Many board members unhappy with organisation roles

A global survey of board members has revealed many are not happy with their roles in their organisations. Research and policy director at the Institute of Directors in New Zealand, Richard Baker, says the trend is likely to be true here, too.

"I wouldn't be surprised if there [were] a significant number of New Zealand directors who thought that they would like to be doing more value-creating with companies as opposed to pure compliance."

The survey, conducted by director Robert F. Felton and consultant Pam Keenan Fritz from McKinsey, was started last year and the results have just been released.

It found that of the 1016 questionnaires completed, more than 75 per cent of directors wanted to spend more time on strategy and risk.

Surprisingly, more than a quarter of the directors reported they had, at best, a limited understanding of the current strategy of their companies.

"More than half say they have a limited or no clear sense of their companies' prospects five to 10 years down the road. Only 4 per cent say they fully understand their company's long-term position.

"More than half indicate they have little or no understanding of the five to 10 key initiatives that their companies need to secure the long-term future," the report says.

Baker says directors need to do more than just know their strategy.

"Directors really do need to understand their company's strategy. The Institute of Directors would say they really do need to be actively involved in the formulation of that strategy with management."

The directors in the McKinsey survey reported they had a focus primarily on financial matters reflecting short term corporate performance, but that they want to "expand their reach into issues that shed light on the longer term".

Roger Kerr, executive director of the Business Roundtable, maintains New Zealand directors are not overly consumed with short-term corporate performance and do not overlook the long-term objectives.

"I can't recall the last time I heard United States-style talk about focus on the quarterly dividend, and so forth. I think it is well understood in corporate finance theory that investors look through short-term results and the share price actually reflects the long-term expected cash flows of a company."

Kerr says it would be irrational for directors not to focus on the long-term view.

"The main complaint in recent times has been about being tied down much more with a focus on compliance with endless rules rather than being able to focus on commercial decisions and the growth of the company. I think that's much more the current theme."

Baker says that as important as compliance is, there is more to good corporate governance.

"I think a lot of the good directors here are saying we're spending too much time on compliance. We're not spending enough time in actually doing the hard yards, the hard thinking and then the hard work in terms of an effective strategic plan and making it work."

The relationship between the board and the CEO is another area where the survey found problems.

Some 50 per cent of boards reported they have little or no formal process for evaluating the CEO's performance. In New Zealand, Baker said the relationship between the board and the CEO has not always been the most functional.

"In the 90s, the business press was full of the cult star status of certain CEOs and boards were quite happy it seems to take a back seat."

But today, boards are still intimidated by CEOs.

"You might have a strong culture where the CEO has a strong relationship with the chairman of the board, for example, where the two of them are effectively steering the company. Now, when they go off the rails or when they threaten to go off the rails, other members of the board may not feel empowered to challenge that."

Boards must be able to hold their own against the CEO, Baker says.

"In an effective corporate governance regime, the ultimate agent is the board of directors for looking after shareholders' interests and it must be. I think that has been lost sight of in the past. A prime characteristic of a good board is a very effective team of people who can tolerate healthy debate and dissent but as a group never take their eye off the ball, which is what the company is all about and what it is supposed to achieve."

The McKinsey report also shows the average length of a CEO's tenure is getting shorter . It recommends that boards take prudent action to maintain continuity of leadership.

"As a new CEO takes office, the board should begin looking for a worthy successor.

"The full process can take time. According to outside observers, GE's board and CEO, for example, identified the attributes they wanted from the next CEO six years before Jeffrey Immelt replaced Jack Welch," it says.

Baker says the whole way a board is structured is limiting.

"They only get to meet, in terms of elapsed time, two to four weeks full-time looking after a company for an entire year.

"Now they are dependant entirely on the information they receive, which they have to read and discuss within the context of a meeting.

"So, their mode of management is very narrow - it's a meeting. There is no day-to-day engagement."

There is no lack of examples of things turning to custard.

"Over the past 10-15 years there has been an unfortunate degree of incidence of shareholder value loss where boards have failed to do their job," Baker says.

"You don't have to look far on either side of the Tasman to see large instances of large shareholder value loss which is seated back to boards, for example, who simply hadn't been informed or hadn't asked the tough questions, or had basically been too complaisant and too agreeable to, for example, strong-minded CEOs."

Baker says directors can't be intimidated and should ask the hard questions.

"An effective director needs to understand the numbers, doesn't need to be an accountant, but needs to understand the numbers.

"Where's the cash coming from? Where's it going to? What's our differentiation in the market? How much are we going to grow the next year and why? What are our threats? What have we got in place to counter them?"

Baker says that an effective board in New Zealand must do more than manage compliance issues in its running of the company.

"It needs to be far more active in terms of setting a strategy in collaboration with management, in making sure that management is constantly accountable, in achievement of a company's goals in compliance with its purpose."

The McKinsey report said that if directors want to take a more active role in their companies, then boards and management must be prepared to mitigate the tensions the change will produce between them.