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What a Board Expects from Management, and What Management Expects from a Board

Jan 27

Posted in Board-CEO Relations, Relationships and Communication | 2 Comments »

I recently trained a group of directors and CEOs from the banking and agricultural sectors in Texas and Arizona. We discussed mutual expectations on the part of the board and management. The following represents the output of these discussions, which could apply to a variety of boards.

What the Board Expects from Management

Here is what a good board is entitled to expect from management, in no particular order:

1.         No Surprises or Spin

There should be no surprises for a board. CEOs and senior management need to tell the board the true state of affairs, without the “spin.” Directors know when they are not getting the “real deal” from management. If the CEO manages the board, or holds cards too close to the vest, this is a problem for a board.

2.         Bad News Must Rise

The board needs to be the first to know when need be, not the last. Management needs to have systems, processes and incentives that promote full transparency and reporting, right up to the board and its committees. The board needs to be assured of this.

3.         Deep Expertise in the Business

The board wants to see expertise across the full management bench, with no gaps. A problem arises when the board sees a weakness with which the CEO does not agree. Some CEOs have had trouble adjusting to a “new normal” of boards opining on C-level positions and oversight functions (e.g., internal audit). If a CEO does not accede to a board preference, this will be a problem.

4.         Visibility of Management Thinking

The board should see proposed options from management, including what was rejected and why. Management’s thinking and assumptions need to be fully transparent to the board and open to critique. A red flag occurs when management’s thinking is not visible.

5.         Full Information

There should be no information funneling or blockage of any sort. The board is entitled to any piece of information or access to any personnel to do its job. Management should support full information flow, including information that does not support management’s positions.

What Management Expects from the Board

Management, in turn, has expectations of the board. They are:

1.         Candor

Directors need to be candid and speak their mind in board meetings, not have hidden agendas, nor speak inconsistently offline. If directors are inconsistent, it can cause a schism in board-management relations and trust. The board should speak with one voice and not send mixed messages to management.

2.         Integrity and Independence

Directors cannot be self-interested, nor use their position to self-deal. If a director promotes management capture to occur by currying favor with management, this will undermine management-board relations. Management is entitled to directors preserving their independence and not placing management in compromising positions.

3.         Direction

A good –and smart– CEO wants a strong board. A board of directors should direct management as and when necessary to prevent the CEO from making that one big mistake. The board should be in charge at all times and management should know this.

4.         React in a Measured Way

If management is to be transparent, the board needs to react proportionately. If there are leaks, or the board is constantly critical, the CEO will not bring ideas or concepts, or his or her real thinking to the board, but only a polished crystal ball for board approval. This tone will cascade to senior management. This could cause governance failure as the board is shut out.

5.         Trust and Confidence

Management gets demoralized when they feel the board lacks trust or confidence in them.

If a board does not have trust or confidence in its CEO, it has the wrong CEO. CEOs may react when this happens – “either you have confidence in me or fire me” for example. If the board as a whole lacks confidence in the CEO, the CEO needs to go. If only a small minority of directors do and cause dysfunction as a result, these directors need to go.

6.         Knowledge of the Business

Management expects directors to invest the time to understand the business fully, especially if they are not from the sector. Otherwise, these directors will be of limited use to management strategically and their opinions will not be taken seriously nor be credible. Management gets frustrated by dated, legacy directors who have outlived their usefulness. Boards should know when this happens.

7.         Meeting Preparation

Management expects each director to arrive fully briefed and ready to discuss and should be able to rely on this. Otherwise, the engagement level degrades and gets sidetracked. The chair of the board should set these expectations and lead by example.

8.         Asking Good Questions

Lastly, management knows that the best directors ask the best questions that cause them to really think. If directors have a hobbyhorse, or ask inane questions in the eyes of others around the board-table, their credibility will suffer. These directors should go.

Many of the above topics are not visible from outside a boardroom. Nor can they be, for the most part, regulated. But they all contribute to the quality of the board-management relationship, board decision-making, and whether the organization is well governed.

The Board’s Right to Know and Red Flags To Avoid When You Don’t

Sep 14

Posted in Information, Resources and Reporting, Meetings and Decision-Making, Relationships and Communication | Comments Off on The Board’s Right to Know and Red Flags To Avoid When You Don’t

I was called into the Chairman’s office. I received a message on my voicemail from his assistant saying the meeting was urgent. The company was splashed all over the newspapers because of misstep after misstep. People were saying the board was asleep at the switch.

The Chairman shrugged when I met him and simply said, “We missed it.” (Again.) Part of my job was to interview each director and find out why, and produce a report to the full board and regulator. I had a month to do it. The Chair’s office would book any plane flights I needed.

This scenario – my assessing a board – has repeated itself in situations ranging from fraud, stock option backdating, bribery, property destruction and death. When a board “misses it,” it’s rarely because they were not complying with rules or laws. They were. The reason is what goes wrong inside the boardroom – with relationships and people.

Here are some questions that go beyond the rules and more often than not in problematic boards the answers I receive (and see) is “No,” “I think so,” or “I don’t know.” Ask yourself as you read these questions if you can answer, “Yes” to all of them for the board or boards you are on.

Does bad news rise in your organization?

This is a favorite question to ask a director. It’s simple but powerful. If you are not getting the real goods, sooner rather than later, consider this a red flag, as you may be the last to know.

Do your CEO and CFO have integrity?

Another favorite. If the CEO or CFO holds back, funnels information, manages agendas, is defensive, or plays his or her cards too close to the vest, this is a warning sign.

Do you understand the business and add value?

If you asked the management team whether you as a director understood their business and added value strategically, what would their response be? What if you asked shareholders? You would be surprised at the answers I get. Frequently there is a disconnect.

 

Do you know how fraud occurs in your company and industry?

Depending on your local markets and the business you are in, there are tried and true ways to commit fraud that work and are being practiced by your employees and key suppliers. Do you know what they are?

Do you compensate the right behaviors?

You are at the helm as directors. Whatever you compensate, management will do. Ask yourself whether you are rewarding what you intend to reward.

Do you get disconfirming information?

If you get your information only from management, this is a red flag. Use social media, go on unscripted tours, listen in on analyst calls, move a board meeting to a jurisdiction you need to know, and get industry presentations on your competition.

Do you get exposure to key business lines and assurance functions?

Bring these people into the boardroom, with no PowerPoint slides. See how they think on their feet. It is good for succession planning, and is an excellent source of information.

Do you get good advice and stay current?

Don’t let management pre-select advisors. Bring tailored education into the boardroom and stay on top of emerging developments. Get the information you need to do your job.

Do you meet with shareholders – apart from management?

Ten years ago I had to ask CEOs to leave the room when independent directors met separately. Now I am doing so when directors meet with shareholders. Meet with key shareholders regularly. Listen to them. Don’t let lawyers interfere.

I brought the Chairman of the Hershey Company, James Nevels, into my corporate governance class that I taught at Harvard this past summer. We talked about people and relationships, but what Jim also said was how important the Board chair position is to create the climate and environment for the above questions and practices to occur. Jim has a saying he uses to focus his fellow directors – “We need all hands on deck for this one” – for a key decision, and makes sure each director brings their “A” game all the time. He goes around the table and he speaks last.

You need to bring your skills forward as a director. Every director slot matters now more than ever.