There is more to being a successful corporate director than meeting strict fiduciary duties, enjoying the prestige of position, hobknobbing, ego-stroking and raking in big bucks.
At the moment an individual is invited to become a corporate director – especially of a public company – there is a natural rush of well-earned ego gratification. At its most superficial level, being a director of a public company gives the individual status and bragging rights at the country club or cocktail parties. On a more fundamental level, the invitation to join a board is recognition and validation of past efforts, accomplishment and sound experience; all things that can’t help but to stroke the ego. There is nothing wrong with that, but to be an effective director, that ego must be checked at the door.
Efforts targeted to achieve individual success and recognition must be relegated to the past and sublimated to the development and accomplishments of a larger organization and its management team. (You may be able to name the CEO of a successful company, but can you name even one of its directors?) The effective director will recognize they are entering a new phase of their business life; that, while it will draw on their past experiences, it is not about the past or their individual recognition.
Rarely is it expressed in this fashion, but becoming a corporate director is, in a way, like the young person who has had a great time playing, partying, enjoying the freedom to care only about “me,” and then becomes a parent. Suddenly life is not all about them, but about parenting and providing the child with every possible opportunity for healthy growth and a good life. The surest path to failure as a parent is to impose your plan on the life of the child; or even worse, to interfere with and attempt to live their life for them.
Good parenting means setting a good example, exposing the child to ideas and opportunities, supporting the efforts of the child to find their way, being a resource for them to depend upon and then stepping back to allow them to be what they will be. It is the same type of role the corporate director should fill. Some critics may view this “corporate-director-as-parent” analogy as fanciful. It is not, after all, the traditional way to describe the duties of a director. But it is the way that effective directors see their role and add value to the company they serve.
Could You Be a Good Director?
At its most fundamental, the board of directors is a group of individuals elected by the shareholders to represent their interests. Shareholders charge the board with seeing that the company is well managed and the value of their investment is protected and potentially enhanced. These accountabilities call for the director to perform two clearly defined duties:
- Monitor the activities of management
- Make certain that strategies are developed and implemented that offers the best opportunity for increased shareholder value.
Critical to the effective functioning of a board of directors is the understanding that fulfilling the fiduciary obligations and encouraging increased value are interdependent, but separate and distinct. A company has never become great because it functioned under a clear set of processes and procedures. Likewise, many a successful company has been rent asunder by the failure to have strong organizational and financial controls. This is a delicate balance that many directors fail to understand or strive to achieve.
In order to fulfill its fiduciary duties, the board of directors will appoint and compensate the officers and managers of the organization, review, approve and endorse a long-term vision that has been identified and delineated by management; and finally to approve and monitor – with specific and determinable checkpoints – the development and implementation of strategies calculated to achieve the vision.
It is important that most directors bring to the board business experience rich in operational and strategic success. But there’s a caveat here. Such experience can lead to the most egregious error a director or board can make, and that is to become involved in the actual management of the company.
The board of directors is – and should always be – distinct from management. In its role as parent, it should to act that way: encouraging, guiding, supporting, and challenging, but not being one of the kids. It is not the province – nor should it be the prerogative – of the board to manage a company, but it does have the responsibility to monitor the managers it has hired. When the board inserts itself into the management of the company, these lines become blurred, and it risks losing focus on its primary purpose. The authority of the CEO is then undermined. Messages to management and employees can become mixed as well as confusing. The ability of the board to hold management accountable is weakened.
The most effective separation of powers is for the executive team to conceptualize a vision and develop strategies to achieve it. The board can properly question and challenge management’s thinking, but once it has given approval to the vision and strategies, involvement should be limited to overseeing the execution of the strategies and measuring the performance of the management group against the agreed-upon objectives. The board of directors can rightly offer an experienced, independent sounding-board for management to present their ideas and plans, but once approved, the board should step back from management and serve as a council of accountability for the actions of management.
This approach to the relationship between the board and management does not preclude individual directors from using their unique experience and knowledge to offer perspective and mentoring for management; much like a parent can use their life experience to guide and mentor the child. After all, it is this distinctive individual knowledge and successful experience that qualifies one to be a director and is the license to judge and monitor the plans and performance of management. But, at the same time, this past experience should never be used as an excuse to interlope on the actual management of the company; just as a parent should not use their life experiences and desires to interlope on how a child lives their life.
And the Moral of the Story …
A board of directors plays a unique and valuable role in the corporate universe. The board straddles the worlds of ownership and management. It has a fiduciary responsibility to represent the interests of shareholders, but is closest to the management group it has hired. To be efficient and effective the board must position itself as a fulcrum that balances the obligation of corporate governance without inhibiting management from developing and implementing their plans for growth.
This is the ultimate challenge for most corporate boards because they are comprised of individuals who have a history of success and leadership in management. Most directors are used to being hands-on, involved and in charge. Thus, the very attributes that qualify an individual to be a director are the very attributes that make it difficult for them to remain above the fray and function in the objective role to approve, monitor and assign accountability.
It is possible for a board of directors to function effectively, but only when the individual directors recognize that – unlike their past experiences – this is not about them. There is no need for them to prove how good they are or how much they know. Instead, the board and its directors should take on the role of parenting. The experience and success of the individual directors provides the knowledge to protect the interests of shareholders and is a resource that can advise and consent with management as they develop and implement plans for corporate growth.
As long as a board and its individual directors keeps this balance in perspective, it can be very effective; but when this is violated – either by not meeting their fiduciary obligations or by interfering with management’s ability to manage the company – they become little more than bad parents.