Variations on a Value Theme

Good boards know this to be so and demand from management both strict conformance (minimising non-idiosyncratic risk) and good performance (exploiting idiosyncratic risk). Post Enron et al some argue that strict conformance now dominates boardroom attention to the detriment of attention to performance. The argument is that boards exist, first and last, to add value to the business and conformance duties should be a minor (but necessary) subset of a performance focus. As William George (Director, Novartis and Goldman Sachs) has said “Avoiding prison should not be the objective of the board of directors. It should be to build strong enterprises”. Three recent references advance this theme.

First, one reads (The McKinsey Quarterly 2005 Special Edition Robert F Felton, Pamela Keenan Fritz) that the principal finding of a recent global survey of over 1,000 directors was that “having focused for a time on accounting-compliance issues, they [the directors] are now determined to play an active role in setting the strategy, assessing the risks, developing the leaders, and monitoring the long-term health of their companies.” The respondents wanted to extend their current concentration on financial matters reflecting short term performance to [1] the company’s longer term health [2] its strategy and risk assessment and [3] its leadership.

The second reference is an address given by Kerry McDonald (Institute of Directors Wellington Branch Chairman) at a recent Institute breakfast in Napier where he spoke on effective company boards. Effective boards cannot merely look over management’s shoulder once a month. They must add value. They add value by doing more than just ensuring compliance (important as that is) but also [1] by understanding and driving company strategy [2] by holding management accountable for that strategy’s fruition through rigorous operational planning, task assignment and performance management [3] by reviewing, testing and guiding management to produce a high performance company through sound practice and policy and most importantly [4] by always acting, promptly and effectively, when required to do so i.e. by showing leadership.

A board that adds value by delivering these outcomes does so by assessing itself regularly, ensuring it has the right balance of skills and by being non-executive in overall character. Of particular significance was McDonald’s observation that New Zealand management has benefited from the rigorous practices, policies and methods imported into New Zealand by multi-national companies operating here.

Thirdly, in an article entitled “The Value-Adding Board: Activities and Structures” Corporate Governance Vol. 1, 2003, Ivor Francis offers some trenchant observations.

• The CEO as superstar myth has been exploded by Enron, AMP, Chrysler and others. While our lives may be enriched by the creative individual brilliance of other people, companies are different. Companies “execute and compete and coordinate the efforts of many different people” and they do this best where the system [emphasis added] is the star.
• Whereas the superstar myth propounds that people make organisations smart, more often than not it is the other way around. Echoing McDonald’s observations above, Francis talks of the systems and quality processes that defined the success of such companies as Toyota, WalMart and Proctor & Gamble.
• While the structure of a company’s board can have a major impact on the company’s conformance as opposed to its performance, it is the activities of the company directors that can have a major impact (more than 50%) on a company’s performance.

How directors add value is a central governance issue. Later this year the Institute of Directors will be releasing a Best Practice Statement on boards and how they can, and should, add value to the enterprises they direct.

Courtesy Governance Notes August 2005