Value creation or governance: The dilemma of PLC Boards and challenge for Non-Executive Directors

As more privately-held companies rush to list on the stock exchange, owners/managers of these companies will be faced with new challenges from Boards of Directors, some of whom may be new to both the industry and the company.

One of the principal challenges would be that previously, as a privately-held entity, the management group would have direct access to the owners, and thus be better able to understand their expectations, while owners would be hands-on in reviewing management plans and performance.

While the Board may have persons with skills and experience that are highly relevant, if it were to get too involved in developing annual and strategic plans as well as in implementing them, the Board could end up owning both the problem and the solution.

The other area that could result in tension is risk management. In the privately-held entity, managers would have developed deep understanding of operational and financial risks and be highly skilled in risk management whereas the primary aim of the new Board of Directors may be corporate governance or risk avoidance.

With the transition to a company with public shareholding, a new set of owners also emerges. Unlike previously, these new shareholders are not a homogeneous lot, and their expectations can differ by sub set.

There could be large institutions, and small shareholders, value investors and growth investors as well as long term shareholders and short term hedge funds. The Board has to balance the interests of this diffused group, as well as ensure that they are accurately and equally informed about performance and progress of the business.

Making Boards more effective

The result of these tensions is that after a brief honeymoon, the new Board may be seen by management as ‘not entrepreneurial, risk averse and slowing things down’.

What could be done to make Boards more effective?

1.Strategy formulation and performance discussions

While there is a need for Boards to be aware of their statutory duties and governance responsibilities, the detailed work for regular governance issues could be delegated to the relevant Board committees which could also be provided with a small support staff, including analytical resources.

This could free up Board meeting time for discussion of strategic issues that could drive shareholder value creation as well as discussion of performance drivers and key indicators. The Board could even set aside a time in their meeting for topics on which mangers want Board advice.

Board members could also be invited to sit in on quarterly reviews and annual planning sessions which will enable them to ‘deep dive’ into business issues.

However, the Board does not tell the management what the annual or strategic plan should be. Mangers develop their plans and Board members use their experience and insight to ensure management’s plans are well thought out, clear, detailed and meet stakeholder’s expectations.

2.Board education

Since Non Executive members of PLC Boards may have less detailed understanding of the business than full time Directors, an induction programme of at least one week should be held, during which they meet a wide section of managers, factory visits, branch network meetings, key customer meetings, as well as department or divisional briefings. Boards could also define with greater precision the regular information and KPIs that they need to stay up to date on business performance and trends

3.Increasing informal interaction with executives

While formal meetings are the backbone of Board interactions, Non Executive Directors should be encouraged to spend extra time that they can make available on informal discussions with executives. These interactions should be tailored to both specific business issues and the skill set of the Director. The time and quality of these interactions could be a key driver in improving Board effectiveness

4.Increasing the time expectation of Non Executive Directors

Typically Non Executive members of a Board would be expected to spend a minimum of 10 days annually in meetings. This is hardly sufficient time to develop an in-depth understanding of the business, its performance drivers and management capabilities.

Non Executive Directors need to move beyond their traditional role expected by investors – which is seen as controlling executives, preventing them from taking unnecessary risks and misleading investors – to challenging and coaching the executive team to maximise value creation.

(The writer is an Independent Non Executive Director of PC House PLC – PCH – and a freelance Brand and Marketing Strategy Consultant. The views expressed in this article are his own. Feedback on this article is welcome on http://activeboardroom.blogspot.com. You can also follow him on twitter @shantin.)