Overly intrusive board is CEO’s worst nightmare

Ultimately, management’s job is to manage, whereas the board’s role is to oversee

A perfect division of responsibilities between the board and management is a mere illusion. While the board sets strategy and oversees management, and management executes the plan, there is an inherent overlap and interdependence. A successful relationship is built on clear communication, defined boundaries, and a collaborative culture, rather than a rigid separation of duties. However, once the board has delineated its role in the lines as described before, it will be in a solid position to convey to the CEO that he/she is responsible and accountable for everything else in enabling the organisation to deliver on its mission, vision and purpose

“Where does board responsibility end and executive responsibility begin?” is a question often posed by chief executive officers and other C-suite executives who are immobilised in their decision making like ‘rabbits caught in the headlights’ due to lack of decision definition. They even fail to exercise their legitimate decision rights. This can be very costly in today’s dynamic corporate and business world where timely action is the difference between success and failure and ‘good’ and ‘excellent’. Having participated on both sides of the ‘line’, one as a member of the board and the other as an executive, and on the ‘line’ itself as an executive on the board, over long periods, I am well placed to respond to the primary question and make related comments and observations. 

Tension between the board and management originates primarily from the board’s role as the monitor of agency issues between investors and managers. The board is the proxy of the investors in ensuring that management acts in the best interest of the company, shareholders and other stakeholders. Tension between the board and management is also born out of the increasing pressure which corporate boards face today because of the ever evolving, and at times excessive, regulatory requirements, enhanced investor expectations, closer investor scrutiny, complex risks emerging out of greater interconnectedness, cybersecurity threats and the essentiality of balancing short-term performance with long-term strategic goals. Furthermore, performance scrutiny and evaluation have assumed new dimensions with investors jostling to allocate their resources among different alternatives in seeking the biggest bang for their buck and executives taking ‘unauthorised risks’ in attempting to earn lucrative performance-based bonuses and incentives. 

In my view, the ‘line’ dividing responsibility between the board and executives is an ever-moving, tangible and, more often, intangible phenomenon. It is rarely cast in stone over the long term. If not for human-dictated regulatory impositions which raise their head from time to time, the ‘line’ would probably be undergoing a ‘Darwinian’ like evolution in continuously adapting itself to a fast-changing external environment in which the organisation operates in pursuing its goals, objectives and deciding on its competing priorities. As was alluded to earlier, the natural balance between board engagement and intrusion is often disturbed by event-centric and time-centric edicts which relegate the ‘line’ to a situation-driven invisible impulse which is difficult to define in words. 

In my Executive Director stints at both Anglo American Corporation (Central Africa) Limited (Anglo), Lusaka, Zambia and John Keells Holdings PLC (JKH), Colombo, Sri Lanka, the dividing ‘line’ was defined largely by decision rights of the board and the executive committee in areas such as strategy and planning, people management, investments, acquisitions et cetera. Despite the existence of the same and despite the use of clear language, many were the times when professionalism, common sense and mutual trust had to prevail in interpreting the applicability of such decision rights in complex situations. The boards and management at both Anglo and JKH operated within an engagement-oversight continuum which, though unwritten, enabled the making of decisions in a spirit of mutual trust, due care and professionalism while adhering to the laws and regulations. Most importantly, the objectives were pursued without compromising the ethics and values which the two organisations espoused, conveyed, and displayed to the public through their words and deeds. 

Balancing act

Board governance is a balancing act. JKH and Anglo boards were, and are, very adept at maintaining oversight without interfering in daily operations. The appropriate levels of board oversight and degrees of engagement and intrusion are dependent on how the board stays focused on the significant issues which demand their attention and how the board engages with management in the right conversation at the subject time without being unduly sidetracked by non-value-adding regulations.

In his book, “The Imperfect Board Member,” Jim Brown proposed that boards adopt a “Noses In- Fingers Out” approach in determining the right balance between ‘being engaged’ and ‘overstepping.’ “Noses In’ is where board members stay informed, ask the right questions, and ensure that management is held accountable. As per this style, board members ask for the information they require to provide big-picture strategic direction, formulate high-level policies and ensure that the organisation is structured and resourced to fulfil its vision, mission and purpose within a level of risk appetite recommended by management and approved by the board. “Fingers Out” reminds the board that it must not interfere with management’s authority, responsibility, and accountability and attempt to run the organisation themselves. A clear separation between strategy/direction and operations/implementation is very important. This can be effectively enabled by an astute Chairman and a balanced Chief Executive Officer (CEO). Where there is a combined Chairman/CEO, the counterpart can be the Senior Independent Director.

