The CEO’s Guide to Boards

“The board has two vital roles: Craft a strategy and hire & fire the CEO” Terry Neill

The following is based on my notes from?Professor Herman Daems’ ?session for the IESE Advanced Management Program.?His course is titled?“The role of the Board of Directors in Evaluating and Selecting the Strategy”.?

Dr Herman Daems?is professor at University of Leuven and visiting professor at Harvard Business School, and currently he is the Chairman of the Board at?BNP Paribas Fortis SA/NV.?He has been part of many public, private and charitable boards over his career.

Herman Daems: What does a High Performing Board do?

1. Develop an?Ambition?for the Company?– an ambition is not a strategy.?An ambition might be to “Climb Everest”.?A strategy would be the specific path to gather the necessary resources and execute the climb of the mountain.
2. Find the Leadership?to develop a Strategy to realise the ambition – management must develop strategy.
3. Approve a strategy?– Important to be clear that a board does not make the strategy, only approve that the leadership’s strategy supports the Company Ambition.
4. Provide Resources?(Financial and Human) – importantly the board establishes the dividend policy.
5. Balance the Power of Differing Interests?(shareholders, management, employees, government, public) – board members must have general business experience.?Specialist members do not make good board members.?Board must make collective general business decisions, not just good specific decisions.?Individual members must have credibility and be willing to raise their hand and make an impact.
6. Monitor and Control Strategy?– the board plays a much greater role on controlling strategy than on deciding the strategy.?Management will rarely say that their strategy is not working.?This is where the board is really necessary.
7. Control the use of Resources, control the risks involved?– see next item…
8. Assume responsibility?for the actions and risks of the company –?The Board of Directors have “collective responsibility” for the actions and risks of the company.?Members are not personally responsible.?Some legal attempts to hold a finance expert or an audit committee member personally responsible have always been pushed back by courts on the basis that board is collective responsibility.?In banking crisis, some executives have been held personally responsible, but in no cases have board members been found personally responsible.

The Major Tasks of the Board

The following is a checklist of all the areas where a board can provide input, leadership and critical push-back for the management team.

The high performance board contributes positively to management decision making in the following 9 areas of strategy, operations, people management and capital structure.

1. Strategy

• Strategic Direction
• Strategic Plans
• Strategy Implementation

2. Strategic Transactions

• Major Investments
• Portfolio Change (M&A)

3. Operations

• R&D
• Manufacturing
• Marketing and Sales
• IT

4. Human Resources and Organisation

• Leadership Development
• non-CEO executive compensation
• human capital
• Organisation
• Corporate Culture

5. Financial Management

• Financial Strategy
• Capital Structure
• Liquidity Management
• Dividend Policy
• Financial Reporting

6. Risk Management

• Enterprise Risk Management
• Ethical Performance and Compliance
• Audit

7. External Relations

• Brand Positioning and Integrity
• Shareholder Relations
• Legal and Regulatory
• Other Constituencies

8. CEO Effectiveness

• CEO Performance Appraisal
• CEO Compensation
• CEO Succession

9. Corporate Governance

• Board Effectiveness
• Director Selection
• Director Assessment

How Engaged should the Board be?

At different times, the board may play a more or less engaged role in day to day operations. The directors and the CEO should have a conscious explicit agreement about which of the following levels of engagement are appropriate to the current context.

1. Passive?– uninvolved, often under complete control of the CEO
2. Certifying?– reviews and approves strategy, sometimes meets without the CEO being present
3. Engaged?– contributes to strategic development, recognises their responsibilities to oversee CEO and company performance
4. Intervening?– engaged and contributing actively in specific areas of the business, convenes frequent meetings
5. Operating?– setting strategy, taking decisions, running day to day business operations; fills gaps in management experience

What does an Individual Board Member Do?

A good board member will have two important elements:?independence?and?competence.

• Independence is that they are free to take a contradictory stance and question the CEO and management.
• Competence can be judged in the following list of areas where board members need to bring capabilities to the table:

1. Knowledge of Key Areas

• Strategy
• Finance
• Industry
• Risks
• Shareholders
• Business

2. Understanding of Role

• Relates well to Management
• Knows Role
• Prepares Well

3. Quality of Input

• Insightful
• Curious
• Logical
• Persuasive
• Valuable

4. Contribution to Interaction

• Effective with Others
• Constructive
• Listens
• Engages

Further Resources on the Role of the Corporate Board

1. What does the Board do?
2. What is the job of the CEO?

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I hope this article gave you some practical ideas for how to take charge of your life.

Thanks for reading,

Conor

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