Governance, not Management: the role of the corporate board

The Role of Corporate Boards: Governance, not Management

Should the Board set strategy? Should it review the performance of all senior managers? Should the corporate budget for the year be approved by the Board? What exactly do we want corporate boards to do? Where does the role of the CEO end and the role of the Board begin?
We argue that the Board has only 3 functions:
1. To ensure the long-term survival and health of the company
2. To protect the interests of all stakeholders, including the public and the environment
3. To appoint the CEO

Does this mean the Board should not be concerned with strategy, then? Or with gross mismanagement? Obviously not. On the other hand, is it not the role of the CEO and his management team to formulate the company’s strategy? These are the delicate questions that we need to find an answer to.

On Strategy, clearly, the Board must ensure there IS a strategy, and that the strategy appears to make sense and is likely to be a winning strategy. If the company’s strategy is weak or nonexistent, it threatens the long-term survival of the company, which is the Board’s concern no. 1. But it should not be the role of the Board to formulate, or direct the formulation of, the strategy – that is clearly the prerogative of Management. The Board will seldom know enough about the day to day work of the company and the functioning of its markets, to be able to direct strategy formulation and execution. The CEO should present the strategy to the Board, who should then test it to make sure it holds water. Certainly, if the Board, in its wisdom, can suggest strategic ideas, they should be welcomed by the CEO, but it remains his prerogative to accept or reject those ideas.

Gross mismanagement, again, threatens the viability of the company. If the Board comes to know of such mismanagement, it should insist on the problem being fixed, and replace the CEO as a last resort.

In the same vein, the Board should not get into the details of the annual budget, for instance. But it should make sure that a budgeting process exists, that it is appropriate to the nature of the company, and that it is being followed. Reviews by the Board should focus on these perspectives, and these only.

Should the Board concern itself with the nurturing of talent? To the extent that a culture in the company resists fresh talent, and thereby threatens the long-term viability of the company, the Board should intervene to make sure that the management team takes steps to change the culture. To the extent that there is no replacement available for the CEO, the Board must concern itself with the matter. But reviewing the HR processes in the company, the compensation practices and policies, are clearly not the Board’s field of play.

Unfortunately, many executives become Board members after having been successful executives elsewhere, and bring to the Board role the same mindset that made them successful as executives! Neither will they be good Board members, nor will they allow good executives to succeed…