The Chairperson/CEO relationship is crucial in board governance because it is the foundation for effective leadership and decision-making within the organisation. This relationship involves a delicate balance of oversight and support, with the chair providing guidance and support and ensuring CEO accountability and the CEO executing the board-approved strategy and managing day-to-day operations. Besides the obvious benefits of collaboration through regular dialogue and healthy challenge, the relationship between the chairperson of the board and the CEO sets the tone from the top and is a great influencer of relationships between the board chair and board members and among the CEO, C-suite staff, managers, other staff and various external stakeholders. 

The chairperson and CEO partnership is a powerful and crucial one and can either make or break the organisation. It can set the stage for respect and cooperation, or it can foster tension and dissonance among the ranks. Whilst the chairperson must avoid overstepping, he/she must exercise due care in not being seen as too “hands off.” While finding the right balance between the two is challenging, an effective chairperson avoids these pitfalls by engaging in regular dialogue with the CEO, asking him searching questions without dictating or exerting undue pressure on his/her response and making good use of formal and informal monitoring moments which invariably arise from time to time.

Calls for increased oversight by boards

With the evolving complexity of the business environment in recent times, the calls for increased oversight by boards have grown louder and stronger. Investor, regulator, and other stakeholder expectations of board involvement in business operations, including aspects which, traditionally, were the sole purview of management, are changing in ways which are blurring the lines of responsibility between the two. My approach in such a situation has been, and is, based on one underlying principle i.e., “Ultimately, management’s job is to manage, whereas the board’s role is to oversee.” It is as simple as that. Do not complicate the solution with various ‘ifs’ and ‘buts.’ Do not read too much into regulatory decrees. Just employ this principle as the guardrail. Effective oversight relies upon maintaining clear ‘lines’ of responsibility between the board and management. So, what is that ‘line’?

This question is best answered by considering the following features and characteristics of the subject situation. > Is it a ‘business as usual’ or are there risks to the organisation’s mission, vision, values, purpose and identity? > Is it a matter where the management may require some strategic guidance because it is an untested area or an area which, if not carefully handled, can have a material impact on the organisation’s performance? > Are there critical external factors which call for the board’s broader knowledge, experience, exposure, opinion and attention? > Does management have the competence, capability and capacity to handle the issue?

The answers to each question will be different for every board and organisation and will also be very situational. 

Main responsibilities of the board

Under the overarching reasoning that the board’s role is to oversee, and the management’s role is to manage, the main responsibilities of the board are.

Corporate governance: The board must ensure that the organisation has a governance framework which, while being aligned with its mission, vision and values and facilitative of its short, medium and long-term goals and objectives, compels the organisation to operate as a responsible corporate citizen. In promoting model corporate citizenry, the governance framework must have the checks and balances to ensure that the organisation traverses the straight and narrow in adhering to ethical standards and complying with applicable laws, regulations, and industry guidelines. The board led by the chair must set the tone for ethical conduct through role modelling and by establishing codes of conduct which promote ethicality, integrity and transparency. 

Strategic oversight: Whilst in theory, the board is responsible for setting the organisation’s overall strategy and direction and in ensuring that it is aligned with its mission, vision and purpose, in practice, it is the CEO and his/her team who are responsible for day-to-day operations and ensuring that all activities are carried out in line with the board’s direction. Therefore, it is common sensical for the development, monitoring and the continuous review of the strategy to be a collaborative effort between the board and management. Strategy review must be a standing item on the agenda of all board meetings where management presents updates on progress and details of significant challenges or obstacles hampering and/or impeding progress.

Financial oversight: Ensuring financial stability and sustainability is a key goal of the board oversight efforts. The board must, using an audit committee where appropriate and applicable, ensure that appropriate financial controls are in place to prevent fraud, mismanagement, and inefficiency. The audit committee must be chartered to oversee the audit process, obtain assurance from management on the existence of effective internal controls and conformance with laws and regulations, ensure the accuracy and integrity of financial reporting and public disclosure and oversee the work of external auditors and internal auditors. 

Appointment of the Chief Executive Officer; - The board is totally responsible for the appointment of the CEO and planning for the CEO’s succession. Where appropriate, the board may, in conjunction with the CEO, be involved in the appointment of selected key management personnel. Furthermore, the board must be proactive in enhancing the CEO’s effectiveness by providing him/her with continuous training and development. Additionally, the board must, using a remuneration committee or equivalent, set the CEO’s compensation and evaluate his/her performance against key performance indicators (KPIs) or pre-specified objectives and key results (OKRs). 

