By Stuart R. Levine
Published in, The Credit Union Times
The relationship between boards and senior management is changing. Boards’ obligations and their engagement with management have grown in today’s world of increasing complexity and risk. The National Association of Corporate Directors (NACD) 2015–2016 Public Company Governance Survey compiled benchmarking data on governance trends and practices from over 1,000 corporate directors and governance professionals. Its findings are instructive for all governing boards, whether they represent public company shareholders or credit union members.
The days of passive, response-only boards are ending as board members more fully and deeply address the topics of strategy, talent, technology, cybersecurity, reputation and other enterprise risk issues. Directors now spend more time with management than ever before. As boards expand their influence and time commitment, however, concerns of unhealthy friction between the board and the executive team emerge. NACD notes that problems can arise like overstepping boundaries and ineffective communication. Quarterly financial reporting and rising shareholder activism potentially cause a short-term view that constrains long-term value creation.
Although boards must observe the dividing line between oversight and managing, there are no one-size-fits-all rules defining a line that cannot be crossed. Often the size of the company makes a difference. Smaller company senior management might want the day-to-day counsel of experienced directors, and mid-sized companies may benefit from assistance not needed nor appropriate for large organizations. Smart directors, however, do not meddle in execution of day-to-day operations and management affairs. But they do ask the tough questions of management that their duty requires. And they resist management pressure to agree to ideas or proposals about which they have serious reservations.
Senior management and the board should have a culture of information sharing, open dialogue and constructive debate. An effective Lead Director, who is often but not always the Chair, has the skill to facilitate communication, keep meetings on track and make sure agendas target the needed topics. They make sure the board engages C-Suite executives about issues that affect their areas of responsibility. The board makes its expectations of management clear and articulates performance goals. It reinforces accountability through effective questioning.
Such open dialogue requires trust, as the fiduciary duty to ask robust, insightful and probing questions can cause tension. Trust leads to open communication and effective communication can avoid major problems. The NACD data confirmed that a breakdown in board/management communication underpinned many company crises. When trust is missing, management may try to manage the board to the point of controlling or concealing information that should be openly shared. Problems appear when important topics go unaddressed by management and unquestioned by the board.
Appropriate direct communication with managers below the C-suite can give directors needed perspective and informs succession planning. Visiting local offices and facilities provides insight to improve understanding of the company’s business and the quality of management. An NACD respondent observed: “You need substantive engagement with those who are possible C-Suite candidates… it’s about getting to know someone’s values.”
Long-term value creation is central to board and management responsibility. It is a fiduciary duty, but this can be challenging in a world of quarterly earnings reporting and increasing shareholder activism. Almost 80% of NACD respondents felt pressure to demonstrate financial results within two years. The strategic time frame should be at least three years, according to 75% of those surveyed, but 44% of respondents use a shorter planning horizon because of such pressure. Moreover, 20% reported that activist investors approached their boards, yet 46% of these boards were unprepared. Boards must think like activists, making sure that management is attuned to unrealized value and alert to vulnerabilities in strategy in the way that activists are. Boards must ask the tough questions an activist might ask and management must be prepared with well thought-out, data-driven answers as to why the chosen policies are in effect and not others.
This public company discipline serves credit union boards as well. All boards must be sensitive to the balance between short-term results and long-term value creation. Directors should be concerned when management reports and presentations mainly focus on historical issues and short time frame activities. Board meeting agendas should regularly include a discussion of long-term strategy, market trends and forward-looking risks and opportunities. Relatedly, incentive plans should be tied to long-term value creation, not just short-term goals and metrics. Non-financial performance measures that contribute to long-term growth, such as product quality and customer satisfaction should be central to performance assessments. Employee engagement, their morale, their contribution to revenues and their retention all matter. As one director said: “If we take care of the employees, they’ll take care of the customers.”