Challenge and Change in the boardroom
For all their differences, Enron, Royal Bank of Scotland (RBS) and Eastman Kodak have at least one thing in common: in each case, a flawed corporate culture, resulting from defective leadership, led to corporate downfall on a massive scale.
In Enron’s case, the company’s collapse was precipitated by a corporate culture that encouraged greed and fraud. Eastman Kodak’s commanding and seemingly unassailable competitive position spawned a complacent and almost arrogant corporate culture. Substantial errors of judgement and execution in the boardroom resulted in RBS announcing a £24 billion pound loss for 2008 – the largest in U.K. corporate history – requiring a £45.5 billion rescue by UK taxpayers – the world’s largest bank bailout.
In the wake of the demise of these – and other – industry giants, increased attention has been rightly given to the makeup and the role of boards of directors. The best people to lead companies during buoyant economic times may not necessarily be the right leaders in a downturn. But whilst this is now more widely appreciated, it seems, in terms of the executive leadership team, there is still a lot of ground to make up for some companies when it comes to their non-executive directors. And it is the collective responsibility of the board, executives and non-executives alike, to set the tone. As the UK Corporate Governance Code puts it; “the board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met”.
This places an important responsibility on nominations committees to recruit non-executive directors who will provide entrepreneurial leadership and to do so in a responsible manner. If the role of board directors has not been changed by the current global financial situation, then it is certainly arguable that greater awareness of directors’ accountabilities means the execution of that role has altered.
Paradoxically, this issue may be no easier as we enter a hoped-for economic upturn. In tough times, tough decisions are expected and usually welcomed. In the early days of recovery, however, and as shareholder expectations increase, the decision-making environment for boards looking to return to sustainable growth is no less challenging.
Recruiting the right board members for the post-recession era must begin with a candid analysis of the skills, experience and knowledge needed amongst the non-executives. Any gaps then need to be addressed through a professional process which not only casts the net as widely as possible but which also brings lateral thought and imagination to the exercise. Strategically as well as operationally, there is a real role in this for HR, although – contrary to some expectations – this is sometimes more difficult when the HR director is on the board. So the challenge for HR is to prepare the ground in advance, especially by working closely with the chairman and senior independent director, so that any new search starts with a clear competency framework in place,
Overall board composition is just as relevant as individual competencies, something which may be harder to achieve in the light of a growing belief that smaller, more diverse boards provide better leadership in difficult economic conditions and increasingly fragmented marketplaces. Where boards are too large, the decision-making process can be slower and it can be harder to detect underperforming directors. Smaller boards are also more likely to improve communication and interaction between board members and executives.
The tenure of board directors is an area increasingly coming under the spotlight. Many of the major ratings agencies assess board tenure as one of their criteria for evaluating board effectiveness, and longer tenure potentially leads to lower scores. Whilst this may indicate that some board members have potentially outlived their usefulness, it doesn’t mean that the entire board is failing in its duties. Indeed, some commentators have suggested that audit committee members with long board tenure have greater expertise and experience to oversee financial reporting effectively. There will always be debate on the optimum tenure for board membership, but the key issue for boards, and especially chairmen, is to ensure they manage, refresh and broaden their non-executive leadership.
This, too, is an area in which HR has an opportunity – some would say a responsibility – to shape the agenda, especially in championing diversity as a competitive advantage. In today’s increasingly complex marketplaces, homogenous leadership teams are almost bound to fail. Diverse boards avoid group-think and have effective decision-making processes, two key characteristics of successful strategy implementation. Moreover, the interconnection between diverse boards and successful corporate performance is more than a business school theory, and should be high on every board’s agenda.
In practical terms, the return to growth presents as many challenges for the board as for the operating business. But there is no reason why it should not also present an opportunity for competitive gain. Boards that recognise the need to adapt to a changing external environment, especially by focusing on core competencies, director commitment and diversity, will be in a much stronger position to recruit talented non-executive directors from a limited pool, be one step ahead of their competitors, and satisfy the requirements of shareholders.