What Makes Great Boards Great

My summary of "What makes great boards great" by Jeffery Sonnenfeld. Published by HBR September 2002.

With boards responsible for how corporation conduct business, the high profile failure of companies such as Enron, Tyco and WorldCom must be due to negligent behaviour on the BOD's part. However, this does not seem to hold true. Despite having all the right committees in place, having significant sums invested within the business and following the letter of the law in terms of regulation, lots of boards still fail to pick up on issues which eventually destroyed their business. Sonnenfeld, based on this premise believes that the BOD needs to be fundamentally rethought, and its operations and evaluations methods need to be reworked.

The Conventional Wisdom

The conventional wisdom holds that if the following steps are adequately taken care of then boards will have a strong governance structure:

  • Regular Meeting Attendance - attendance will result in greater understanding of issues faced

  • Equity Involvement - having a stake in the company will result in greater commitment

  • Board Member Skills - expert board will result in strong oversight

  • Board Member Age - the older the board gets the weaker its governance

  • The Past CEO's Presence - the old dragons will tear down the work done by the new kid

  • Independence - internal managers will try to hide and coerce independent directors

  • Board Size and Committees - small is good, big is bad

However, all the above factors when looked at in the wider context of the industry at large does not seem to correlate very positively with good or bad governance structures. There are examples on both side of the fence regarding their effectiveness, resulting in an inconclusive argument for any one factor in particular.

The Importance of the Human Element

Sonnenfeld believe that the key to making a great board is not the governance recipe, but the human element. The human element consists of how the board members and the CEO have a relationship built on trust, respect and candor. It is only by having a board which is open with each other and relies on each other in an honest way can there be a semblance of good governance. The board needs to have strong team dynamics where information is openly shared, debate is encouraged, and all members have the greater good of the company as their primary concern.

Create a climate of trust and candor

By having an environment of trust and candidness, all members can build on each other qualities to openly and honestly discuss the key issues at heart without fear and judgement.

Foster a culture of open dissent

There is a difference between dissent and disloyalty. Dissent implies challenging aspects which you do not believe are in the best interest of the company, while having the company's interest as your top priority. If dissent is not encouraged, the resulting groupthink can result in ineffective boards which does not serve its purpose.

Utilize a fluid portfolio of roles

Board member need to be adaptive in their thinking patterns and need to identify the role that is most important for them to be playing based on the particular situation that they find themselves in. The need to be willing to be the ruthless cost-cutter, the big-picture guy or the peacemaker based on the specific situation they find themselves. It is critical for them to adapt to the changing times to serve their organisation according to what required by the environment.

Ensure individual accountability

Although the BOD is supposed to work as a team, each individual must be fully accountable and understand the complexities of the business they are in. This needs to be maintained through peer pressure to ensure duties are taken seriously.

Evaluate the board’s performance

No matter how good a board is, people and organisations cannot learn without feedback, and intelligent feedback is critical for self-reflection and improvement.