What questions would every counselor need to consider in order to change the rules of the game and improve their effectiveness?

Few are the companies that have a model Board of Directors in its operation. Some of the problems identified in the research suggest that:

  • The onboarding of a new board member is weak or nothing is done.
  • The definition of the Council’s agenda has problems.
  • There is less trust than there should be between directors and between them and the management team.
  • The Board dynamics in different dimensions (time dedicated to the strategy, diversity vs. inclusion, shareholders vs. stakeholders) is deficient.

The cause

Due to issues identified in the article, said governing body develops bad practices that harm its effectiveness and with it the company they serve. This is partly due to the fact that there are certain myths or preconceived ideas that surround the work of this body. The research shared in this article reveals some dynamics that most councils point to as room for improvement.

The solution

By pointing out myths, they can be combated, thereby allowing the Board of Directors to be more effective in its role. We put forward some proposals for improvement through questions that change the rules of the game, allowing Councils to take precautions, avoiding incurring in most of the bad behaviors identified.

Being a member of a Board of Directors is a complex and demanding task. This idea is in the antithesis of the commonly extended belief of charging a good sum of money for going to a few meetings a year (drinks and cigars through) without doing practically nothing else. That is a myth, like others shared on the following pages.

There is currently an extraordinarily stressful environment for the CEOs of companies, which is transferred with equal intensity to the directors. Whether due to the regulatory framework, interest groups or the macroeconomic context (very volatile environment due to Covid, war in Ukraine, interest rate hikes, inflation,…), the responsibilities assumed by belonging to the maximum governing body are growing, not to mention those of a criminal nature. If it is not carried out with due diligence, it can profoundly affect the director, both in terms of assets and reputation.

Due to this, the CEO’s and some reference shareholders apply their particular share of pressure to the directors, frequently seeking to make them become passive members who approve what is presented to them without much opposition for fear of not being renewed. The drawback is that by participating in this governing body you are responsible for what a company does, but at the same time you have limited tools to understand the reality of the company. Although the directors are “neither nor are they expected” in the ordinary management of the company, because that is what the executive team is for, they are responsible for the progress of the business, both good and bad. Approval and monitoring of progress against the strategy are two of the main priorities of a Council.

The problem is that, by participating in this governing body, you answer about what a company does, but, at the same time, you have limited tools to understand the reality of the company. Although the directors are “neither nor are they expected” in the ordinary management of the company, because that is what the executive team is for, they are responsible for the progress of the business, both good and bad.

In this regard, Antonio Núñez states that “the work of the council mainly consists of three tasks: Putting on the best possible CEO, checking that this CEO does not have other interests than the ones the company should have and bringing independence of judgment in big decisions (which is known as strategy. Having a good CEO is therefore key.” In this sense, as Professor Foncillas points out: “However, the findings of a McKinsey investigation that denounced that only a small proportion of directors said they fully understand the sector in which their company operates (10%) are scandalous.” as well as the strategy of their company (20%) (that is to say, 90% and 80%, respectively, have not just found out). That was the starting point to approach the work that we presented”. Antonio Núñez for his part adds: “Another investigation, carried out with the minutes of the boards of directors of several companies, has highlighted that, in general, when they had to vote on a decision, the CEO presented them with only one option in 99% of the cases. of the cases. On this option, the representatives of the highest government body disagreed with the CEO only 3.3% of the time. Putting both investigations together invites us to think because the majority of directors, intelligent, well-prepared people with successful careers most of the time, admit that they do not fully understand either the company on whose board they serve or the sector in which it operates. Thus, it is complex to oppose.”

Therefore, the pressure exerted on the professionals who occupy the positions of the Board of companies, whether they are listed or not, is very high, because it would seem that they “vote blindly”. With this, the supposed advantage implied in the past by occupying one of the “chairs” of the Council has turned into a strong discomfort today because they run the risk of making bad decisions.

Understanding this context, what can directors do in this scenario to do their job better? What are the catalytic questions to keep in mind? In short, how can you improve the effectiveness of boards of directors? If those issues that the directors themselves identify as possible barriers to carrying out their function correctly are not defined, it will be impossible to improve the functioning of this governing body and, with it, its effectiveness.

This has been what has motivated the research shared in the following pages. It addresses the perception that the Directors themselves have on a series of issues that we understand significantly condition their performance within the aforementioned governing body. These form the conceptual framework applied in the research, which follows the sequence from when a director lands on a Council to the emoluments he receives for doing his job (see Table 1). In addition, the aspects that are not normally addressed in a Board of Directors have been identified and should be done to improve its effectiveness, trying to dismantle some myths related to the daily practice of these governing bodies.

In this sense, Antonio Núñez, from Paragon Partners, comments that “having a great CEO implies having someone with a very strong determination, that is, someone who wants to succeed and that being good is sometimes accompanied by a huge ego and with it, who wants to do great things. That is the reason that leads to the results that the second investigation reveals. And it is that the CEOs create such a suitable context for their plans to be voted favorably that they rarely find due resistance on the board.”

Regarding this last point, Professor Foncillas mentions that: “to avoid falling into a situation in which the CEO presents things in such a way that everything is perfect, the question that could change the rules of the game would be: What can go wrong when everything seems to be going well?

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What questions would every counselor need to consider in order to change the rules of the game and improve their effectiveness?