Market-Driven Boards

Oct 082008

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

The board of directors has the ultimate responsibility for protecting and enhancing shareholder value. They accomplish this by assessing and monitoring the implementation of the plans by the CEO and senior team for the effective operation of the company. Corporate boards must assess the performance of the company, and boards, which insist that senior management strategically align their corporate plans with the forces driving the market, will be the most effective.

Corporate boards must hold the CEO and his management team accountable for innovation. Markets will never stand still. Nimble companies with CEO’s that have not learned to be satisfied will fill niches left open by larger, established and less nimble conglomerates. American car manufacturers, and for a time, American television manufacturers produced units then spent millions trying to convince consumers to buy the models they produced. The Japanese nearly wiped out both American industries by correctly assessing the consumer’s preferences and offering a product to the market that met the demand. An effective board will insist that management align strategic plans with the evolving market.

Performance measures coupled with incentives and accurate thorough evaluations will cause the CEO and management team to innovate and find ways to fill the demand in the market. The Chairman of the board must have a leadership style that encourages directors to ask penetrating questions, promote and celebrate change. The board must support the CEO in trying new ideas even when some of the innovative solutions challenge established policy. The CEO should implement corporate strategy, but he and his management team should be allowed to innovate even if the occasionally fail in their attempts. A corporate culture that punishes all failure is a corporate culture encouraging stagnation.

Sarbanes-Oxley regulation hobbled many companies, and stymied corporate board’s efforts to innovate. In 2002, company boards failing to establish an advisory board to deal with the new regulation often failed to adequately focus on the companies products and where the market for their products were heading. Compliance to regulation replaced adherence to market demands. Compliance management replaced product management. Corporate governance focused on issues and allowed CEOs to excuse lack of sales and ballooning expense lines on the effort to comply with Sarbanes-Oxley.

The nimble corporate governance structure will hold the CEO accountable for allowing small issues outside the company’s core competency to interfere with the focus on profit centers and customers. Corporate directors will establish an advisory committee with the resources to deal with the new regulations while allowing the corporate CEO to continue to focus on the strategic plan and continuing to innovate and create new ways of taking market share and driving profits and increasing shareholder value.

Companies with a leadership development program should always challenge participants to question established product lines, and methods of product delivery. Corporate ethics should be enforced and held sacred, but other issues that could lead to innovation and new strategies for success should come under intense scrutiny. No idea should be dismissed as worthless. No employee should be disregarded. Companies listening to line employees often learn how to make simple, inexpensive changes that save a company millions.

Corporate boards are likely to continue to face regulations and other distractions as they work to govern their company. The boards which refuse to take their focus off of the job of providing corporate governance that enhances shareholder value and holds the CEO accountable for executing corporate strategy and foster innovation among the corporate management that follows and meets the markets demands will be the boards that win.

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