Leading the Company: Governing versus Managing
Directors must wrap their minds around the role of the board versus the role of senior management in leading the company.
It's challenging because while the board has ultimate accountability for company performance, it is definitely not the board's job to manage the company.
One governance reform that has been suggested is making directorships full-time jobs to level the playing field between senior management and the boards to which they are accountable. This is a terrible idea. There are sound reasons that the CEO reports to a board of able, committed part timers versus full timers.
The CEO reporting to a group ensures that multiple points of view and time for deliberation will be reflected in major decisions. This is not a guarantee against reflexive, impulsive, and occasionally catastrophic decisions, but it helps.
The board being part-time reduces the odds of ambiguity and confusion over who is in charge. Unity of command is the principle that no one in an organization should report to more than one person. It may seem a little quaint and antiquated in a world of matrix structures and network organizations, but it is essential at the most senior level. People must understand that the board appoints the CEO, the CEO reports to the board, and everyone else reports directly or ultimately to the CEO.
Take my word on this. It's based not only on sound management theory but also on my own hard-won and unhappy experience. In one of my jobs reporting to a board, several board members developed the habit of going directly to one of my subordinates to get what they wanted. Neither they nor he informed me. It ended badly, as such things usually do.
The board's being part-time does not guarantee unity of command, but it helps reduce the potential for directors to compete with senior management over who performs executive and operational functions of leadership. The executive function of management is to execute policy, direction, and decisions that, at a high level, are made by the board, usually on management's recommendation. The operational function of management is to operate the company on a day-to-day basis, fulfilling the organization's mission, doing its business, and attending to myriad details. Neither the executive nor operational function is the work of the board.
What, then, is the board's work? In a word, it's governance.
In later chapters, I will discuss in detail what constitutes the substance and process of great governance. Suffice it to say that governance involves four key functions of the board:
1. Appointing, incenting, evaluating, and, when necessary, removing the CEO and senior management.
2. Setting aspirations and direction and approving strategy and policy, plans, (annual and long-range) and performance measurements. This includes making the most consequential decisions that define the entity's
• risk profile (strategic bets and capital structure);
• culture (tone at the top, beliefs, values, style); and
• future (major initiatives, capital investments, mergers and acquisitions).
3. Monitoring results and verifying the integrity and accuracy of disclosure, especially of financial condition and results.
4. Self-monitoring and renewal of the board.
When the board performs these functions well, it enables senior management to lead the company effectively and facilitates the work of the organization.
A different take on governance, wholly consistent with these four functions, involves a paradox, one that seems little understood by many governance reformers. The board has two responsibilities vis-à-vis management:
• Monitoring and holding management accountable for performance and results
• Supporting and helping management succeed in achieving high performance and intended results
There is nothing novel about the coexistence of these functions. They can appear contradictory but don't need to be. Parents face a similar challenge. We have to expect a lot of our kids, monitor their behavior and performance, and ensure proper consequences. We also need to support, advise, and occasionally reassure them as they face new challenges, difficult situations, and trying circumstances. Tough love comes to mind.
Done well, the board's performance of these dual roles has complete integrity, in the purest sense of the word. They are performed seamlessly and are mutually reinforcing. They engender respect.
They can be done wrong, however. I remember a director whose day job involved doing depositions; his style was skeptical and intimidating. He had the same style as a board member interacting with management. I also remember a director whose transparent need for acceptance and affection made her incapable of asking hard questions or being straight with management about performance failures. Her questions were all softballs, and her evaluative comments about management were relentlessly complimentary.
Like the best parents, good directors know that monitoring and disciplining are necessary but not sufficient conditions for growth, development, and high performance. The same is true of help and support. A rich mix of both is essential.