over a decade and a half,
indeed our very reason for existence as
a consulting company, is that the role has
not been well understood. As a consequence
it has often not been well executed.
One
element that has changed dramatically is
the visibility of boards and directors.
Even as little as a decade ago, the role
of company director carried with it a mystique.
Directors of commercial entities were viewed
by many as a select and elite group of grey-suited
individuals, a secret society who closeted
themselves in the secrecy of the boardroom
and did things that no else could fully
fathom or ever saw the consequences of.
Not-for-profit directors (who would not
have been called directors back then) also
worked behind closed boardroom doors and
did some things that were of doubtful value
such as second guessing management or duplicating
the work of the CEO.
But all this has changed. Numerous high
profile court cases involving company directors,
a plethora of books appearing on the bookshop
shelves, the emergence of governance educators
as a new category of management consultant
and the demands of shareholders, have all
contributed to the progressive demystification
and exposure of the role.
Just because the process of governance has
become more visible does not mean, however,
that it has become any easier to enact.
Indeed, it could well be argued that this
exposure is making the role more difficult.
Directors are now open to scrutiny in a
way that has not been the case before. Poor,
unethical or illegal practices are now headline
items and not just in the business sections
of our daily newspapers. The courts too
have exercised their interest in corporate
governance with directors being held to
account for breaches of fiduciary duty and
company law. Recent dramatic company collapses
have severely dented the reputations of
boards and individual directors. Together
with the complex debate about CEO and director
remuneration, these events have brought
into question the boardroom ethics of many
of our major institutions and those who
command them.
As
if all of these pressures were not enough,
an exploration and deeper understanding
of the governance role highlights a number
of inherent and fundamental paradoxes. Boards
and directors must address the challenge
of these paradoxes successfully if corporate
governance is to deliver on the promise
of stakeholder and shareholder value and
measure up to the 'trust in trusteeship'
that is at the core of the board's role.
From our research and our work with boards
we have identified some such paradoxes.
In this edition of Good Governance we describe
eight paradoxes and highlight some of the
elements of each. In subsequent editions
we will revisit the paradoxes and offer
suggestions for managing them to the benefit
of the board and individual directors.
Paradox
one
Directors
are expected to be strong-minded independent
individuals yet many boardroom practices
result in the board becoming a cosy club.(
1) A good board knows that to be successful
it must work as a team. Shareholders and
stakeholders know that to form a good board
they must identify strong individuals who
have the capacity to provide leadership,
to think for themselves, to represent the
owners' interests and who will fight for
the best outcomes for the enterprise and
all its stakeholders. But time and necessary
compromise can result in the smoothing out
of individual passions in the greater interests
of a cohesive board, able to speak with
one voice. One consequence of this is a
'cosiness' that can set in as the board's
ability to be critical and to challenge
deteriorates. Often also described as 'clubiness'
this cosiness, brings with it all the associated
connotations of loss of independence and
objectivity.(2)
There
is a clear possibility that as the members
of the board team become more familiar with
each other and as decision-making necessitates
regular personal compromise, a level of
comfort grows. The peaks of individual intensity
and independence are also shaved off in
response to peer pressure.
Paradox
two
Directors are required to have commitment
and depth while at the same time demonstrating
detachment and breadth.(2)
Effective directorship requires directors
to demonstrate a high-level of commitment
to the organisation governed with sufficient
depth of understanding of its business to
facilitate sound decision-making and strategic
guidance. It is self-evident that directors
will ultimately fail to add value to an
organisation if they do not know enough
about its business to make informed judgements.
Yet juxtaposed against this requirement
is another that requires directors to also
be sufficiently removed or detached so as
to provide objective analysis and an outsider's
strategic view of the enterprise and its
operating environment that can only come
as the result of a broad business and life
experience.
Paradox
three
Directors
are legally responsible for supervising
management but management controls the information,
planning and organisational systems.(3)
In order for the board and the organisation
to be effective, there must be a delegation
to a CEO and staff to carry out the operation-alisation
of many of the board's overall responsibilities.
As much as many directors may wish that
they were in a position to run the organisation
and that things were done according to their
wishes, the fact is that the CEO, not they,
runs the business on a day to day basis.
It is also not possible for the CEO to tell
the board everything about the consequences
of his or her management. There is simply
too much to tell and, of necessity, every
CEO filters information going to the board.
As
a result this poses a considerable challenge
and quite some risk to the directors. While
they have to have their hands firmly on
their governance role they need to keep
these same hands firmly off the day-to-day
operations. Were it to be otherwise they
would undermine their ability to hold the
CEO accountable. Yet, ultimately it is the
directors who carry the responsibility and
liability should things go badly wrong inside
the organisation.
