Insights on the critical role of today's boards
- By Robert Davis
- Aug 01, 2014
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?