Managing the Board: Healthy Relationships and Clear Accountabilities

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Hey there and welcome to Episode 54 of the No Bullsh!t Leadership podcast. This week's episode, Managing the Board: Healthy relationships and clear accountabilities. We've been getting quite a few requests from listeners to produce an episode about managing boards, so today I'm going to give it a crack.

There are many different types, structures and levels of involvement of boards, but of course there are also some universal rules of thumb that should help you work with your board no matter what type it is. And for those of you who sit on boards as non-executive directors, there may even be some lessons in this for you.

So we'll start by discussing what the different types of boards actually are and why they exist. Then I'm going to let you in on a little understood insight. You know the board has very little control, right? And then we'll finish with the key principles of the CEO-board relationship. So let's get into it.

Now we know that the No Bullsh!t Leadership podcast is in over 50 countries. And when it comes to boards, every country has different rules for the composition and structure of a board, but the principles are generally the same. The key function of the board is to supervise the management of the company while delegating all of the day to day running of the organisation to that management team. In short, the board role is one of oversight and governance.

Typically, boards deal with things like risk, strategy and corporate governance. Now in Europe, companies frequently use a two-board model, so they'll have a management board and a supervisory board. The supervisory board is generally prohibited from getting into detail on how the company is actually run. Strong separation of powers exists here, but the lack of visibility and proximity for the supervisory board can be tricky to navigate.

Now in countries like the US, the UK and Australia and so forth, they use a single board model. Although even here, there are some stark differences in approach. Boards generally have a few different types of directors. Primarily, directors are classified as either executive directors or non-executive directors and then these are further split down into independent and non-independent directors.

So let's start with non-executive directors. These people sit on the board only. They have no involvement in the management or the running of the company, and it's a part time role. So they only turn up for scheduled meetings or large decisions when called by the chair. They might get together a dozen times a year at most.

Executive directors on the other hand are both members of the board and they're also part of the management team of the company, so they have a dual role. Executive directors are less common than non-executive directors.

However, in Australia there's a very common role which is called Managing Director. Now, this is one in which this individual is both the top executive of the organisation, either the Chief Executive or president, but also holds a formal board seat, complete with voting rights. Many CEOs by comparison are not officially part of the board, and they don't necessarily participate in all board functions and discussions. Now in large Australian businesses, it's almost unheard of to have an Executive Chair role, an individual who's both the top executive and the chair responsible for managing the board. However, in the US, this is fairly commonplace. Independent oversight of management's activities is supposed to provide a layer of comfort, governance and confidence about the actions and behaviour of management. Although there are frequent and widespread cases where this doesn't work as it's intended.

Many boards also create what we call subcommittees, and on subcommittees there are small groupings of directors who have meetings to examine certain areas of the business operations in more detail. So for example, most large organisations in Australia would have an audit, risk, finance style of committee and they'd certainly have a remuneration committee to talk about how management is paid.

The chairs of these committees, who are generally not the same as the chair of the main board, may need access to key executives below the Chief Executive to discharge their duties. So for example, the chair of the audit and risk committee would probably require access to both the CFO and the Head of Internal Audit, whereas the chair of the remuneration committee would need access to the Head of HR.

Now many organisations in their constitutions assign board seats to certain types of individuals. So for example, in France, any large company with over a thousand people must have at least one employee representative on the board. In Australia, we have industry superannuation funds who have seats reserved for appointed officials from the labour unions as well as a number of independent directors. In some types of organisations, so for example, the not-for-profit sector, it's common that as well as providing governance, the directors may perform other functions which are considered more aligned with the running of the organisation.

So for example, directors will leverage their contacts by opening up their little black books to drive fundraising and sponsorship for the cause, using their network of high worth contacts. Most listed companies that trade shares on the securities exchange have minimum requirements for the number of independent directors, so in other words, not founders or others with a vested interest and a bias in how the business runs. And these days, many jurisdictions are also moving towards mandatory representation thresholds or quotas for female directors on boards.