Paradox
four
To
act as responsible agents for the owners/members,
directors have to push management to optimise
organisational performance, which often
conflicts with management self-interest
- job retention, compensation, risk-aversion
and tension reduction.(4)
The challenge for directors inherent in
this paradox is that directors have a duty
to challenge management, to ensure the veracity
and integrity of the assumptions that underpin
management decision-making and to verify
what they are told about organisational
performance. On behalf of the organisation's
owners the board has a duty to ensure that
management remains focused on that which
matters most - the achievement of the fundamental
purpose of the organisation.
But directors also have a duty to provide
support and affirmation to 'worthy' management.
There is an ever-present danger that the
board will be too tough or too soft on management.
The former may result in the loss of a good
CEO to the detriment of the organisation
and the board. The latter may result in
the CEO and his or her self-interest influencing
the board's objectivity and ability to act,
to the detriment of the board's integrity
and trusteeship responsibilities.
Paradox
five
The
board delegates operations to management
and agrees not to interfere, yet the board
has to stay in control and know that management
is doing its job well.(5)
When
the board has too-close-an-eye on the operational
management of the organisation there is
the risk that it will find itself 'micro
managing' the CEO and senior team. Yet when
the board is too-great-a-distance from the
operational management, it risks being negligent.
The challenge facing boards is to find the
balance between maintaining sufficient control
in order to exercise the duty of care bestowed
upon the board and granting to its CEO sufficient
freedom to allow for the exercise of creativity
and innovation.
Paradox
six
Boards
are required to make profound and responsible
decisions, yet the boardroom is a lousy
place for decision-making.(6)
If
one were to design the ideal forum for debate
and decision-making, the typical boardroom
would not be it. As the paradox states,
the boardroom is typically a lousy decision-making
forum. Typically rule-bound, steeped in
ancient practices, physically uncomfortable,
held at unfriendly times, too short for
sound debate or dialogue and too long for
comfort, board meetings fall well short
of the ideal. Yet traditional practices
persist and decision-making suffers as a
result. Time and time again we hear prospective
directors say that they are not interested
in joining this or that board, not because
the other directors are not worthy people
or that the enterprise does not represent
a worthy cause but, rather, the anticipation
of board meetings gets in the way. Even
though the stereotype is not always an accurate
reflection of the reality, the reputation
is there and will remain until there is
radical rethink of this element of boardroom
practice.
Paradox
seven
The
role of director is becoming increasingly
onerous and demanding yet directors typically
do not have any more time to give to the
role than when it was thought to be easy
and undemanding.
As was outlined in the introduction, the
roles, tasks and responsibilities associated
with directorship are now much more widely
understood with associated performance expectations
and transparency of a kind not dreamt of
even a decade ago. Yet it is largely from
the same pool of community and business
talent that directors are sourced. Not-for-profit
directors, who unlike their commercial counterparts
are usually unpaid, continue to be typified
by individuals who are already heavily committed
and thus have only limited time to give
to the role. Yet despite such constraints,
most directors in this sector give freely
of their precious and limited time in what
is arguably the most demanding and important
of all volunteer contributions to organisational
life. Remunerated or not, commercial, public
sector or not-for-profit, the job requirements
of directorship and the time available to
be a director are on ever divergent paths.
Paradox
eight
The
organisation belongs to its owners who come
together only infrequently to exercise their
ownership rights yet, at such times, management
and the board control all the elements of
ownership/shareholder democracy.(7)
Our
experience of Annual General Meetings over
many years suggests that few people actually
enjoy them or come away satisfied that 'corporate
democracy' has been truly honoured. The
AGM is the one time when owners can exercise
their constitutional powers to influence
the performance of the organisation. The
board and management, on the other hand,
have a vested interest in projecting their
view of the organisation and their plans
for its future. There is a tension between
the wish of owners to be heard and to exercise
their rights to shape the strategic direction
and performance of the organisation through
the appointment of directors and the wish
of the board and its current directors to
be independent of owner 'interference.'
Management and the board would argue that
corporate democracy can get out of hand
on such occasions and needs to be controlled.
Owners would argue that on such occasions
that management and the board control them
and that corporate democracy is not given
the opportunity to work to the advantage
of the organisation.
Summary
However
many such governance paradoxes there might
be, and we do not doubt that others could
be added to this list, their very existence
contributes to the complexities of the role
of director. The challenges that they represent
add up to the importance of selecting the
right directors for their role on the board
and then supporting them with opportunities
for professional development, effective
board leadership, time to consider the really
important issues and a well designed governance
structure and system to work within.
1)
Demb, Ada and Neubauer, F. Frederich. The
Corporate Board: Confronting the Paradoxes.
Oxford University Press. New York. 1992
Pg. 133.
2)
Ibid Pg. 99.
3)
Leighton, David S.R. and Thain, Donald,
H. Making Boards Work. McGraw-Hill Ryerson.
Whitby Ontario. 1997. Pg. 62.
40
Ibid. Pg. 62.
5)
Ibid. Pg 62.
6)
Ibid Pg. 63.
7)
Ibid. Pg. 63.
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