Board duty: take back performance control: increasing the board's effectiveness in establishing and enforcing financial performance objectives will improve its effectiveness in many other areas as well.

AuthorKontes, Peter
PositionDUTIES OF THE BOARD - Reprint

THE BOARD OF DIRECTORS has three main duties: exercising fiduciary oversight on behalf of the shareholders, providing counsel to the CEO, and assuring compliance with specific legal and regulatory mandates. Exercising fiduciary oversight, the original and paramount role of the board, has arguably been much diminished in modern times. Indeed, boards of public companies seem to have less and less influence over their companies' financial performance, a state of affairs that has also undermined effectiveness in other areas of board responsibility.

Broadly, modern boards can influence company performance in four ways:

  1. Appoint or Replace the CEO. This is the most powerful lever boards currently use to influence a company's financial performance over time, but it is an unwieldy mechanism--episodic and yielding highly variable outcomes.

  2. Approve Financial Performance Objectives. All boards "approve" company performance objectives at some level. The vast majority of boards adopt the generic earnings and revenue growth goals proposed by the CEO, or something close to that. These are typically, top down, unimaginative, wrongly (EPS) focused, and more or less toothless objectives that look broadly the same across almost all large public companies.

  3. Approve Company "Strategy." This is a high-level review of largely conventional financial plans imbued with catch phrases like "be number one," "be low cost," "beat the competition," and other simplistic nostrums passing for serious thought. Except in extremis, no public company board meets often enough or long enough to have a deep understanding or a constructive influence on business unit or company strategy.

  4. Approve Specific Decisions. Boards are required by law to approve certain specific decisions such as share issuances and repurchases, dividends, divestures, and mergers and acquisitions. Many of these decisions impact performance only at the margin, although major divestitures or mergers and acquisitions can have larger and longer-term effects--and here the track record of boards is decidedly mixed.

    Collectively, these actions result in the board having only a weak and highly unpredictable influence on company performance over time. A promising opportunity for boards to reestablish their proper oversight role is to assert formal responsibility for establishing and enforcing financial performance objectives. Increasing the board's effectiveness in executing this duty will improve its effectiveness in many other areas as well.

    General Recommendations

    The shareholders own the company and should, through the board, determine what does or does not constitute adequate financial performance and oversight of their investment. It is the board, not the CEO or management team, that should set, own, and enforce at least the minimum acceptable financial performance objectives of the company. The current...

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