Noses in, Fingers Out, One More Time

That expression will be familiar to readers who have served on boards of directors or have had some board governance training. They will agree with it or not, often largely depending on their financial involvement. I was reminded of this axiom while reading a post from Dave Berkus, a very smart investor/educator I once interviewed for my print newsletter. It got my attention, thus this post.

The phrase, for those not familiar with it, refers to the role of board directors as they work with CEOs of the companies on whose boards they serve. The concept of “noses in” means board members need to monitor the company’s activities, to ask the hard questions about all those areas that impact the success or failure of their companies. The job of a director – whether in a public or private company, or even a nonprofit organization – is to try to make sure no surprises will either damage the company or cause it to lose an opportunity to be better. They do that by asking the questions, evaluating the quality of the answers, supporting the good responses and pushing back at the bad ones. But none of that implies they should burrow into the details of company operations and try to direct management actions and give orders to the management team. That’s the “fingers out” part.

The board has authority over the CEO. The CEO has authority over the management team. That authority gives the board the right to hire, evaluate and fire, if necessary, the CEO. They do not have that same authority over the CEO’s management team, or the actions of those team members. And that’s where it sometimes gets messy. Board members are often corporate leaders in their own right, and accustomed to having their expectations acted upon by those under them. It’s sometimes hard for them to keep in mind that they’re not in charge when they serve as directors. But it’s critically important they do just that.

On the flip side – there’s always a flip side, don’t you know – what if the answers to directors’ questions just aren’t right, or a situation has arisen that the CEO is clearly not prepared or willing to handle? If it involved outsiders – lenders, investors, regulators – the hands-off approach may expose directors to liability because of their responsibility to the company. Yet if they were in a “fingers in” mode when the situation came up, they may be deemed a part of the problem, and they could even find their D&O insurance less than supportive.

The best course of action for a director? Diligent review of the information you get; alert monitoring of company operations in support of approved strategy; and don’t try to be the backup CEO. And make sure your insurance is solid, just in case....