Whatever the type, composition and structure of your board, it is there to supervise and provide oversight of management on behalf of the owners. It's not intended that the board gets into the day to day operations of the business.

I'm going to let you in on a little secret that might surprise you. You know that the board has very little control, right? Virtually all boards, but especially those that don't have executive directors as part of the management team, have almost no control over what goes on.

Now, let's just pull this apart for a minute. Directors spend very little time in the business if any. And I've seen directors come onto a major board in an industry they are not familiar with and they don't even spend the time visiting the operations to work out what drives the business, despite management's exhortations that they should probably do so. How can they possibly understand the business? How can they even work out what the drivers are for making money?

For many, the post of director is about status and power, which is not particularly conducive to good governance. What else? The lens through which they view the business is their interactions with management - board papers, meetings, and ultimately following down the track, the results.

In Australia at least, they hold very little control, but is subject to huge personal liability in the discharge of their obligations. In my opinion, the board has really only one safeguard against being blindsided by a company disaster, and that is a CEO who is open and transparent, who doesn't do cover ups, or present a view of the business through rose-coloured glasses and who isn't afraid to deliver bad news without softening or varnishing it.

I've seen what happens to extremely clever, highly engaged and diligent directors when they're let down by a bad CEO who doesn't tell them the truth. And no matter how good the directors are, they don't have the ability to either control or manage it.

Now, this might sound a little pessimistic and negative but I genuinely believe that this is the nature of the relationship between the board and the management team.

So the number one thing, if you're a CEO reporting to a board, is this: be worthy of the trust that the board places in you and the management team. Make sure they know what's going on at all times, of course, only the material things, of course, not letting them into the minutia of the business, and keep them informed on your thinking and progress using your judgement as to when to engage with the chair.

Alright. Let's get to the meat and potatoes. I want to give you the Seven Key Principles of the CEO-board relationship. I want to start by saying that I've been very fortunate to work for some really outstanding chairs. They managed to run a very tight ship even despite having some directors on the board that I would call marginal at best. They managed to get the right balance between challenging and supporting management, and this is not an easy thing to do. They understood pretty well the line between management and the board and they generally didn't cross it, and they kept the other directors under control and made sure that they observed the same standards for the most part.

There are some rules of thumb for dealing with the board successfully and I've boiled it down to seven key points. Remember, every board is different and provides its unique challenges. Also remember that directors are not normally shrinking violets. For the most part, they're quite experienced in their field. They can sometimes harbour an excess of both self-importance and confidence in their ability and sometimes this is completely unwarranted, but as the CEO, you can't let this intimidate you.

So number one, build trust quickly. The board operates in what I like to call a strobe light. They only get to see you in limited circumstances quite infrequently and they form their impression based on that. And so you can imagine a strobe light flashing on and off, and the flash of the light is the board meeting in the board might hold once a month and they get to see an impression from a couple of hours they spend with the senior management on what's happening inside the business. And then it goes dark until they come back for their next meeting.

And so they have limited opportunities to see what happens in between. This is why as a CEO or an executive in front of a board, you need to ensure that everything you do gives them confidence that these interactions are high quality and that you're giving them the information they need to hear. The fastest way to build trust when the board's operating in the strobe light, is to give them confidence that you're going to give them the insight that they can't necessarily see in the board reports themselves.

A great example that comes to mind is a discussion that I had with my last board about safety. And the occasion for this conversation was that we were being congratulated on the outstanding safety statistics that had been posted. And what I said to the board was this, "Please don't get comfortable with these numbers. You'll hear around the traps that a lost time injury rate of less than one is indicative of world class safety performance. Now, although ours is well within that range at the moment, there's a really good measure of luck in that result. If you pay attention to the other indicators, like the number of serious near miss incidents we've had, it's really amazing that we haven't had more serious injuries. Because the processes, the leadership and the culture in the organisation are not yet deserving of the results we've achieved. So this has got to change at some point because the fundamentals aren't there."

