Corporate Governance

Directors’ roles no longer a sinecure

01 August 2016

Board

Human Capital Alliance managing director Edwin Sim talks about more demanding roles for today’s directors.

Boards of directors are quickly realizing their roles in current highly disruptive digital economics are becoming much more demanding.

In the past, large company directors primarily validated financial results, protected the company’s assets, and counseled chief executive officers on strategy and helping them find, nurture the next generation of leaders.

In a recent McKinsey publication “Are you getting all you can from your board of directors?”, authors Jonathan Bailey and Tim Koller said in the past many boards were large and often perfunctory in the performance of their duties.

No longer an easy cushy retirement job

The authors said David Beatty, a noted University of Toronto board advisor said in the past the main event of many board meetings was the lunch that followed. “….. a seat on a board is no longer a sinecure—and the day of a board comprising solely gifted amateurs is over.”

Partly because of fast-changing external circumstances, Beatty said companies are beginning to realize that boards must be smaller, harder working, and more expert. “And they have to be able to commit the time to do their work.”

More than 300 hours per year

Beatty said a prior S&P 500 companies study reported that directors were spending an average of around 240 hours per year on board-related activities. “That includes time spent at home studying, committee time, and board time.”

Today’s board members are spending at least 50 percent more time on their duties. “…and if a potential director can’t put in 300 to 350 hours a year, he or she shouldn’t take the job.”

How directors add real value

Even at 300 hours per year, time spent by board members still pales when compared to the 3,000 hours a year that each management team members devotes to his or her work. Most managers these days, he said have spent a lifetime working in their industry. “Even a gifted amateur director who works hard is not likely to be able to add much value to an experienced management team about the day-to-day business.”

The only place outside directors can really add value—aside from policing and oversight functions, Beatty said is in offering a different perspective on the competitive environment and the changes in that environment. Using general business judgment, independent directors can help management think through strategy and specific objectives for three to five years down the line. “That’s where directors have their best chance of making a difference.”

Ideal term limits

Because it’s difficult to get rid of directors, Beatty favors term limits, whatever the cost. He noted that the United Kingdom has decided that publicly traded companies’ directors should only serve nine years, even though in some circumstances they can extend to 12 years. After nine years, directors can’t sit on the audit committees, nominating committees, or compensation committees; so their functional utility drops by about 60 percent.

Board evaluations

During the past decade, many boards, including in Thailand have formally sat down and appraised themselves. “That can be a paper-driven appraisal, and it could be done in-house or by third-party experts.”

In many cases, Beatty said companies alternate between paper and personal appraisals where the chairman sits down with each director and runs through an extensive agenda of questions about the board’s talent, use of time, and tone.

“Every second year, I supplement that with a six-page questionnaire that inquires in more detail about the functioning of the board. I then use a third party to collate those results and report to the governance committee so that any critique of the chair can be included in the results.”

Family-controlled companies outperform

Publicly-owned family-controlled companies in Canada significantly outperformed the rest of the market. Their better performance, Beatty said may be partially attributable to their longer-term investment perspectives. “The average tenure of an external CEO in the United States is around five years, and of course he or she is thinking shorter term. You get what you pay for.”

By their nature, Beatty said family-controlled business CEOs think longer term that the hired-guns you bring in from outside. “Happily, most other markets in the world are family controlled, so short-termism may be an endemic disease only in the United States, the United Kingdom, and some parts of Canada.”

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