What Is Your Board’s Value Proposition This Year?By: Paul C. Winum
Boards of directors are expensive.
If you consider the combination of director fees, travel expenses incurred for board meetings, and the time put in by management teams to prepare for those meetings, the cost to a corporation for having a board typically totals several million dollars a year.
What, then, is the return on investment? Given the need of companies to maximize profits and the increased pressure on boards to contribute to the success of the organizations they direct, this question needs to be asked and answered. And the answer may well change over time.
An excellent paper authored by Franklin Gevurtz in the 2004 Hofstra Law Review offers some interesting context. Entitled “The Historical and Political Origins of the Corporate Board of Directors,” this paper examines the history of how and why an elected board of directors came to be the accepted mode of corporate governance. Tracing the roots of modern corporate governance to models that evolved from structures for merchant cartels in Europe and from businesses in the early history of the U.S., Professor Gevurtz outlines the evolution of the principal role of the modern board—the monitoring of corporate management.
From this broad principal role, the board derives its key power: to hire and fire the chief executive officer. Ensuring continuity of great leadership in the CEO role and in all mission-critical roles is how a board delivers its highest value. That value proposition is the reason why every board needs to be ever vigilant about ensuring ongoing attention and rigor to the processes attendant to CEO succession.
But what value—beyond succession planning and the general monitoring and oversight of management—should a board contribute?
The answer to that question depends upon where the organization is in its developmental arc. In a 2016 study jointly conducted by the New York Stock Exchange’s Governance Services and RHR International, a full two-thirds of more than 600 directors surveyed indicated that the particular role and value they are expected to contribute to the organization have changed over the course of their tenure. For example, the board of a start-up or of a company with relatively flat revenues might need to actively engage in establishing or resetting strategic direction. A company expanding into new markets or geographies may need its board to vet and advise on new opportunities. A board’s particular focus at a given point in time beyond ensuring fiduciary oversight, setting policy, and approving budgets should evolve in step with the evolution of the operating and competitive landscape in which the company functions.
So, to deliver a meaningful ROI each year, a board must ask itself the following questions:
- Beyond standard management and fiduciary oversight, what does the organization need from us to maximize its success this year?
- By what methods and metrics will we gauge the value we contribute?
- What is the role of each director in advancing our board’s value proposition?
Asking and answering these questions will help your board enhance its contribution and shape how committees and the board operate to add value. The answers will also guide the process and content of the evaluation you conduct at the end of the year. And the management team, organization, and all stakeholders, in fact, will thank you for addressing these three questions.
SIGN UP TO RECEIVE BLOG POSTS.
Our insights and thinking, direct to your inbox.