Board of Directors – Evolution through Devolution

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Relationships between the Board and Management

As a company matures, management needs to recognize that they work for the shareholders and that the board of directors, as the appointed representative of those shareholders, is the body that they have to answer to. Beyond the legal needs to recognize this fact, management needs to also recognize that a fully functioning board provides the checks and balances that will help it do a better job of managing the company’s affairs. Correctly structured, populated and resourced, the board will become an invaluable asset in helping management reach this goal.

This transition of understanding can be difficult for many CEOs. Indeed, some of them will come to the conclusion, often with the help of the board, that they are not suited for the new role. ¹ The board will seek a collaborative relationship with the senior team. Within that relationship it will seek a balance of power and prerogatives which are appropriate and productive. Management which understands this and is able to accommodate to the new reality will find that the new partnership will open up new vistas – new possibilities for growth – and allow them to substantially reduce the risks that are associated with more narrowly focused power arrangements.

The Wisdom of the Structure

The journey – from an in-house board to a collaborative one – involves recognition that a collaborative board is not merely a legal nicety but a critical component of a healthy company. ² Only with the evolution of such a board can the true value of a company be realized. When it was smaller, the amount of wisdom and good judgment required could be contained within the senior team. But increasing size brings increasing complexity and, where once it was easy to see the interests of management as roughly the same as the interest of the shareholders, shareholder interest now becomes a sharply distinct and dominating consideration. As the company grows, it becomes clear that it is the shareholders, and not the management team, that are the true owners of the company. As the number of shareholders increases, it also becomes clear that the interests of these two groups diverge on key issues.

The broadening of equity participation which normally accompanies corporate growth can be a principle driver in the evolution of the board of directors. Minority shareholder interest is strongly protected by law and directors who participate in ignoring or abusing those interests can incur substantial liabilities. Other drivers may include the increasing complexity of managing human resources, the growing complexity of providing adequate financial resources and increased regulatory scrutiny. But whatever the reason, pressures develop to professionalize the board as an independent and sovereign counterbalance to the management team.³

I have written elsewhere that “it’s not the dog that you love that normally bites you; it’s the one that you can barely tolerate – if at all.” The evolution of the board presents this type of challenge to a CEO. Most will find the devolution of power and prerogatives an uncomfortable process and many will see it as a direct challenge to their own authority within the company. In almost every case the CEO has the prerogative, and power, to successfully oppose the process of evolution of the board of directors. The implications of that opposition may in fact be acceptable in the CEO’s eyes. But the broader issue is ‘who really bears the burden of this opposition’? CEOs who direct their company into life-style status may be satisfying their own needs and avoiding confronting their own demons. But there are others involved and, as the company grows, their needs must be increasingly taken into consideration. Shareholders may suffer, employees may have to settle for less and the company may never realize its true value. With such in the balance, it is important that a CEO and senior team carefully consider their responses to the emergence of an insurgent board and its pressure to reach collaborative status.

If the company is going to realize its full potential, and the shareholders are going to harvest the value arising from that potential, a successful journey from in-house to collaborative board must be made. The good news is that it is a journey that can be made – in fact; most highly successful companies make it. It is also a journey of necessity for the future of all involved hangs in the balance.

© Dr. Earl R. Smith II

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Related Articles:

• Corporate Ethics and Compliance – Board Responsibilities

• Governance for Growth

• Business Ethics – A Function of Corporate Governance and Commitment

• Board Assessment – A Critical Part of Good Governance

• Good Governance and Delegation

• Developing Visionary Leadership – Board Contributions

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1. I have worked with CEOs who, upon reaching this conclusion, have realized that they are better suited for taking a company from start-up through the initial growth stages. This is a powerful lesson that can help that person focus their life and professional career towards the things that they are really good at and keep them from the extended frustration of swimming against a strong and insistent current.
2. If you’ve been paying attention, you probably are realized that the model that have been describing contains two board types and one transitional period. The insertion board is an indication of building pressures to move from the in-house board to the collaborative board. The successful resolution of those pressures will determine the future of the company but will also depend on the responses by the CEO in senior management team.
3. It is easy to fall into the good guys and bad guys trap here but that is not the issue at all. One man can manage a rowboat with a pair of oars and a general sense of direction. But a broader range of skills and more sophisticated organization an oversight is required to manage a cruise ship. Sure, both will have a single person who calls themselves captain but the one may be captain in a way that the other is not.