Is it time for professional boards?


Existing approaches to corporate governance are being questioned as a result of recent developments.  The 2008 financial meltdown plus some famous corporate implosions over the past decade – WorldCom, Tyco and Enron to name three – has focused government and academic attention on how shareholders and the public are being safeguarded.  Secondly, senior management is being challenged by growing business complexity arising from increasing globalization, the impact of new technologies and growing consumer activism.     

The Sarbanes-Oxley Act was supposed to improve governance by bringing greater financial transparency and management & director accountability to public corporations.  Despite its promise, SOX by itself was insufficient to prevent the financial crisis and loss of public confidence.  In reality, all of the troubled Banks were more than compliant with SOX’s stringent regulations.  Clearly, regulatory compliance is not a substitute for prudent financial, strategic and risk management.

One way to improve corporate governance is by professionalizing the Board of Directors, says Robert Pozen in a recent article published in the Harvard Business Review. Pozen,  a senior financial services insider and Harvard Business School lecturer, believes that governance failures arise from a lack of director expertise as well as the behavioural dynamics that influence their actions.

Pozen asserts that many Boards suffer from three basic weaknesses:

  1. Lack of expertise – Many Boards are populated with independent and “generalist” directors who do not possess the necessary skills and industry experience to effectively execute their role.  This skills gap can be especially problematic for Boards in complex, risk-laden sectors like energy, financial services and pharmaceuticals.
  2. Lack of time – Many Board members do not devote enough time to deal with the complex demands of their organizations. According to Pozen, a typical Board member in Financial Services might put in only 200 hours of part-time effort per year spread across Board meetings, telephone calls and prep time.  Moreover, generalist directors, especially those engaged in other pursuits, are often challenged to maintain the required knowledge of the business and industry.
  3. Lack of manageability – With an average size of 10-20 members, many Boards are too big and unwieldy to be effective decision making and oversight bodies. Within groups of this size, individuals often engage in what psychologists call “social loafing”: Members resist taking personal responsibility for the group’s actions and rely on others to take the lead. Furthermore, large groups are challenged with consensus building and open communication, both vital requirements for effective Board governance. In general, the more members there are, the harder it is to reach agreement.  As a result, fewer decisive actions are taken.

To address these challenges, Pozen recommends that Boards become “professionalized” through the following changes:

Reduce the size of the Board

Effective deliberation and decision making can be achieved by making Boards smaller or by creating a more focused sub-group within a larger Board, tasked with specific oversight or strategic responsibility. 

Research on group dynamics suggests that a team of six or seven individuals is the ideal size for effective decision making.  Smaller groups enable all members to take personal responsibility for the group’s actions.  Additionally, small groups can often reach a consensus in a reasonably short time.

Require higher levels of expertise

Boards could be required periodically to undergo an external talent assessment to identify key skills gaps and develop plans to fill them.  Firms have a number of options to augment Board expertise including recruiting more senior industry experts (versus Generalists) as independent directors or periodically educating existing directors on key facets of the Company or industry.  Part of this effort could involve a new director “boot camp” so that additions are quickly brought up to speed on key business and industry issues.

Demand greater time commitment

Directors should be required to invest more time than they currently do understanding the business, meeting key stakeholders and executing their responsibilities. For example, companies could stipulate that independent directors, who are now allowed to serve on the boards of four or five public companies, should be restricted to just two.

The above recommendations could go a long way in creating a dedicated and expert class of professional directors who would strengthen the current governance model and help rebuild the public’s confidence.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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1 comment so far

  1. Kyle McGuffin on

    It is time for accountability in 2011. Stop blaming and step-up and make required changes.

    Great post Mitch!

    We have too many people being paid or not on these boards and do not make the required commitment to make a difference. Let’s make 2011 the year we step-up and be accountable.

    Make it a great day!

    Kyle


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