Robert Davis

OPINION

Insights on the critical role of today's boards

Top management always performed its work while being under close scrutiny; it comes with the job.

Today, this scrutiny is ever more intense and will not abate. With our industry experiencing too much capacity, slower pace of contract awards, increased budgetary pressure, ever more competitors that have unbounded appetites, where are the new sources of revenue to sustain growth?

The fountain of mergers and acquisitions may slake a company’s thirst for growth. M&A activity can provide revenue relief for some but research shows that in the long run, acquisitions seldom achieve the touted synergies and benefits. M&A activities do not always match companies’ management system and culture.

Maybe it is time to truly engage the company’s board of directors or advisors.

Today, boards of public companies have multiple responsibilities especially since the numerous ethical lapses by top management during the past several years. Boards, including boards of advisors for privately held companies, have three primary charges:  oversight of the company’s ethics, accurate accounting and financial reporting, and strategy

Strategy refers to having an understanding of the company’s market position and intended direction i.e. known as vision.

Being responsible for oversight of the company’s ethical conduct requires vigilance on the part of the board to ensure all employees and partners understand the performance of their responsibilities within an ethical framework.

Executives are under intense pressure to achieve financial goals each quarter. Their personal financial success is often based upon achievement of these quarterly and annual goals. Pressure to achieve financial goals can inadvertently create ethical challenges when executives are faced with making decisions that have short-term versus long-term trade-offs on the company.

How does the board perceive these complex, decision-making situations often faced by top management?  What mechanisms are in place to minimize this tension?

The board must ensure accurate accounting and reporting on behalf of the company.  Are the reported numbers valid, credible, and auditable?  Is money being invested wisely?  Are expenses in line with industry norms?  Does the owner of the business make financial decisions that recognize their fiduciary responsibilities to the company’s stakeholders?

By far the greatest threat to a company’s long-term viability is its inability to perceive and understand threats to the business that arise from the external environment.

Companies have no systematic way to monitor ever changing factors in the external environment that can pose a threat. Neil Fligstein’s research of the Fortune 100 presented in The Transformation of Corporate Control traces the survival of the 100 largest U.S. companies from 1912 through 1995.

Repeatedly, a stunning number of these large companies failed overtime because of having a common problem: They were unable to perceive change in their external environments and adapt their business models to address the external threat.

Changes in the external environment such as the market i.e. customers, new government policies and regulations, competition, technology and more can catch a company off-guard one day after the company continues to milk the last nickel from an outdated business model.

Top management is so heads down, in the now, that they rarely have time to reflect on long-term external threats to the firm. The company’s board must help top management perceive and address these long-term external threats.

By definition, board members bring their business and life experiences to the company to serve as a fount of wisdom for top management’s benefit. But you have to ask: Is your board contributing to the company’s well being?

Reader Comments

Mon, Aug 25, 2014

Am afraid that author's comment, which sounds 100 percent real-world, confirms the idea that boards do little or nothing to articulate or enforce ethical standards in many (most?) companies. As true in government contracting biz as in any other. But the lip-service volume and phony "awards" are being used to posture some activity and thought when there are little or none.

Mon, Aug 11, 2014 Bob Davis

My comments were meant to raise awareness of senior management and Boards to ensure they are mindful of maintaining ethical conduct of the entire organization. I have served on two Boards and the topic of ethics was assumed and not explicitly discussed. Ethics applies to not only management, of course, but to all stakeholders e.g. subcontractors and partners. Normally Boards do not involve themselves in day-to-day Operations but are supposed to ensure that an ethical standard of conduct exist that has been communicated to all of the company's stakeholders.

Mon, Aug 4, 2014 John

What you are saying is: the senior executive teams leading companies tend in the direction of unethical conduct, were it not for being reined in by the BODs. You really do state this in a rather broad and general way., An industry of brigands and ne'er-do-wells, you say? But you seem to ignore the obvious point that BODs have supposed to have had the surveillance in place to control these miscreants who run companies on a day-to-day basis. So, it is reasonable that these BODs were either asleep at the switch, or complicit, in some, or many, of the "ethical lapses" you refer to as common in the last several years. So, if nothing has changed about the composition or mission of the boards, what are u recommending? Is it as simple as having the lazy and somewhat ethics-blind BODs do more of what they have been doing? Or, should they be doing something differently. I can't quite grasp it. Maybe someone will explain this--please.

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