Now I took what was a super positive conversation with the board and I slowed it down and said, "Don't believe those numbers. There's more to it than this and you need to understand what sits behind it." Now, many CEOs would've just let that go through to the keeper. But why did I tell them that? Well, first of all, I told them that because it was true. I told them that because they needed to know. And I told them that because I didn't want them being blindsided if things went sideways.

Number two, you drive the level of detail that the board engages in. It starts with setting the board meeting agenda. Often, this is done in conjunction with the chair, but you set the tone by the level of detail that you go into in the board papers. The best piece of advice I ever got about managing boards was from Wayne Patterson, the Chief Executive of NTI. He said, “Only ever give the board detailed information to the level at which you are happy to have the conversation. The discussion will naturally gravitate towards the level of detail presented and discussed, so keep it up at board level.”

Now many CEOs and executives complain about the board getting into the work of management and then they don't realise that they are unwittingly driving that based on the amount and level of detail they put in board reports and presentations. But this is your best opportunity to ensure that the board doesn't dive down into an inappropriate level of detail and getting into the management of the company. But this is pretty tricky.

Number three, put yourself in the board's shoes. If you were a director, what would you want to know in order to make good decisions, to discharge your duties competently and to provide direction and insight to management? Think carefully about the board's role and what the directors are looking for.

Now, lots of senior managers in Australia do a Diploma in Board Governance at the Australian Institute of Company Directors as this is a great way to learn the role of the board and to understand how to satisfy their needs better.

Number four, it's the chair's job to manage the board, not yours. If you have rogue directors that are overly assertive or overly directive or overly involved in the management of the business, talk to the chair. It's the chair's responsibility to manage the directors and keep the board on task. It's the chair's job to ensure that every director has the opportunity to contribute. It's the chair's job to rule on and formalise board decisions, and it's the chair's job to manage the performance of the board, and of course the CEO. So let them do their job.

Number five, push back respectfully when necessary. You need to be courageous and tell the board what it needs to hear, not what it wants to hear. Respect before popularity needs to be brought to the boardroom first and foremost, but I see many CEOs fold under the weight of board pressure. This can sometimes be detrimental to the business as the CEO is a lot closer to the action yet capitulates inappropriately. You need to be strong about your views and recommendations, but not stubborn or bloody-minded. If you believe strongly in something, nail your colours to the mast. Make sure the directors know what you stand for and why and give them a sense of your philosophy and approach.

Number six, allow access for directors judiciously. Make it easy for them to do their jobs. Facilitate access for subcommittee chairs to the appropriate people, but of course keep your finger on the pulse and know what they're doing. Management should operate through the chair in the first instance and expect the directors to work through the CEO in the first instance, but have a quiet word to any director that's overstepping that mark with management. And if they persist, take it to the chair and get her to resolve it because it's her job.

Number seven, take accountability for the business so that the board doesn't have to. A CEO has to demonstrate extreme ownership. Every issue, every problem, every challenge at the organisation belongs to the person in the CEO role. And this is true irrespective of time in the role. So you own all the sins of the organisation, past and present. You have to take accountability for everything that happens below you, everything that happens because of you, for example, suppliers' behaviour, and everything that happens around you in the market.

Now, obviously you can't be in control of everything, but the board needs to know that you're on top of everything and that you profoundly understand the context in which the organisation operates.

Now, you may see some parallels in this guidance. A CEO who reports to a board of directors is really no different to any leader who reports to a boss above them. The challenge is to understand the level of detail and involvement that each of you should have at this pinnacle of decision making.

Alright, so that brings us to the end of Episode 54. Thanks so much for joining us. And remember, at Your CEO Mentor, our purpose is to improve the quality of leaders globally. So if you're enjoying this podcast, please share it with the leaders in your network because this is how we improve the world of work. I look forward to next week's episode, Onboarding New People

Until then I know you'll take every opportunity you can to be a No Bullsh!t Leader.