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Speaking at the memorial oration on the 12th year remembrance of late K. Sivagananathan, highly respected banker and financer of our time, Ranjith Fernando who has acted as Director/CEO of NDB, Secretary to Ministries of Industries and Constitutional Affairs listed key pointers that would make a company CEO an effective one.
The oration was organised by the trust in association with the Association of Professional Bankers Sri Lanka and was followed by a Memorial Trust Award Ceremony took place at the BOC Head Office in Colombo 1.
The model of a company
Explaining his subject from the much celebrated case in 1986 when the House of Lords decided in Salmon Vs Salmon to create the fiction of a legal entity/personality in a company – a personality who is distinct from the owners of the company, and from the shareholders of the company with power to own property, to be sued and to sue – a hallmark decision at the time, Fernando noted that the very model and workings of a company has changed over time, with ramifications when needed, to a tripartite arrangement between three parties – shareholders, board and management.
The working of this model also brought with it umpteenth issues and but has grown to such an extent that there is now a body with legal statute and case law which has built up, and defines the framework within which a company works.
In time to come issues such as the role of a regulator and an independent director will be resolved, he assured confidently.
"A CEO must subjugate himself to the oversight function of the board. The greatest disaster is having a weak board so that the CEO can run the company as he wants. A CEO must have a strong board that demands he performs certain functions. The CEO is runs the company on a day-to-day basis, and therefore it is his duty to defend the turf he is given
Today we find that many CEOs find it convenient to let the chairman make certain decisions and even preside over staff or departmental meetings. That kind of CEO is not an effective CEO as you are breaking down the very model
An individual who is a CEO is both a manager and a leader. Both roles are very different from each other, one is not inferior to the other but are complimentary to each other. Most companies are, I submit, over-managed but under-led. Not everyone can be good at both. In fact, companies today try to bring about manager-leaders and leader-managers who perform both functions
Managing is a stabilising influence; leadership is a destabilising influence as you bring about change. Because the world outside is changing and unless your company can change in relation to what is happening in the world, the end will be in sight. You need to anticipate change
– Ranjith Fernando"
The tripartite relationship
Today, there are two fundamental principles that defines this relationship – separation of power between the three bodies with each body having a role to play and the checks and balance you have against one another, i.e. that the plenitude of a power of a company is not derived on a single body. If these principles are violated one cannot be an effective CEO, he said.
Further elucidating the former he noted that each body has a role to play. Shareholders meet and discharge certain functions such as election of the board, declaration of the dividend, etc. and appoint a Board of Directors who tries to understand the laws that govern the particular industry of which they are on the board (of a company) and ensure that the company functions within the said parameters.
The board can also demand a business plan from the CEO whom the board appoints. They not only appoint the CEO but demand a business plan setting out clear, time-bound goals to be achieved by the company; and ensure that CEO delivers these targets. They have an oversight function over the CEO and the management. They also have a duty for shareholders to whom they report.
Yet another duty of a board is to ensure integrity of financial statements produced by the company to the shareholders periodically and understands the risks in business and ensure the management has put in certain controls to take care of those risks and are effective.
Understanding the model
The role of a CEO must therefore be taken in the context of working that model, he said.
“This relationship between three parties had been defined over time by courts, statutes, and by codes of conduct which are rules made and changed in a more flexible manner than an act of parliament,” Fernando explained. “Today we have a body of knowledge that defines these roles in a much more definite manner than at the time when the celebrated case was decided by the House of Lords.”
Within that model, how can a CEO by effective? As the chief of the management what is his role, he questioned. “The CEO needs to understand the model and without that understanding he cannot play an effective role as a CEO.”
“A CEO must subjugate himself to the oversight function of the board.” The greatest disaster is having a weak board so that the CEO can run the company as he wants; he noted adding that a CEO must have a strong board that demands he performs certain functions.
The CEO is runs the company on a day-to-day basis, and therefore it is his duty to defend the turf he is given. “Today we find that many CEOs find it convenient to let the chairman make certain decisions and even preside over staff or departmental meetings. That kind of CEO is not an effective CEO as you are breaking down the very model,” Fernando assured.
Playing the dual roles
An individual who is a CEO is both a manager and a leader.
“Both roles are very different from each other, one is not inferior to the other but are complimentary to each other,” he stressed.
Leadership has nothing to do with charisma nor is it better than managers. “Most companies are, I submit, over-managed but under-led. Not everyone can be good at both. In fact, companies today try to bring about manager-leaders and leader-managers who perform both functions.”
Management is about coping with complexities. It brings about order and consistency. Regulate and deciding on a systematic way of allocating resources, checking performances, getting feedback, correcting the loop and achieving certain results.
Leadership on the other hand is synonymous with change. It is very different from managing. “Managing is a stabilising influence; leadership is a destabilising influence as you bring about change. Because the world outside is changing and unless your company can change in relation to what is happening in the world, the end will be in sight. You need to anticipate change.”
Each deals with what needs to be done, no doubt, but under different circumstances and different roles.
Managers plan and budget, setting targets and goals, detailing implementation steps, allocating resources, monitoring implementation, controlling and problem solving.
In contrast, leaders set direction, a long term vision for the company. “They articulate that vision to the people whom he leads, exciting and aligning them to the vision, obtaining commitment from them, motivating and inspiring and appealing to values and emotions.”
Fernando said: “It is not a completely rational thing whereas managing is a deductive process.” Planning is a managerial position, design to produce orderly results. Setting direction on the other hand is more inductive – doesn’t produce plans, but a vision and strategy.
Planning works best not as a substitute for direction setting but as a compliment to it. Planning process is a useful reality check on the direction setting. “The latter provides a focus, framework within which planning can be carried out.”
He added: Managers organise to create human systems, structures; but aligning is more a communication challenge which necessitates talking to more people than in organising clients, governments, etc. “Direction setting identifies appropriate path for movement whereas effective movement gets people moving down that path. Managerial process must be as close as possible to fail-safe and risk-free, whereas leadership is fraud with change and risk taken.”
“My submission is aligning people is not the same as getting them organised as a structure,” Fernando said.
Pix by Upul Abayasekara
