For several decades,directors of an organization tended to have a clubby relationship with each other—rarely focusing too much on the mundane details of governance, but managing the future of their company. In practice, several of these discussions took place on a golf course or in a club, and there was room to step back and examine the challenges and opportunities facing their business.
Cut to 2009, and the board agenda has become dominated by more dreary elements of governance. Boards and audit committees have to check boxes four to eight times a year, often at meetings crammed into a few hours. This change, caused largely by the big-ticket scandals of the past few years, has come at a price.
Boards now have less time to dedicate to two key elements of their business—the development of strategy and the examination of risk. The absence of involvement in these areas was amply in evidence when distinguished boards were caught on the wrong foot by the financial crisis.
From Satyam Computer Services Ltd to Chrysler Llc., companies are slowly recognizing that not all directors are strategically minded, and that providing dispersed responsibility for the same does not address this critical issue. What is required instead is a lead director who would take responsibility for strategy on their behalf.
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This is important for two reasons. First, it focuses responsibility in one individual who has the credibility and independence of being on the board while being distanced from daily operations. Second, it also provides some semblance of a sounding board for the views of the chief executive officer (CEO).
As directors will know, the dynamic of a board meeting is one of information asymmetry, where the CEO, chief financial officer (CFO) and their colleagues have had several days to prepare their case and the board usually has little information to challenge these views—even if it intuitively doubts the strategy being presented.
However, nothing is served by boards frequently second-guessing the executive management and preventing timely action. This can be avoided in large measure if at least one person other than the CEO has some level of involvement in strategy. This could be the lead director, who could play many roles.
First, as strategy work is a continuous and iterative effort, only an engaged lead director can nudge managements to take decisions and explain their rationale to fellow board members. CEOs would normally welcome such an involvement, as few major business choices are black or white, and the support of a fellow director who has had the opportunity to assess all the options and comprehend the logic of the business can be invaluable.