Putting a Price on Corporate Governance: Does Your Board Add To Your Value Chain?


Print | No Comments | Share/Save

Expert Perspective from Grahall’s OmniMedia Editorial Board

We noticed that the Forum for Corporate Directors recently hosted the “7th Annual Directors’ Institute to Prepare Directors for Change in the Boardroom by Addressing the Consequences of New Governance Policies”.  According to the press release, the 2 day conference was to focus on “the most timely and critical issues facing today’s boards of directors.”   Quite frankly we were pleased to see that one of the panel topics was “Do You Really Have the Right Board?”  We think that if boards truly asked themselves this question, the answer for many companies going through change would be a resounding “NO”. 

Organizations at different stages in their life cycles have vastly different needs that impact their short- and long-term business and rewards objectives.  A company in a start-up phase will have significantly different issues than when it is growing or mature.  And most pointedly a company in a turnaround situation needs a unique set of management and governance functions if it hopes to recover.  The problem is, although the company may have changed dramatically, it is almost certain (except in the case of a bankruptcy) that the Board of Directors has not.   

Ideally, a company would have a situational board comprised of individuals with the appropriate experience to shape and enhance the organization’s value in each stage of the business cycle.  During a start-up phase the Board should let the company executives determine strategy and operations. Speed and agility with strong executive leadership is the best practice in most start-ups. At the same time during the mature phase of the organizational the Board needs to contribute more, evaluating proposed strategies and pushing for management to take appropriate risks.

In reality though, boards are far more entrenched.  And often for companies in a turnaround situation, the Board comprises the same people who helped the company get into the mess in the first place. 

The selection and election process is far from “democratic” or even constructive.  Board members are usually some form of “insider,” either a company executive or someone known well by the current board or management.  Rarely are there competing candidates so the election is essentially won before any votes are cast.   Too often Board seats are conditioned only on age (with mandatory retirement most often at age 72 or so) rather than on knowledge and experience in dealing with the business and governance issues the company currently faces.

Our experience has taught us that the Board can have a significant impact on an organization far beyond its governance decisions.  Investors, especially institutional investors, consider Board and management credibility, when determining whether or not to invest and will essentially reward more credible companies with a higher market value for its stock. 

An experienced Board knows when and how to steward these shareholders investments.  Grahall has created an index referred to as the Grahall Board of Directors Contribution Index that identifies the different characteristics of the Board governance and matches that governance to the company’s situation optimizing the chance for successful governance. It is clear from our analysis of over 1,000 publically listed companies that great governance is situational.  It is regrettable that most Boards are not. 

Boards need to assess how well they display credibility individually and collectively and whether, again individually and collectively, they have the right skills to steward the company.   This assessment needs to occur at regular intervals and particularly when economic or business strategy changes occur that may drive the company in a new direction.   When Board seats become available, candidates should be sought who can help address the company’s specific business issues, not just business issues in general.

Unfortunately, most Boards do not effectively self-evaluate often or well, primarily because they have neither the framework nor the tools to do so.  Investing the time in this effort, though, could contribute greatly to the company’s overall value.

Call us.  We have the framework and tools to help you evaluate your Board members.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

Post a Comment