Risk management oversight: While the board has clear responsibility for the existence of risk management and internal control systems and processes which are consistent with the organisation’s risk appetite, its involvement in risk management must be one of strategic oversight. It must never be operational. It must, through a risk management committee where appropriate and applicable, ensure that a risk management policy and framework exist and that they are relevant, effective and serve the intended purpose. Progressive boards are known to be very active in embedding risk-reward thinking in the organisation’s culture. The board must not kill executive enterprise and innovation through excessive, time-wasting and value-destroying checks and balances and interference. Balance is the key. It can only come through an unambiguously articulated and transparently practiced board engagement-oversight continuum. The thrill and spill of management is to take risks for commensurate rewards amidst uncertainty. A board must not kill such enthusiasm. Organisations that do not take risks or innovate will enjoy average or below-average returns. Studies indicate that organisations that take a calculated approach to risks consistently outperform their risk-averse competitors. 

Stakeholder relations: The board, in collaboration with the CEO and his top team, must ensure that structures exist for formal and informal communication and engagement with key stakeholders. As a part of these endeavours, the board must balance the interests of different stakeholder groups while protecting the long-term sustainability of the organisation. Stakeholder relations also involve overseeing the organisation’s social responsibility efforts and managing its public image.

Executive leadership: Overall, the board must provide guidance and offer support to leadership while holding them accountable for achieving the organisation’s goals. In addition to appointing and evaluating the performance of the CEO and, where appropriate, other members of an executive team, the board may, in keeping with its monitorship of principal/agency issues, be the final approver of the compensation of key management personnel (KMP). Where such KMPs are also on the board, the board may, through the remuneration committee and the senior independent director, be involved in the performance evaluation of such KMPs. In cases of CEO and/or KMP underperformance, the board must retain the authority to take the necessary action and even replace them in protecting the organisation’s interests.

Fiduciary duty: In operationalising the above, the board has a fiduciary duty to act in the best interests of the organisation and its shareholders. Fiduciary duties include the duty of care i.e. making informed board decisions, the duty of loyalty i.e. putting the organisation’s interests above personal interests, and the duty of obedience i.e. ensuring the organisation adheres to its mission and governing documents.

Perfect division of responsibilities a mere illusion

A perfect division of responsibilities between the board and management is a mere illusion. While the board sets strategy and oversees management, and management executes the plan, there is an inherent overlap and interdependence. A successful relationship is built on clear communication, defined boundaries, and a collaborative culture, rather than a rigid separation of duties. However, once the board has delineated its role in the lines as described before, it will be in a solid position to convey to the CEO that he/she is responsible and accountable for everything else in enabling the organisation to deliver on its mission, vision and purpose. 

In principle, the CEO is responsible for providing overall operating leadership to the company. It includes, amongst others, establishing a positive public image, delighting customers, aligning the various operating and functional teams with the organisation’s goals, providing a safe workplace, managing human resources, attracting and nurturing talent, implementing strategies, abiding with laws and regulations, allocating resources, managing finances and risks, driving growth, managing stakeholders et cetera. Other than when specifically identified and isolated, there can be no ‘physical’ and ‘imaginary’ walls dividing responsibilities between the board and the CEO/Team. It is a collaborative relationship akin to the partnership between a ‘scrum half’ and a ‘fly half’ in rugby football. The board i.e. the ‘scrum half’ passes the ball to the CEO, i.e. the ‘fly half’ who makes the play.

There are other additional factors which a board and management can consider in establishing the imaginary ‘line’, being, > Asking the right questions in real time, > Assessing the context of the issue, > Focusing meeting agendas on the right priorities, > The Board making itself approachable and accessible to management, > The Management being forthcoming with the relevant information proactively, transparently and unreservedly. 

Great governance is not just about abiding with the ‘line’. It is recognising the level of engagement required by a board in addressing context and navigating those changes thoughtfully and intentionally with management. An overly intrusive board is the CEO’s worst nightmare. The board must spare him/her such nightmares with an approach based on mutual trust and respect.

(The writer is currently a Leadership Coach, Mentor and Consultant, and boasts over 50+ years of experience in very senior positions in the corporate world – local and overseas. www.ronniepeiris.com.)