Companies across the world have grappled with the fine balance between the powers of directors and the CEO. In the US, CEOs have tended to exert so much influence over the board, that they often appear to choose directors. Compounded by the fact that CEOs usually know more about what they run, and therefore, demand a free hand to run their organizations, directors are often unsure of the boundaries of their roles. When all is well, most board members are rarely recognized for their contributions, but when things go askew, shareholders are quick to query whether the board was sleeping at the wheel.
This challenge has sharpened all the more since the problems surfaced in Satyam Computer Services Ltd. Some director friends have explained that they do not know what is the right information they need, to enable them to ask the questions required to intervene more strongly. Directors are generally dependent on the information supplied to them at board meetings. Rather than attempting to alleviate this information asymmetry, I list a few questions, which should enable any director to assess whether he has answers to the most important drivers of an organization’s performance.
Understanding an organization requires a comprehensive grasp of its strategy. Directors caught in the maze of compliance rarely have time to discuss this. Not surprisingly a survey by Mckinsey suggests that at least 50% of responsible directors want to increase the time spent on issues related to strategy. Do you, director, dedicate at least two days a year to assess the long-term strategy of the business, and the resources required to achieve this? In particular, does this assessment include in what manner the strategy as currently prescribed by the management varies from what was presented earlier and what has caused this change?
A second important function of a director is to be able to ensure adequate succession planning and to benchmark the skill set of top executives with those of competition. Meaningful assessments of management talent can only be achieved by having a personal equation with the senior-most managers across the organization. A round of golf with the business heads or the head of HR can provide a deeper view of the company’s human capital and a useful perspective on issues such as organizational morale or the tone at the top that is evident at board meetings. The question directors should ask themselves is whether they have met the top five managers in the company over a drink even twice in the last year.
Great boards need to take the time out to measure CEO performance in a detailed manner. While this does happen by proxy through the profitability of the company as well as by the share price, too many organizations have found, to their unpleasant surprise, that these measures often do not reflect the long-term strength of an organization. Have you had your go at your CEO and his top team?
Until the early 1980s there was substantial clarity about who the customers of an organization were and why they bought its product. This simple pact with the customer has changed, in part due to the options available through technology. Most corporations now offer a multiplicity of services, frequently with some level of technological complexity and sell to a wide range of customer segments. From experience I have noticed that nothing can focus the mind towards organizational priorities, as the ruthless manner in which most customers can strip away the illusions that managers have about their products and services.
How many of your customers have you met this year?
For long, academics have pointed out that companies that have succeeded over the decades have usually done so due to the simplicity and clarity of strategy. Businesses are complex to run but customer benefits need to be simple to understand. A main cause of erosion of shareholder value is the temptation, prevalent in many managers to engineer ever more complexity into their product, apparently believing that increasing internal complexity somehow translates into a benefit that customers will pay for.
Can you explain your strategy to your kids? If you cannot, you need to get there, before someone finds a cheaper and better way to service your customer.
I have limited myself to the above five questions of a business nature because directors do have many other statutory requirements to fulfill. The intention of seeking a greater level of engagement at the board is not to come in the way of entrepreneurial impulses of CEOs but to provide the board with sufficient information to be able to force senior management to introspect more. While some CEOs have argued that activist intervention from boards will result in stultifying risk taking, this has not been my experience. Naturally, one outcome of increased awareness of the market space will be that some of the more marginal proposals put forth by the management will be questioned. Similarly, issues relating to employee motivation or weak internal processes will get escalated faster than otherwise might have, but that can only be to the good.
No one could suggest that an affirmative answer to these questions automatically implies perfect governance. However, if your answer to even three of the above queries is in the affirmative, I would suggest that you could feel satisfied of being in the top 25% of engaged and active directors.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes on issues related to governance. The views expressed in this column are personal. Write to him at email@example.com