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Governance as leadership

posted 12 Jan 2020, 20:01 by Michelle Stewart   [ updated 19 Jan 2020, 18:17 ]

“Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson, boxer)

Several years ago, governance expert Bob Garratt published a book called “The fish rots from the head”, the colourful title having its origin in a Chinese proverb. The contents focussed on the role of the board of directors in company failures, misdemeanours and other poor corporate behaviour. I am not sure if it is anatomically correct to say that fish rot from the head, but the stark image reminds us of the importance of the head, particularly for humankind. The head is the site of the brain and therefore of thinking, reason and as we now know, the emotions – although the latter were once seen, incorrectly, as the province of the heart. If the body, that is, the company, is dead or dying, Garratt’s reasoning went, the head, that is, the board, was rotting first. Drawing on the Mike Tyson quote above, it is the board that should be foreseeing and planning for any metaphorical “punches in the mouth” that come the company’s way. Boards should provide leadership for the entities they oversee. But how does the board lead in such a way that it does not interfere, compete with or undermine management? There are no hard and fast rules to dividing up leadership roles between the board and management except to say that at any particular point in time, roles should be clear and documented. What follows are suggestions as to the areas of leadership that boards should acknowledge and pay particular attention to.

A. The board as the head

Experienced directors will be aware that under corporations’ law the board can delegate virtually any task to management, but it cannot delegate ultimate responsibility for the entity. The board of directors is the collective head, the overall leader of the company, a reality that all boards should embrace. This is why Garratt’s “rotting from the head” analogy rings true in concept whether or not that is what happens in nature. Even if management is the source of the “rot” (whatever the rot may be), it is the board that appoints management, then oversees and monitors their actions. The board may not be directly at fault for a major failure, but responsibility is a higher concept than fault. A board is responsible whether or not it is at fault. This is the reason why shareholders often vote to remove directors when things go seriously wrong in an enterprise. So, if the board is the head, the leader of the company, how does it exercise its leadership in such a way that it does not interfere with the role of the management team?

B. The board as the holder of the long-term vision for the enterprise

CEOs come and go but the board remains. Some would argue that directors also come and go – which is true – but only on rare occasions does each and every director get sacked or resign at the same time. It is therefore the board that should turn its attention to profitability, sustainability and other key areas over the longer term. In view of that reality, the directors should, develop an own a vision for the future of the enterprise that goes beyond that of the current CEO and her or his leadership team. In my view, that vision should be at least 10 years into the future.

Over the years a number of boards have commented to me that they were pleased with their CEO but that the board tended to respond to the CEO’s proposals in the absence of itself having agreed a vision beyond management’s typically 3-5-year horizon. These boards felt that management was de facto controlling the strategic agenda. In most cases, management was only controlling the strategic agenda because the board did not have its own documented view on the company’s long-range focus.

In 2013 the Chairman of BHP Billiton, Jac Nasser, wrote:

"In late 2010…the BHP board asked and debated this question: ‘If we had to choose three areas to put extra emphasis and time on, what would they be?’ 

The answer was people development, capital management and reputation. Under each of these categories we had further goals and decided that each that every year we would go back and stress-test if those were the right strategic imperatives for the and whether the action items underneath those goals were being met or needed to change from year to year.

I don’t think many boards do that type of self-reflection consciously. They may end up doing it around an event. But BHP feel that, just like it was important for the company to have strategic objectives, the board needed to have a similar framework." (Company Director Journal, May 2013)

It is interesting to note that Nasser believed that the BHP board needed to have its own strategic framework. If this is the case, I would argue that such a framework must take a long-term view, longer and more strategic than that of management. In fact, management’s strategic and operational plans should sit under the board’s 10-20 year strategic vision. I have worked with a number of boards to develop a 10-year vision for their enterprise. I recommend that such a vision be succinct and articulated in no more than 1-2 pages. The board is the primary owner of the high-level 10-year vision while management is the primary owner of the more detailed and specific strategic and operational plans. The term “primary owner” is chosen deliberately to reflect the fact the two plans should be aligned. As an aside, I have generally observed that prospective CEOs are impressed with boards that have a long-term vision, even if they do not agree with every aspect of what is articulated.

In summary, one of the most important leadership roles for the board is to ensure that they have vision for the enterprise that looks well past the term of the current CEO.

C. The board as the holder of the company culture and values

If the idea of the board owning the 10-20-year vision for the company is somewhat controversial, the role of the board in setting and monitoring company culture and values is perhaps more so. The discussion of the board’s role in culture and values is fairly recent in Australia and has its roots to some degree, I believe, in the outcomes of the sexual abuse and financial services Royal Commissions as well as the spate of high-profile corporate collapses of the last two decades. The final reports by the respective banking and sexual abuse Royal Commissions drew attention to real failings in the leadership of boards and governance bodies. There were examples relayed in excruciating details of situations where bad news did not “travel fast” to the board; where boards did not act or act decisively to right wrongs or drive necessary change and where directors failed intervene when management was behaving inappropriately or even illegally. Sadly, we can expect the current Royal Commissions into aged and disability care to deliver similar reports cards of governance and management failure. It is now regularly argued in governance circles that nurturing a strong company culture that emphasises fairness, compliance, accountability and transparency alongside high performance and profitability, plays a powerful role in regulating staff activities and articulating the desired positive behaviours organisations expect of their employees. The Banking Royal Commissioner, Justice Hayne, for example, did not call for new laws to keep rampant bankers in check, but for the enforcement of existing legal frameworks both by regulators and by boards. That is, a culture of accountability and compliance.

Just how boards go about setting culture and values, then monitoring adherence, is a work in progress. But the board as governors have a growing leadership role to play in the area of enterprise culture.

D. The board as exemplars of desired leadership behaviours

I have been a member of, consulted to and witnessed, many fine boards populated with directors of high ethical and professional standards and exemplary ability. I have also been privy to examples of the opposite. I’ve observed some directors and boards undermine, berate and even publicly humiliate management and express contempt for customers. I’ve heard some directors complain to each other in private about their CEO’s performance then award the individual concerned the highest possible performance review. In one case I had direct contact with, a CEO was sacked for poor results just two months after being formally rated 5/5 by the board! I have even seen directors at war with each other in board meetings demand that the executive team collaborate more effectively – these individuals were obviously fans of the “do what I say, not what I do” approach to leadership. These are clear examples of the fish rotting from the head. As directors, our role includes that of leadership exemplars to management, customers or those we serve in the broader community. As the former head of the Australian armed forces once said, “the behaviour you walk past is the behaviour you accept”.

Directors are not called to be perfect, but we are called to articulate and model the kind of leadership we wish to see as the norm, particularly if we’ve played a role in setting vision, culture and values in the first place.

Philip Pogson FAICD, January 2020.

Philip has been a company director, Chair and business owner for more than 20 years. He consults and advises on strategy and governance across a range of business sectors.